Aqa A Level Business unit 9 - Strategic methods: how to pursue strategies

What are strategic methods?

They refer to the different strategies a business might pursue to achieve its objectives

Why might a business change its scale?

- May change it's scale by growing

Why is changings its scale by growth important?

- Shows progress
- Can create financial benefits such as higher revenues and lower units costs
- Creates momentum which can be important (means there are new opportunities)

What are the forms of growth?

- Organic (happens when a business expands on its own operations)

- Organic:
Increasing sales of existing products
Launching new products

- Inorganic (involves growth by joining with other businesses)

- Inorganic (one business could gain control over share of another organisation)
Mergers
Acquisitions/takeovers

Internal growth through assessing a change in scale?

- Tends to be slower
- May be easier to manage

External growth through assessing a change in scale?

- Sudden change in scale
- There may be clashes in the way organisations operate

Why is economies of scale relevant to assessing a change of scale?

- Pursuing growth, this may be because of economies of scale
- The unit costs fall as the scale of operations increases
These economies occur due to:

- Purchasing economies
- Technological economies
- Financial economies
- Managerial economies

Types of economies of scale?

- Technical economies - A business saves on production costs by using better methods and equipment.
- Managerial economies - A business can employ specialist managers who improve efficiency.
- Financial economies - A business does not have to pay out as much money to raise finance.
- Risk-bearing economies - A business has a range of products or services, so it is not dependent on one product.
- Purchasing economies - A business is given a discount for buying in large quantities.
- Marketing economies - A business saves on advertising and transport costs.

What are the potential benefits towards growth?

- Economies of scale - The unit costs fall as the scale of operations increases, these economies relate to the volume of output
- Economies of scope - occur when a business gains cost advantages by sharing costs between different products and divisions: these economies relate to the scope of the activities of the business
- Synergy - occurs when you put two businesses together and as a combined unit they perform better than they did as individual parts.
- Experience curve - this is the cost advantages that occur from having been in an industry for some time and, therefore, being able to make better decisions

What are the problems with growth?

- Communication problems
- Control and Coordination problems
- Control problems
- Motivation issues

What is diseconomies of scale?

This occurs when unit costs increase as a business expands

What is over trading?

Occurs when they're liquidity problems linked to the financing of rapid growth

What is Greiner's model of growth?

- Greiner's model highlights some of the stages that businesses typically go through as they grow and get older.
- Various times when they grow a business may need more or less centralised control.
- By studying Greiner's model, managers can anticipate and plan for some of the crises that they are likely to experience.

What are the phrases for Greiner's growth?

Phrase 1:
Growth through creativity
Phrase 2:
Growth through direction
Phrase 3:
Growth through delegation
Phrase 4:
Growth through coordination
Phrase 5:
Growth through collaboration
Phrase 6:
Growth through alliances

What do the phrases mean in Greiner's model?

- A method of describing and understanding the different phases of growth that a company goes through.

What are the crisis in Greiner's model?

1. None
2. Leadership crisis
3. Autonomy crisis
4. Control crisis
5. Red tape crisis
6. Growth crisis

what do the crisis's mean in Greiner's model

- The point where a company has to implement a new organisational shift to continue on its upward growth trajectory.

What are the methods of Growth?

- Merger
- Takeover
- Venture
- Franchise

What is a Merger?

- A merger is the result of two firms forming one company. The three major types are vertical mergers, horizontal mergers, and conglomerate mergers.
- The combination of two companies (usually corporations) to form a new company
- Two firms which create an legal entity

What is a takeover?

- Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
- When an existing firm expands by buying more than half the shares in another firm
- When an existing firm expands by buying another firm must

What is a venture capitalist?

- A person or investment firm that makes venture investments and brings managerial and technical expertise as well as capital to their investments
- Provides capital to companies with high growth potential in exchange for an equity stake.

What is a Franchise?

- An authorization granted by a government or company to an individual or group enabling them to carry out specified commercial activities
- A franchise occurs when one business sells the right to another business to use its name and sell its goods or services in return for a fee

What is a franchisor?

- The seller of the franchise

What are the types of integration?

- horizontal
- vertical
- conglomerate

What is horizontal integration?

- The process of a company increasing production of goods or services at the same part of the supply chain

What is vertical integration?

- The combination in one company of two or more stages of production normally operated by separate companies.
- Control of the production, distribution, and exhibition of a film or other cultural product by one company
- Vertical integration occurs when a business joins with another business at a different stage of the same production process

What is conglomerate integration?

This is a merger between firms in entirely unrelated markets - achieve a greater spread of risk, widening the range of output to reduce exposure to any one market.

It allows firms to use funds to cross-subsidise investment in new areas, taking the chance to innovate without losing the revenue drivers.

e.g. Microsoft and Nokia in 2014.

What is a way to reduce scale?

- Retrenchment

What is retrenchment?

- The reduction of costs or spending in response to economic difficulty
- Occurs when a business reduces the scale of its operations

What are the impacts of growth or retrenchment on the functional areas of the business?

Growing a business will have impacts on all the functional areas such as:
- Finance
:Capital may be needed to finance the growth
:Managers need to be aware of cash flow, cash flow out - to pay expansion and may take time for it to come in whilst operations are being set up.
:Without careful budgeting this could lead to cash flow problems

- Human resources
Growth can be positive as it provides new opportunities for employees and responsibilities.
:Short term problems though - extra duties
:Extra burden on staff unless recruitment is undertaken at the appropriate times

- Operations
Short term growth may improve the capacity utilisation
:May find it difficult to sustain this level of effort 24 hours a day, every day.
:Bad - organisations may need to invest into new capacity

- Marketing
:Increased marketing efforts may be required to generate the demand for growth, may be existing or new markets
: Some cases it may require more investment.

Assessing innovation

What is the meaning of innovation?

Innovation occurs when a new idea is brought to fruition and turned into a good or service that can be used and or sold.

What are the pressures for innovation?

- Political pressure
May open up new geographical markets through trade deals requiring a new approach or changes to the product.
- Economic change
May create pressure for a lower cost solution to a problem
- Social change
May put pressure on businesses for new environmentally-friendly approaches.

- Technological developments
- Competitive pressure

What is process innovation?

- Change in the way a product is conceived, manufactured, or disseminated
- Finding better or more efficient ways of producing existing products or delivering existing services

What is the value of innovation?

- The simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy
- Improving on what the customers want
- To remain competitive and to maintain the profitability of the business, depending on the product it will allow the business to have better quality, lower costs, faster delivery, and more reliability.

The ways of becoming an innovative organisation

- It is acceptable to fail
- There is funding available for experimentation and for trying new things
- It is good to share:
Bouncing ideas off of one another
Challenging each other
Share different skills, experiences and perspectives

Additional - the ways of becoming an innovative organisation:

- Leadership
- Listening
- Kaizen groups
- Intrapreneurship
- Benchmarking

What is leadership, listening, kaizen groups, intrapreneurship and benchmarking?

Leadership - what do the leaders want to happen, what do they value, what do they encourage, what do they reward?
Listening - it's important to listen, whether it be listening to customers, partners, employees or to anyone you work with, it is important to listen to learn what is working, what is not working and what needs to be improved.
Kaizen groups - continuous improvements. Kaizen's approach appreciates that regular, small improvements can lead to major improvements in performance over time.
Intrapreneurship - individuals who have their own business ideas and are willing to take the risk to develop them.
Benchmarking - occurs when managers identify the best in their field for a particular aspect of their work and then try to learn from them. The aim of benchmarking is to adopt the best practices from the best in the world and therefore improve your own performance.

Key parts of kaizens continuous improvements:

- Standardised work
- Make problems visible
- Develop counter-measure
- Determine root cause
- Hypothesise solution
- Test hypothesise
- Implement solution

How can a business protect its innovations?

- A business must be able to protect its advantage to prevent rivals from copying what it does one way this can be done is by protecting intellectual property.

What are intellectual property rights?

- org has ownership of innovation by an individual or business enterprise
- a product of employee creativity and enterprise resources
- includes patents, trademarks and copyrights (ex: inventions, processes, images, logos, works)
- includes trade secrets/confidential info even though its not specifically protected under patents

What is disruptive innovation?

- A process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up the market, eventually displacing established competitors
- Unique and successful creations that are successful because they disrupt the mundaneness of the normal products

What are the impacts on innovation on functional areas?

- Human resource
The way in which the employees are managed and rewarded must encourage them to bring ideas forward and share them.
- Finance
Money will need to be made available for R&D and innovation projects.
- Marketing
The initial stimulus for innovation may come from marketing research
- Operations
Innovation may require project management to develop new products.

Assessing internationalisation

What has caused greater internationalisation?

- Trade agreements
- Improvements in transport
- Improvements in communications technology

What is a free trade?

- Occurs when there is trade between two countries without barriers such as tariffs and quotas

What is a tariff?

- A tariff is a tax placed on foreign goods and services

What is a quota?

A limit on the number of goods that can be imported

What is a customs union?

- A group of countries that have agreed to charge the same import duties as each other and usually to allow free trade between themselves.
- Free trade areas that impose a standard tariff on non-members.

what are the benefits of selling overseas?

- A larger target population
- The opportunity to reduce risk

Examples of greater Internationalisation?

- Sell abroad
- produce abroad
- Buy from abroad

What are the methods of entering international markets?

- Exporting
- Licensing
Low level of commitment and risk

- Alliances/ventures
- Direct investment
High level of commitment and risk

What is a multinational company?

- Has operations based in overseas markets

Additional info about multinational companies:

Welcomed by the overseas government:
- Bring skills and expertise
- Bring employment
- Increase demand for goods and services
- Increase tax revenue

Criticized for:
- Exploiting local resources and not sharing the rewards of the business with the local economy
- Keeping senior jobs for their staff and employees for low-level jobs
- Keeping the majority of profits for their own head office and not investing locally.

For the business itself being multinational:
- Gives it direct access to local markets
- Means its production is closer to local customers.
- Spreads the risks of being dependent on one country or one production base by having more than one around the world.

However, multinationals may:
- Bring management challenges
- Bring criticism from some groups if the business is said to be abusing its power in any way or if there is pressure to buy local brands not global ones

What are the factors influencing the attractiveness of markets?

- The size and growth of the market
- The expected costs of entering the market
- The macro environment
- How culturally similar is to the UK?
- The degree of competition
- The perceived risk involved
- The fit with the overall strategy of the business and its competences

What are the reasons for producing abroad?

- it costs less
- It may be nearer to resources
- It may be more efficient to produce locally in overseas markets and sell there

What is re-shoring?

when a business moves departments back to its country of origin

What is outsourcing?

- A decision by a corporation to turn over the production of parts to independent suppliers
- obtain (goods or a service) from an outside or foreign supplier, especially in place of an internal source.

What are the influences buying, selling and producing overseas?

- The pressure for growth
- The pressure for lower costs
- Location
- The availability of suitable resources locally
- Politics / economics

How to manage international businesses?

- The extent of which the local markets differ to the local requirements
- The costs of adapting products to local needs
- The cost benefits (economies of scale) from standardising products and selling the same products around the world
- The ease of managing the business centrally from one location.