9. Strategic Methods-How to Pursue Strategies

Organic and External Growth

• Strategic options for growth:
  • Strategies:
    • Innovation
    • Diversification
    • International expansion
    • Cost leadership
    • Product development
  • Methods:
    • Organic (internal) growth
    • Takeovers/ mergers
    • Joint ventures or strategic alliances
• Reasons for Business Growth:
  • To increase profitability:
    • Growth could mean new markets and products which might add extra customers and lead to more long-term profits.
  • To increase efficiency:
    • Growth increases the scale of production and brings about economies of scale which help to reduce average costs per unit and raise profits
  • Increase market power:
    • Growth helps firms increase their market power helping them become less price-elastic and generate greater revenue
  • Achieve managerial objectives:
    • Growth helps to show business progress and helps prove the worth of managers to the firm's shareholders.

What is organic (internal) growth?

• Growth from within the business
  • Examples:
    • Launch of new products
    • Expansion into new geographical markets
    • Exporting
    • New distribution channels
    • Franchising
• Examples:
  • Tesco: Introduced Tesco Mobile, which is an example of organic growth
  • Amazon: Expanded its product and service offerings beyond its original online bookstore model and into new markets like healthcare and logistics
  • Dominos UK: Has implemented a successful organic growth strategy
  • Apple: Has implemented a successful organic growth strategy
  • Costa Coffee: Has implemented a successful organic growth strategy
• Benefits:
  • Less risk than external growth (e.g. takeovers)
  • Can be financed through internal funds (e.g. retained profits)
  • Builds on a business's strengths (e.g. brands, customers)
  • Allows the business to grow at a more sensible rate
• Drawbacks:
  • Growth achieved may be dependent on the growth of the overall market
  • Hard to build market share if a business is already a leader
  • Slow growth – Shareholders may prefer more rapid growth
  • Franchises (if used) can be hard to manage effectively

What is external growth?

• Growth from outside the business
  • Examples:
    • Takeover of competitor
    • Merger with competitor
    • Acquiring a supplier or major customer
    • Joint venture overseas
• Examples:
  • Morrisons and Safeway: Morrisons purchased Safeway in 2004, increasing the number of Morrisons stores from 120 to over 500. This was an example of horizontal integration, which increases market share and reduces competition.
  • Facebook and WhatsApp: In 2014, Facebook bought WhatsApp for 19 billion, giving Facebook 700 million customers. This was an example of vertical integration.
  • Amazon and Whole Foods: Amazon diversified into grocery retailing by taking over Whole Foods.
  • Disney and Pixar: In 2006, Disney and Pixar merged to form one large company.
  • Virgin Group: Virgin Group is an example of a conglomerate business, which combines companies with unrelated lines of business. Virgin Group's activities include music, banking, rail transport, and aerospace services.
• Benefits:
  • Access to new markets: A business can expand into new markets or reach new customers
  • Increased market power: A business can increase its market share and reduce competition
  • Diversification: A business can diversify its risk by merging with or taking over a company in a different industry
  • Access to new technology: A business can gain access to new technology or brands
  • Improved efficiency: A business can increase the efficiency of its operations
  • Rapid growth: A business can expand quickly
• Drawbacks:
  • Cost: Merging with or taking over another business can be expensive.
  • Lack of experience: Managers may not have the experience to deal with other businesses.
  • Culture clashes: Different opinions on how to run the company can lead to culture clashes.
  • Lack of competition: Taking over rival firms can lead to a lack of competition, which could result in inefficiency and a private monopoly.
  • Clashing synergy: When two firms are merged, they may have different management styles, which can lead to hostility and a fall in productivity.
  • Integration challenges: There may be challenges integrating the two businesses.
  • Financial risks: There may be financial risks.
  • Regulatory issues: There may be regulatory issues.
  • Loss of focus: There may be a loss of focus on the core business.
  • Risk: Mergers and takeovers can be extremely risky, with more than half being unsuccessful.
  • Difficulty managing: The sheer size of the business can make it difficult to manage, coordinate, and communicate effectively.

Retrenchment

• What is retrenchment?
  • ‘To cut down or reduce something’
  • ‘Use resources more carefully’
  • Retrenchment is the process of deliberately downsizing a business to enable it to improve operational control.
  • Firms often use this strategy to minimise the impact of diseconomies of scale after a period of previously rapid growth.
  • Sometimes a downturn in the external economic environment can leave a business with excess stock and resources lying idle. This is inefficient and costs a business money.
• Examples of retrenchment within a business:
  • Reduce output and capacity
  • Job losses
  • Product/market withdrawal
  • Disposal of business unit
  • Scaling back investment
• What drives retrenchment?
  • Costs too high
  • Low ROCE
  • High gearing
  • Loss of market share
  • Failed takeover
  • Economic downturn
  • Change of ownership
    • All of which indicate the need for strategic change
• Modern examples of retrenchment:
  • Nokia:
    • ‘I have learned that we are standing on a burning platform. And, we have more than one explosion - we have multiple points of scorching heat that are fuelling a blazing fire around us.’ Stephen Elop (2010)
  • Tesco:
    • Tesco exits its US chain of 199 Fresh and Easy shops, which never made a profit, at a cost of £1.2bn. 2013
  • Microsoft:
    • “The overall result of these changes will be more productive, impactful teams across Microsoft… We will simplify the way we work to drive greater accountability, become more agile and move faster’ Satya Nadella (2014)
• Implication for change management:
  • Much depends on the scale and scope of retrenchment
  • Small-scale, incremental retrenchment has only limited impact
  • Significant retrenchment is often associated with a fundamental reappraisal of the business
• Retrenchment and change:
  • Change organisation structures:
    • Changed management responsibilities
    • Greater workloads / higher stress (possibly)
    • New teams and colleagues
    • Different reporting structures
  • New leadership and/or ownership
    • Different leadership style
    • Uncertainty (particularly amongst management)
    • New priorities, aims and objectives
  • A threat to the prevailing corporate culture
    • Previous projects often abandoned (e.g. investment)
    • A new / renewed sense of urgency
  • Fewer people:
    • Loss of morale and increased de-motivation
    • Bad news for some external stakeholders (e.g. local community, local suppliers)
• Problems with retrenchment:
  • The nature of retrenchment (downsizing) inevitably means that there will be job losses.
  • Job losses can attract trade union action, negative media attention and stakeholder protests within the local community.
  • Job insecurity concerns for remaining employees.
  • Employees might be uncertain about the future direction of the company and, as a result, might look for other work, leading to a rise in labour turnover.

Economies of Scope

• What are Economies of Scope?
  • Economies of Scope arise when unit costs are lower when a business produces a wider range of products rather than specialise in just one or a few products
• Examples of economies of scope:
  • Sharing resources:
    • Companies can use the same resources to produce multiple products, which can lower the average cost per unit. For example, a restaurant can use the same fryers, cooks, and cold storage to produce chicken fingers and French fries.
  • Co-production:
    • Companies can use the production process for one product to create another product. For example, a company that makes dried fruit can use the peels to produce fruit oil for the skincare or culinary industries.
  • Mergers:
    • Companies can merge to share research and development costs and diversify their product portfolio. For example, two pharmaceutical companies might merge to create new products.
  • Brand extension:
    • Companies can expand their product range to take advantage of existing brands. For example, the Easy Group applies its business model to a range of markets, including gyms, pizza delivery, and estate agencies.
  • Optimising the use of resources:
    • Companies can optimise the use of resources to reduce costs. For example, airlines can transport freight cargo underneath passenger planes to make better use of the plane, fuel, and flight crew.
• Business examples of economies of scope:
  • Airlines:
    • Passenger airlines often transport cargo under the plane, which makes better use of the plane, fuel, and flight crew.
  • Warehouses:
    • Warehouses can store goods for multiple companies, which maximises the investment in the warehouse.
  • Restaurants:
    • Restaurants can produce multiple items, like chicken fingers and french fries, at a lower cost than if each item was produced separately.
  • Shoe manufacturers
    • Shoe manufacturers can produce multiple lines of shoes, like men's, women's, and children's, using the same production process, equipment, and distribution channels.
  • Procter & Gamble
    • Procter & Gamble produces many hygiene-related products, like razors and toothpaste, using the same inputs.
  • Co-production
    • Companies can use the production process for one product to produce another, such as using the peel of dried fruit to produce fruit oil for skincare
• Benefits:
  • Efficiency:
    • Companies can save time and money by using the same resources to produce multiple products.
  • Lower production costs:
    • Companies can reduce the average cost of production by using the same resources to make different products.
  • Increased revenue:
    • Companies can increase revenue by selling more products.
  • Improved customer satisfaction:
    • Companies can improve customer satisfaction by reducing product costs and offering various products.
  • Reduced risk:
    • Companies can reduce risk by diversifying into related products. For example, a car producer that only makes SUVs is vulnerable to market changes, but a company that produces a variety of vehicles can respond to consumer preferences.
  • Quicker incorporation of new technology:
    • Companies can incorporate new technology into product designs more quickly.
• Drawbacks:
  • Risk of damaging reputation: Expanding too quickly into too many products can dilute a brand's value, especially if the business was originally built on a niche.
  • Less experience with new products: The second product a company tries may not be as successful as the first, which can reduce the brand's value.
  • Disorganisation: Expanding too fast can lead to the accumulation of expansion costs that the company can't pay.
  • Fewer job opportunities: Economies of scope can mean fewer job opportunities because the company doesn't have to take on as many employees.
  • May never reach a plateau: Economies of scope may never reach a point where the business is right-sized and right-shaped.
  • Substantial initial outlays: New manufacturing technologies may require substantial initial outlays.
  • Risk is higher: With increased costs, the risk is higher and the gamble is greater.

What are Economies of Scale

• Economies of Scale arise when unit costs fall as output rises

Experience Curve

• The idea behind the experience curve:
  • The more experience a business has in producing a particular product, the lower its costs
  • The experience curve is a graphical representation of a decline in costs per unit brought about by staff making fewer and fewer mistakes as they become more experienced as volumes of production rise
  • The experience curve in theory provides market leaders with a significant barrier to entry
• Where has it come from?
  • It was devised by the Boston Experience Curve
  • Manufacturer of semiconductors: Unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced
  • Concluded: The more experience a firm has in producing a particular product, the lower are its costs
• Why might the experience curve happen?
  • More efficient and better-skilled labour
  • More standardisation of production and specialisation
  • Better use of technology (e.g automation) as a result of experience
  • Product improvement and redesign
• Implications of the experience curve:
  • Businesses with the most experience will have a significant cost advantage
  • Businesses with the highest market share are likely to have the most/best experience
  • Therefore:
    • Experience is a barrier to entry
    • Try to maximise market share

Low-cost strategy

• With this strategy, the objective is to become the lowest-cost operator
  • Ryan air
  • Aldi
• Likely features of a low-cost operator:
  • High levels of productivity and efficiency
  • High capacity utilisation
  • Large scale= economies
  • Use bargaining power to negotiate the lowest prices from suppliers
  • Lean production methods and culture
  • Access to the widest and most important distribution channels = experience
• Criticisms:
  • The model was developed in the 1960s — a long time ago!
  • Market leaders often become complacent - perhaps because of their "experience"
  • Experience may cause resistance to change and loss of innovation
  • Might this cancel out the cost benefits of experience?
• Benefits:
  • Lower costs: As a company gains experience, it can reduce production costs, which can lead to lower prices.
  • Increased market share: Lower prices can attract more customers, which can lead to a larger market share.
  • Higher profit margins: Lower costs lead to higher profit margins.
  • Improved operational efficiency: Companies can enhance cash flow by improving operational efficiency.
  • Better product design: Companies can learn from experience to improve their products.
• Analysis:
  • A workforce might seek to resist change as they are comfortable 'experienced' with the existing setup.
  • The modern economy is a rapidly changing one thanks to improved communication and technology - therefore what value does experience offer?
  • Do costs continue to decline indefinitely or do they eventually start to plateau?

Synergy

• Synergy is a concept associated with external growth:
  • Takeover
  • Merger
  • Joint Venture
  • Strategic Alliance
• What is ‘Synergy’?
  • It arises when the whole is greater than the sum of the individual parts
• Synergy as an equation:
  • 1+1=3
• Example of synergy:
  • Sainsbury’s buying Argos for £1.4bn
  • Lloyds Banking Group is paying for the MBNA credit card business
• Cost and revenue synergies:
  • Cost savings:
    • Eliminate duplicated functions and services
    • Better deals from suppliers
    • Higher productivity and efficiency from shared assets
    • Economies of scale
  • Higher Sales:
    • Cross-selling to customers of both businesses
    • Access to new distribution
    • Brand extensions
    • New geographic markets opened up
• Benefits of Synergy:
  • Improved problem-solving:
    • When team members have different perspectives and skills, they can brainstorm and debate to find solutions.
  • Increased productivity:
    • Team members can distribute tasks based on their strengths, avoiding duplication of effort.
  • Positive work environment:
    • Team members feel valued and part of a cohesive unit, which can lead to higher job satisfaction and lower stress.
  • Effective conflict resolution:
    • Teams can address issues openly and find resolutions that benefit everyone.
  • Innovation:
    • When people with different perspectives share ideas, they can create more sophisticated products.
  • Competitive advantage:
    • Companies can gain a competitive advantage by combining complementary products or expanding their customer base.
  • Financial benefits:
    • Companies can get loans with more favourable interest rates, and they may be able to reduce the cost of equity.
  • Cost savings:
    • Companies may be able to save money on human resources costs by laying off employees whose roles are redundant.
• Drawbacks:
  • Cultural clashes:
    • Differences in corporate culture, management styles, and employee expectations can lead to friction, reduced morale, and talent leaving the organisation.
  • Financial risks:
    • Overestimating the financial benefits or underestimating the integration costs can lead to disappointing returns. Taking on too much debt to finance the merger can strain the merged entity's financial health.
  • Short-term costs:
    • The integration of two companies can incur non-recurring expenses and short-term inefficiencies.
  • Loss of creativity:
    • Combining marketing departments can eliminate inter-departmental competition, which may extinguish creativity.
  • Loss of local marketing efforts:
    • Combining advertising efforts may remove local marketing efforts that are crucial in some markets.
  • Distraction from business:
    • The pursuit of synergy can distract managers' attention from their businesses' day-to-day operations.
  • Brand dilution:
    • Co-branding can confuse customers and dilute the visual identity if there aren't clear, cohesive branding guidelines.
  • Misaligned brand values:
    • Partnerships with brands having different core values can harm your brand's reputation and customer trust.
  • Unequal effort and rewards:
    • Ensuring that all parties contribute equally and reap proportional benefits can be challenging.

Overtrading

• What is Overtrading?
  • It happens when a business expands too quickly without having the resources to support such a quick expansion
• Overtrading is most likely to happen when…
  • A business makes significant investments in capacity before revenues are generated
  • Sales are made on credit and customers take too long to settle amounts owed
  • Significant growth in inventories is required to trade from the expanding capacity
  • A long-term contract requires a business to incur substantial costs before customers make payments under the contract
• Ratio Warning Signs of Overtrading:
  • High revenue growth but low-profit margins
  • Persistent use of a bank overdraft
  • Significant increases in the payables days and receivables days ratio
  • Considerable increase in the current ratio
  • Very low inventory turnover ratio
  • Low capacity utilisation
• What Can Businesses Do to Prevent Overtrading?
  • Reduce inventory levels
  • Slow the pace of growth until profit margins and cash balances improve
  • Lease rather than buy (e.g equipment)
  • Obtain longer payment terms from suppliers
  • Give customers less time to pay
• Drawbacks of Overtrading:
  • Cash flow issues:
    • Overtrading can lead to a cash flow imbalance, where a business can't pay its bills or staff. This can happen when a business takes on too much trade without managing it properly.
  • Reduced profitability:
    • A business may cut prices to encourage sales, which can reduce profit margins and make it harder to operate sustainably.
  • Loss of supplier support:
    • Suppliers may be reluctant to continue offering credit if a business starts to fall behind on payments.
  • Excessive borrowing:
    • Borrowing money to pay suppliers and invoices each month is not sustainable. Lenders may ask for a personal guarantee from directors, which can put the business at risk.
  • Poor quality products:
    • Overtrading can lead to a business delivering poor-quality products or services, which can damage its reputation.
  • Legal action:
    • Suppliers or customers may take legal action if a business doesn't pay for supplies or fulfil an order.
  • Insolvency:
    • In extreme cases, overtrading can lead to insolvency and the business being forced to shut down.

Mergers and Takeovers

• What is a Merger?
  • A combination of two previously separate businesses is achieved by forming a completely new business into which the two original businesses are integrated
• Examples:
  • 2010: British Airways and Iberia merge to form IAG
  • 2000: Glaxo Wellcome plc and SmithKline Beecham plc merge to form GSK plc
  • 2014: Dixons plc and Carphone Warehouse merge to form Dixons Carphone
  • 2015: Paddy Power and Betfair merge to form Paddy Power Betfair
  • 2015: H.J. Heinz Company & Kraft Foods Group merge to form The Kraft Heinz Company
• The difference between a Merger and a Takeover?
  • Merger:
    • A new business is created
  • Takeover:
    • One business takes control of another business
• Common features of mergers:
  • Both businesses broadly "equals"
  • E.g. in terms of size, value, activities
  • Usually operate in the same industry
  • Significant potential for "synergies"
  • But the usual risks are there - e.g. trying to "merge" organisational cultures
• Benefits of mergers:
  • Economies of scale:
    • As production, operation, or distribution increases, the average cost per unit decreases. This can lead to significant cost savings, which can improve profitability.
  • Increased market share:
    • Mergers reduce competition and increase market share by combining the sales of both businesses.
  • Access to new technologies:
    • Mergers can provide access to new technologies and innovation.
  • Better financial planning:
    • Mergers can result in better planning and utilization of financial resources.
  • Shareholder benefits:
    • Shareholders of the acquired company typically receive a premium for their shares, which is higher than the market value before the acquisition.
  • Consumer benefits:
    • Vertical mergers can benefit consumers by increasing efficiency and creating downward pressure on consumer prices.
• Drawbacks:
  • Financial risks:
    • Mergers can be expensive and place a large cash burden on companies, especially if terms aren't agreed upon.
  • Competition issues:
    • Merging with a rival business can create a monopoly, leading to higher prices and a bad deal for consumers and suppliers.
  • Culture clashes:
    • Merged companies may have different cultures, which can lead to conflict.
  • Integration challenges:
    • It can be difficult to integrate the two companies effectively, especially if they don't communicate well.
  • Loss of key employees:
    • Mergers can create uncertainty, which may cause high-performing employees to leave.
  • Risk of redundancies:
    • Merged companies may have employees who duplicate each other's duties, leading to job cuts.
  • Regulatory hurdles:
    • Mergers may have to navigate regulatory hurdles.
  • Customer dissatisfaction:
    • Mergers can lead to customer dissatisfaction.
  • Increased debt:
    • Mergers can increase a company's debt.
  • Dilution of Ownership:
    • Mergers can dilute ownership.
  • Operational disruptions:
    • Mergers can disrupt operations.
  • Risk of failure:
    • Mergers can fail, especially if there are poor planning, unrealistic expectations, or culture clashes.
• What is a takeover?
  • It involves one business acquiring control of another business
• What are the reasons for this?
  • Increase market share
  • Acquire new skills
  • Access economies of scale
  • Secure better distribution
  • Acquire intangible assets (brands, patents, trademarks)
  • Spread risks by diversifying
  • Overcome barriers to entry to target markets
  • Defend itself against a takeover threat
  • Enter new segments of an existing market
  • Eliminate competition
• Why might they be preferred to organic growth?
  • Existing products are in the later stages of their life cycles, making it hard to grow organically
  • The business (in particular its management) lacks the expertise or resources to develop organically
  • Speed of growth is a high-priority
  • Competitors enjoy significant advantages that are hard to overcome other than acquiring them!
• Benefits of takeovers:
  • Market share:
    • A company can increase its market share and become more dominant in its industry by acquiring a competitor.
  • New markets:
    • A company can quickly enter a new market by acquiring a company already operating there.
  • New technologies:
    • A company can gain access to new technologies or expertise by acquiring a company with them.
  • Economies of scale:
    • A company can reduce costs and achieve economies of scale by combining the operations of two companies.
  • Intangible assets:
    • A company can gain a competitive advantage by acquiring a company with valuable intangible assets, such as brands, patents, or trademarks.
  • Diversification:
    • A company can spread its risk over a wider range of products and services by acquiring a business in an unrelated market.
  • Eliminate competition:
    • A company can eliminate a threat to its business by acquiring a competitor.
  • Defend against a hostile takeover:
    • A company may acquire another company to make itself a less attractive target for a hostile takeover.
  • Increase revenue and profits:
    • A company may acquire another company to increase its revenue and profits
• The risks and drawbacks:
  • High cost involved - with the takeover price often proving too high
  • Problems of valuation (see the price too high, above)
  • Upset customers and suppliers, usually as a result of the disruption involved
  • Problems of integration (change management), including resistance from employees
  • Incompatibility of management styles, structures and culture
  • Questionable motives
• Why do takeovers fail?
  • The price paid for the takeover was too high (over-estimate of synergies)
  • Lack of decisive change management in the early stages
  • The takeover was mishandled
  • Cultural incompatibility between the two businesses
  • Poor communication, particularly with management, employees and other stakeholders of the acquired business
  • Loss of key personnel & customers post-acquisition
  • Competitors take the opportunity to gain market share whilst the takeover target is being integrated

Franchising

• What is it?
  • It arises when a franchisor grants a licence (franchise) to another business (franchisee) to allow it to trade using the brand/business format
• What is a franchisor?
  • They are business that sells the right to another business to operate a franchise – they may run a number of their own businesses but also may want to let others run the business in other parts of the country
• What is a franchisee?
  • A franchise is bought by the franchisee
• What happens during it?
  • Once they have purchased the franchise, they have to pay a proportion of their profits to the franchiser on a regular basis. Depending on the business involved,
• Why is it a good way for an individual to set up a business?
  • They do not have to establish themselves in the same as a sole trader might have to.
  • They will have the support of a tried and tested business model, often with a national marketing campaign behind them
• What are the benefits to the Franchisor?
  • The franchisee is given support by the franchisor. This includes marketing and staff training. So, starting a business in this way requires less expertise and is less lonely!
  • The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product
  • Less investment is required at the start-up stage since the franchise business idea has already been developed
  • A franchise allows people to start and run their own businesses with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market
• What are the drawbacks to the franchisee?
  • The cost to buy a franchise – can be very expensive (hundreds of thousands of pounds).
  • Have to pay a percentage of your revenue to the business you have bought the franchiser from.
  • Have to follow the franchise model, so less flexible. You would probably be told what prices to set, what advertising to use and what type of staff to employ.

Types of Integration

• What is Vertical Integration?
  • It is when one firm takes over or merges with another business at a different stage in the production process but within the same industry.
• What is Horizontal Integration?
  • It is when a firm merges or takes over a rival competitor within the same industry
• What is Conglomerate Integration?
  • It is where a firm diversifies into new markets unrelated to their current area of expertise
• What is Forwards Vertical Integration?
  • It is when a business buys a customer for their product.
• What is an Example of Forwards Vertical Integration?
  • The sometimes-controversial US brand American Apparel has total control over all aspects of manufacturing and retail by operating its own chain of stores.
• What are the Benefits?
  • Tighter control over the retail image.
  • Better relationship with customers
  • Increased market power
  • Expert staff in stores.
• What are the Drawbacks?
  • Expensive strategy.
  • Loss of focus away from their main area of expertise.
  • Very different cultures in retail to manufacturing.
• What is Backward Vertical Integration?
  • It is when a business buys a supplier for their product.
• What is an example?
  • The leading coffee chain Starbucks has relatively recently started to expand into coffee farming, purchasing crop growers in Costa Rica and even China.
• What are the Benefits?
  • Tighter control over quality of supply.
  • Ability to lower prices to customers through cheaper supply costs.
  • Create a USP
• What are the Drawbacks?
  • Less supplier competition could mean inefficiency.
  • Less flexibility in the choice of supplier.
  • Risk of limited management experience in new areas.
• What is Horizontal Integration?
  • It is when a business buys a rival competitor in the same industry.
• What is an example?
  • When the British car manufacturer Rover was taken over by the German BMW group many hoped for a revival of the firm's fortunes. Four years later the company was sold for just £10! Not all mergers and takeovers are successful.
• What are the Benefits?
  • Opportunities for large economies of scale.
  • Less competition.
  • Greater market power and higher profits.
• What are the Drawbacks?
  • Risk investigation by the Competition & Markets Authority if market share is over 25%.
  • Cultural clashes
  • Expensive
• What is Conglomerate Integration?
  • It is when a business expands into markets totally unrelated to its own area of expertise.
• What is an Example?
  • Firms might wish to diversify into new markets and to spread their exposure to risk. Companies such as Samsung, Google, General Motors and Tata are specialists in diversifying into many unrelated markets.
• What are the Benefits?
  • Opens up access to new markets.
  • Asset stripping opportunities
  • Spreads risk
  • Enables rapid growth
• What are the Drawbacks?
  • Expensive
  • High risk (Ansoff)
  • Limited experience
  • Extensive market research
  • Most likely to fail.

Innovation

• Two main types of innovation:
  • Product innovation:
    • Launching new or improved products (or services) onto the market
  • Processinnovation:
    • Finding better or more efficient ways of producing existing products or delivering existing services
• Product Innovation- Benefits:
  • Greater perceived added value
  • Higher prices
  • Build early customer loyalty
  • Enhanced reputation as an innovative business
  • Increased market share
• Process Innovation- Benefits:
  • Reduced costs
  • Improved quality
  • More responsive customer service
  • Greater flexibility of operations
• Key Benefits of Effective Innovation:
  • Improved productivity and reduced costs
  • Helps build a brand
  • Establishes an advantage over competitors
  • Builds a strong organisational culture which should attract more talent
  • Higher sales and profits

Kaizen

• Kaizen Groups:
  • Linked with developing an innovative culture in business
  • Another kind of quality assurance
  • Based on the concept/culture of continuous improvement
  • Encourages employees to find ways to improve processes
• Example:
  • E.G. In Japan, Toyota receives an average of 20 written suggestions per annum from each employee. In the UK the statistic for all UK Industries is 1 idea per employee every 6 years!
• Key features:
  • Improvements are based on many, small changes rather than the radical changes that might arise from Research and Development
  • As the ideas come from the workers themselves, they are less likely to be radically different, and therefore easier to implement
  • Small improvements are less likely to require major capital investment than major process changes
  • The ideas come from the talents of the existing workforce, as opposed to using R&D, consultants or equipment – any of which could be very expensive
  • All employees should continually be seeking ways to improve their own performance
  • It helps encourage workers to take ownership of their work and can help reinforce teamwork, thereby improving worker motivation
• Continuous improvement: