3.9 Strategic methods, how to purse strategies

Question 1

What is retrenchment? Why do businesses grow or retrench?

Answer 1

Retrenchment means business has to down size in certain areas, for example by cutting jobs, reducing output, withdrawing from markets and demerging. Need for retrenchment may be in order for businesses to remain profitable or due to diseconomies of scale, declining markets, recessions and improved competitor performance.

Question 2

What is organic growth?

Answer 2

Organic growth is the expansion within a business (increase capacity, new premises, more staff, expanding consumer base, launch new products and opening new branches or locations)) slower and more gradual change so easier for company to adapt to growth, organic growth often allows businesses to finance their growth by reinvesting profits into business. OG is easy when the markets firm is in are growing quickly, and outperforming competitors which enables them to increase market share.

Question 3

Advantages and disadvantages of organic growth?

Answer 3

Advs
- can maintain current management style
- less risk expanding what firm is already good at
- easy for firm to manage internal growth and control how business will grow
- less disruptive changes mean workers efficiency/productivity/morale remain high
Disadv
-takes long time to grow a business internally and can take a while for business to adapt to big changes in market
- market size isn’t affected by organic growth, if market isn’t growing if firm is restricted to increasing market share or finding new market to sell products to
- firm might miss out on opportunities for more ambitious growth if they only grow internally.

Question 4

What is external growth?

Answer 4

External growth is growth outside of the business in forms of mergers, takeovers and ventures. External growth is much quicker than organic growth and can rapidly increase capacity, workforce, skills etc available to business, can also increase market share.

Question 5

What is horizontal, vertical and vertical forwards and backwards integration (external growth)?

Answer 5

Horizontal integration, when firm combines with another firm in the same industry at same stage of production process.
Forward vertical integration, when business combines with another business that is further on in production process (manufacturer with outlets).
Backward vertical integration, when business combines with another business at an earlier stage in production process (retailer taking over its supplier).
Conglomerate integration, firm joins another firm that is a completely different industry (unrelated) also maybe different areas in production process as well, may be done for product extensions mergers between related products.

Question 6

What is the difference between organic and external growth?

Answer 6

OG is growth achieved within business using its own resources. It’s slower more controlled growth, less risky than EG and maintains ownership and control.
EG involves joining with or buying another business, can provide more rapid expansion, used often to enter new markets and riskier and more complex.

Question 7

What are the issues with growth?

Answer 7

• expansion goes too far, diseconomies of scope—where producing a wider variety of goods increases average costs due to inefficiencies, duplication of roles, or conflicting objectives across departments. Only solution is retrenchment.
• diseconomies of scale, achieving economies of scale often requires large investments in machinery or systems, financial risk if demand doesn’t grow as expected, also reduces flexibility if the market changes quickly.
• when growth occurs, poor decision-making and poor communication across departments may lead to diseconomies of scale, where average costs start rising instead of falling, due to business growing beyond optimal size.
• fast growth increases risk of overtrading, increased demand firm buys more raw materials and employs more people, reduces working capital available to pay bills, firm could go bust before the chance to receive receivables.
• can be tension between staff of merged business as try to establish their status in new organisation, also takes time for staff to learn new procedures
  -Mergers aiming to create synergy often involve cutting duplicate roles. While this reduces costs, it can lower staff morale, create resistance to change, and damage internal relationships.
  -Achieving synergy can be expensive and time-consuming — such as aligning IT systems, retraining staff, or rebranding — which eats into short-term profits and cashflow.
  -Leaders may focus so much on achieving synergy post-merger that they lose sight of day-to-day operations, harming core performance.
• firms in mergers may have different objectives and culture, lead to clashes on important issues and inefficiency (result in diseconomies of scale)

Question 8

What are economies of scale?

Answer 8

The process by which average cost of output deceases output increases, can happen in variety of different ways:
- Purchasing economy of scale, bulk buying of goods or service (discount on more you buy)
- Financial economy of scale, negotiating with banks larger firm will be on better position (bigger firm lower the risk and lower interest rates)
- Managerial economy of scale, employing specialist managers in different functions (more efficient no training)
- Technical economy of scale, specialist workforce and equipment purchased (increased productivity, efficient)

Question 9

What is a synergy and how does it affect bus growth?

Answer 9

This is main motive for mergers, where the business after the merger is more profitable than all businesses before merger, this is result of merged business generating more revenue or cost saving than independent business could between them. Revenue synergy= increased sales cross selling products to wider consumer base.
Cost synergy=lower costs as eliminating duplicate departments and sharing resources e.g. tech, logistics etc. Financial Synergy= better access to finance due to a larger combined business. Managerial synergy= stronger leadership due to combined specialist knowledge, improved strategic d-m.

Question 9

What is economies of scope?

Answer 9

Arises when business produces multiple products instead of specialising in one, its cheaper for firm to produce many products than it is for many firms to produce one product each. Able to expand production department without having to expand other departments, so unit costs decrease. Economies of scope allows business to charge prices due to lower unit costs, gives them competitive advantage over other firms and can force rivals out of market.

Question 10

What is overtrading and how does it affect bus growth?

Answer 10

Overtrading occurs when a business expands its operations too quickly without having enough working capital (cash and short-term assets) to support that growth. Can damage financial stability of firm, restricts future growth, may harm reputation and increases risk of failure.

Question 11

What is the impact of growth on bus functional areas?

Answer 11

• marketing, larger consumer base is opportunity but need to adapt marketing strategy.
• finance, growth can lead to higher revenues and profit (improving access to investment), higher costs due to new premises or staff, equipment, may have cashflow issues or overtrading.
• operations, larger scale=economies of scale, increase production capacity and tech, may loose control over quality as production scales may need new supplier or logistic system
• hr, more opportunities for staff promotion and development and can recruit specialists, need rapid recruitment and training to support growth or redundancies and possible clashes in organisational culture with mergers.

Question 12

What is the impact of retrenchment on bus functional areas?

Answer 12

• marketing, can become more targeted and cost effective may need to rebrand or rebuild customer trust, damage of brand image, consumer sees retrenchment=failure, reduced budget.
• finance, reduce operating costs and improve cashflow and profit margins, short term costs (redundancy payments), fall in investor confidence and share price.
• operations, leaner structure increases efficiency and productivity and focus on best performing products, closing facilities may disrupt production and supply chain adjustments may be needed.
• hr, creates opportunity to streamline teams and remove inefficiencies, redundancies damage morale and increase stress (fear among staff), may be resistance to change, need stronger communication during change.

Question 13

What is a merger (method of external
growth)?

Answer 13

A merger is when two companies join together to form one company, may keep name of original company or a new name, shares of a merged company are transferred to shareholders of the old company. Main motive for mergers in synergy.

Question 14

What is a takeover (method of growth)?

Answer 14

when business buys enough shares in another firm so it has 50% of total shares, called controlling interest as buyer will always win in a vote of all shareholders. There are two types of takeovers:
- Hostile takeovers, occurs when plc buys majority shares in another plc against will of the directors of that company, can do this as anyone can buy shares on stock exchange. Company may also encourage existing shareholders to sell them their shares by offering premium on top of value of shares.
-Agreed takeovers, happens when shareholders or other types of owners (sole traders) agree they’ll sell the business to someone else, usually because owners believe it would benefit survival of the business.

Question 15

What are ventures (method of growth)?

Answer 15

Ventures are small businesses or projects set up by existing businesses in hope of making a profit, often set up to try and and meet needs not currently being met in current market. A join venture is when more than one business invests, they share resources but there is no change of ownership for firms involved, when joint venture is terminated profits are shared and businesses remain separate. Joint venture is good way to set up new business if don’t have the capital resources available and good way to access markets in different countries. Venture involves a lot of risk to firm setting it up, JV is preferable as risk can be spread amongst firms involved.

Question 16

What is franchising (method of growth)?

Answer 16

A franchise is an agreement (contract) which allows new businesses to use business idea, name and reputation of an established business. The franchisor is the established business which is willing to sell, license its name, idea and reputation, the franchisee is business which buys into the franchise, usually pay an initial fee plus ongoing payments (% of revenue or profit). Franchising allows the franchisor to grow quickly as most costs/risk taken on by franchisee. It can have some risks for franchisor, as if one franchisee has poor standards and gets bad reputation, will affect reputation and profits of franchisor.

Question 17

What are the pressures for innovation?

Answer 17

• competitive pressure/ competition (USP)
• technological changes
• change in consumer needs and wants
• globalisation (innovate t meet international demand or USP in new markets)
• government and regulation
• internal pressure (improve productivity, efficiency or profitability)
• social and environmental pressure (demand for ethical and sustainable practices)

Question 18

What is product innovation?

Answer 18

a product which is a significant change from what already exists

Question 19

What is process innovation?

Answer 19

a new way of doing things, making a product or providing a service (new or improved production)

Question 20

What is the value of innovation?

Answer 20

Benefits of innovation:
- USP
- can charge premium or higher prices for innovative product before competitors make similar ones or due to the fact there’s no alternatives
-good for brand reputation, naturally brings interest to future products
- innovations in process can add value to existing product/service, or improve efficiency
- firms with lots of innovative products can take advantage of economies of scope
Drawbacks of innovation:
- innovation can be costly and time consuming if invest too much in R&D and don’t get products to market quickly enough
- waste resources if consumers don’t want product
-risky
- firm may not be able to produce new product on a large scale at low cost and no guaranteed return on investment
- firm risks ruining reputation if innovative product is poor quality

Question 21

Ways of becoming an innovative organisation?

Answer 21

kaizen, research and development, intrapreneurship and benchmarking.

Question 22

What is kaizen?

Answer 22

“continuous improvement”, kaizen approach encourages employees to improve the way they work and the processes they use all the time, small kaizen changes can add up over time and lead to innovation. Kaizen also gives employees control over decision-making, creates working environment in which innovation can thrive.
Benefits
- firm doesn’t have to spend lots of time and money on R&D
- processes becomes more efficient all time.
Downsides to relying on kaizen for innovation
- won’t lead to innovation for new products as employees aren’t really encouraged to think about wants and needs of the consumer.

Question 23

What is research and development?

Answer 23

Research and Development (R&D) refers to the activities a business undertakes to innovate, create new products, improve existing ones, or develop more efficient processes. It typically involves: new ideas, product development, value analysis, test marketing and launching.

Question 24

What is intrapreneurship?

Answer 24

is when employees within business are encouraged to solve problem when coming up with new innovative new ideas (entrepreneurs within a firm), firm allows intrapreneurs to take risks and experiment with different ideas until they find most productive and effective way in terms of processes (implemented across whole department) or a product. **Advantage** of intrapreneurship is done alongside employees regular role, so firm isn't wasting money employing someone to try new things, even if solution isn't made they have still produced work along the way.

Question 25

What is benchmarking?

Answer 25

studying other businesses with excellent quality standards and aiming to innovate by adopting the same methods. Firms can do this by joining benchmarking groups (bus share info) or internally benchmark, by studying efficient departments and use what they learn to innovate in different departments. Benchmarking tends to motivate staff, more encouraging to introduce process or product that has already been seen working successfully than being introduced to something unknown. **Advantages** - provides early warnings to businesses about tech or methods that might allow competitors to overtake them **Downsides** - won't directly lead to new products as they may be protected (patent, copyright) need to be careful ideas firm takes - process may not be transferrable between different corporate cultures (may not be suitable)

Question 26

How to protect innovation?

Answer 26

Businesses need to protect ideas being copied by others, known as protecting intellectual property of business or individual, can be done by: - Patents, is a way of registering and protecting a new invention, by applying for a patent from Patent Office (agency that checks if invention is unique and original enough to be issued a patent), can get patents for product/method for producing, no one can copy unless you've given them a license (can charge for a license). Patents allow firm to maintain unique features of their products as long as the patent lasts (competitors cannot copy exact invention), general P is better if P is specific very easy for competitors to tweak the invention and get around the protection patent offers. - Trademarks, if want to protect business' name, logo or slogan, can register it as a trademark so nobody else can use it. Difficult to register certain slogans as a trademark (e.g. don't include company's name). - Copyright, gives protection to written work and music, illegal to reproduce other's work without their permission, can receive royalties (payment0 every time their work is published or played on the radio. Any original writing, music, video, images are automatically protected under UK copyright laws.

Question 27

What is the impact of having innovation strategy on functional areas of the business?

Answer 27

- marketing, brand differentiation: innovative offerings allow marketing to position the company as forward-thinking and unique (market map). - finance, valuation and funding: a strong innovation strategy can increase investor confidence and business valuation. - operations, quality and speed: innovation introduces methods to improve product/service quality while reducing delivery time. - hr, culture of innovation: Embeds a mindset of continuous improvement and creativity.

Question 28

Reasons for business to have greater globalisation/or being in international markets?

Answer 28

Globalisation is where businesses operate internationally, can buy and sell to any country and manufacture products. - wider access to consumer base - economies of scale - increase market share by selling internationally - extend product life cycle - reduce costs by manufacturing or getting raw materials from cheaper countries - lower labour costs (lower wage rates) -risk spreading if one market goes into recession

Question 29

What's the importance of globalisation for a business?

Answer 29

- market growth/expansion - economies of scale - access to cheaper resources and labour - risk spreading - first mover advantage (expanding early into emerging markets can establish market leadership before competitors enter) - enhanced brand recognition (strong global presence) - increased competitive pressure (may lead to innovation)

Question 30

What's the importance of emerging economies for a business?

Answer 30

BRIC nations- Brazil, India, China are all emerging economies are developing countries but fast growing. Emerging economies are good opportunity for business as offer good returns due to their rapid growth, labour is usually cheaper as well. Thus middle class is formed ppl eager to spend money on luxuries= creating lots of economic activity. Are risky investments as less stable (political instability, currency fluctuations). China and India have large populations so huge markets for businesses that can be very profitable if demand is created for products, recent economic growth= billionaires and millionaires in China and India so demand for luxury products to be successful. Can also reduce costs by outsourcing manufacturing to emerging economies. However there are cultural and language barriers.

Question 31

Reasons for business being in international markets?

Answer 31

- larger consumer base - lower production costs - risk spreading - gap in market in different locations - extension strategy (product life cycle) - achieve global identity - proximity to more materials - brand awareness

Question 32

Methods for entering international markets include?

Answer 32

**Importing and exporting** - firms can easily enter international markets by importing& exporting goods or services, means buying from or selling to companies/consumers in other countries. Firms importing from other countries will benefit from greater variety and cheaper prices. Exporting= benefit from increased market size. Putting infrastructure in place for I&E can be expensive, thus costs will decrease value added unless price of product is increased. **Licensing** - business can also get foreign firms to produce their products under a license (other firm makes product but original company name on it) known as licensing. Beneficial as business benefits from foreign firms infrastructure already in place- can make money without much work and little risk. **Alliances** - business can join forces with similar companies abroad, combining local knowledge with product already proven successful in their own country (called alliance). Alliances can spread out costs and risks and help overcome trade barriers, main drawback firm loses some control over venture in that country. **Direct investment** - when business takes over or mergers with business in different country, main benefit is allows business to enter market quickly and already have instant share of the market, bus doesn't need to invest in establishing name/ rep in new country. DI can also reduce risk of failure as benefits from knowledge and experience of local market and culture provided by bus it joins with.

Question 33

Factors influencing attractiveness of international markets?

Answer 33

**Size of the market** Countries with large populations and developing markets (BRIC) can be attractive prospects for bus as markets will be bigger. Wealth of markets will also affect the size of business' potential market. Availability of tech can also affect size of market as bus may be reluctant to expand in markets where internet is not readily available. **Political and economic factors** Businesses entering international markets need to take into account laws (employment, environmental and tax laws) can all affect profitability of bus. Also need to consider political controls on trade (tariffs, quotas), bus prefer to enter market environments with political stability. Fluctuations in exchange rates make cost of international change unpredictable, so difficult for business to accurately forecast revenue and profits. **Cultural, ethical and environmental factors** Businesses will find it easier to operate in countries with similar cultures and languages, difficult to trade with countries that have language and cultural barriers. Cheap labour is attractive= exploiting workers is unethical, consumers may boycott company. Businesses need to take into account the damage their activities have on the environment, raw materials abroad is often cheaper= transporting from one country to another causes lots of pollution, distributing finished product to diff country also causes pollution. Bus can exploit lack of environmental restrictions in other countries to gain cheap resources. Countries that have fewer restrictions on buying/selling of certain products can be appealing too.

Question 34

What are the reasons for producing and sourcing resources abroad?

Answer 34

- locating abroad can reduce costs, moving production overseas so they can pay foreign workers much lower wages than UK employees (unethical), further cost of land/ office space/ water/ electricity cheaper overseas. - way of targeting new international markets, locating firm close to overseas markets easier to spot local market trends (absorb more local knowledge) less likely to make expensive marketing errors may even spot new market niches. Locating to new international markets makes distribution of products to local market easier and decrease distribution costs to that market. - helps company avoid trade barriers, some countries create trade barriers to protect domestic companies from foreign competition (makes it more inefficient), barriers may be taxes or restrictions on sales of goods abroad. Locating part of bus within country w/ trade barriers helps companies get round these penalties, thus foreign company that locates itself within these trade barriers has competitive advantage because more likely to be efficient. - made easier by improved transport and communication links, price and availability of air travel means easier for people to travel between overseas locations, tech developments (communicate via email and video conferencing).

Question 35

What is off-shoring?

Answer 35

Offshoring involves the relocation of business activities from the home country to a different international location, as they may offer cheaper labour thus good way to cut costs. Not always good for brand image for UK job losses caused by O.

Question 36

What is re-shoring?

Answer 36

Reshoring happens when a transnational business decides to bring previously off-shored manufacturing back to the home country. May be due to bad consumer backlash, allows business to improve quality of products/ processes as manufacturing easier to monitor and control. Also means distribution of home market is cheaper and more efficient as products don't need to be shipped all over the world (bus can offer faster delivery services). May also re-shore due to overseas workers wages increasing due to legislation.

Question 37

What is being a multinational business?

Answer 37

is a business that has branches or departments in more than one country, head office will be in one country and will co-ordinate global activities from there.

Question 38

Value of being a multinational business?

Answer 38

Benefits: - access to new markets - economies of scale due to less strict employment laws - cost advantages - access to talent and innovation - enhanced bran recognition, strong global brand - business seen as exploitative of developing countries e.g. BRIC - may not be environmentally friendly to country operating in - avoid legal restrictions in their domestic market e.g. gun production

Question 39

What influences business buying, selling and producing abroad?

Answer 39

- political restraints, governments use protectionist policies to protect their domestic market's economy e.g. quotas and tariffs. Pressure groups may also force government to put tighter controls on multinationals from one country operating in other countries. - economic restraints, certain countries are in recession or in economic boom may attract or deter foreign businesses. - legal restraints, countries implement new legislation on employment to deter multinationals from overworking their citizens. - cost considerations, cheaper production or labour costs elsewhere and greater proximity to markets - skills and availability of labour, access to skilled or specialist labour can drive decisions if better in certain countries. - market potential, firms often sell in countries with growing middle classes or high consumer spending and accessibility to emerging markets can be a major growth driver. - exchange rates, SPICED, weak domestic currency can make exports more competitive. - cultural and language barriers.

Question 40

What are pressures for local responsiveness in terms of managing international business?

Answer 40

Multinational strategies can vary depending on pressure for local responsiveness. Local responsiveness means adapting products or process for different locations. When demands of different markets are very different, pressure for local responsiveness is high. Pressures include: - cultural differences (traditions or beliefs) - local laws and regulation - economic conditions (income levels and spending habits) - local competitors - language barriers (change packaging)

Question 41

What are pressures for cost reduction in terms of managing international business?

Answer 41

Multinational strategies can vary depending on pressure for cost reduction. Meaning business' reducing costs, can be achieved via global coordination. When pressure for GC is low= centralised structure. Pressures include: - global competition, competing against low-cost producers (especially in emerging markets) means firms must reduce their own costs to stay price-competitive and price sensitive for consumers. - economies of scale, expanding globally allows firms to produce in higher volumes and spread fixed costs across more units, centralised production help reduce unit costs. -standardisation of products, selling the same or similar products worldwide reduces R&D, marketing, and manufacturing costs, enables global branding and mass production. - low profit margins, some industries profit margins are naturally thin, requiring strict cost control to remain viable internationally. - technology and automation, using automated processes and outsourcing to low-cost countries helps cut labour and production costs.

Question 42

What are the pressures to adapt to digital technology?

Answer 42

- digital tech constantly being developed and changing, business must decide which developments provide greatest return on investment and greatest impact. - gain competitive advantage against competitors - need for innovation, lead to innovative new products or helping existing ones. allow to increase or retain market share. - competition don't want to be behind competitors - making product process more efficient (increased capacity, better quality and increased efficiency), may be profitable in long-term

Question 43

Examples of digital technology?

Answer 43

- Automation, using machinery to do tasks instead of human staff, e.g. assembling products or packaging products. Usually cheaper and faster for robots to do this instead of humans, as they don't need a break, production can be continuous. Machines also carry out processes quicker, more accurately, which increases productivity and produces more consistent quality. However, is very expensive to buy, install, maintain and update new machines. May also demotivate staff still working as fear they'll lose their jobs. Machines only suited to one task, so inflexible. - Big data, businesses gathering data via social media, loyalty cards, or consumer spending trends on their apps. - Data mining, big data can then be analysed using computers and specially designed digital software to spot correlations and trends, this process known as data mining. Can make sense of big data and supply useful info on consumers and competitors to different areas of the business. - E-commerce, refers to buying and selling goods or services online, typically via websites, mobile apps, or digital platforms. Given businesses grater access to international markets as can translate website and offer worldwide delivery. Business can interact more directly w/ consumers through social media, and can deal w/ consumer complaints more efficiently via live online assistance. Can also track order history to understand consumer trends and recommended certain products to consumers. However, allows consumers to price compare against competitors and can see reviews.

Question 44

What is the value of digital technology?

Answer 44

- improves coordination and communication (emails, team calls) - e-commerce can reach global consumers without physical presence - enhances marketing and consumer targeting - increase operational efficiency - expensive - improves customer service