Strategy and Implementation Flashcards
(48 cards)
Define franchisee
The franchisee is the individual who is buying into the franchise
Define franchiser
The franchiser is the individual who owns the business which is being franchised out.
Benefits for franchiser
- Extra commitment from franchisees.
- Able to expand the market and sales quickly.
- Increased revenues e.g., in the form of monthly royalties which must be paid even if the franchisee makes a loss.
- Risks and uncertainty are shared.
- Initial fee – what the franchisee must pay to buy into the franchise.
- Expansion can be achieved relatively cheaply.
Disadvantages for the franchiser
- Franchisees may not operate in a satisfactory manner and the reputation of the business may be damaged which may result in bad PR.
- Franchise agreements must be carefully drawn up or disputes could occur.
- Could the franchisor effectively recruit, support and service many franchisees? If not dissatisfaction and poor practice could result.
- Does not have complete control of the day to day running of the business
Benefits for franchisee
- May be supported by national advertising/promotion.
- Reduced risk of failure as they are selling an already proven product or service which makes it easier to get loans from the bank to fund business ventures.
- Support is offered by the franchisor e.g., full training, and start-up equipment such as materials.
- Retaining a degree of independence.
Disadvantages for franchisee
- Cannot operate with same level of freedom as an ordinary business because of the franchise agreement.
- Franchisee cannot sell the business without the franchisor’s permission.
- In some franchises the franchisor can end the franchise without reason or compensation.
- Franchisee must make regular payments to the franchisor. This is a royalty fee.
Benefits of expansion through franchising
- many businesses already have many franchises and evidence suggests that they are successful
- receipt of royalties
- no need to find finance to set up because that is the role of franchisee
- no need to find sites because that is the role of franchisee
- able to expand the market and sales quickly
- expansion can be achieved relatively cheaply
- employees are the responsibility of the franchisee
- can take advantage of enthusiasm/commitment of
franchisees - do not suffer losses of individual outlets
- do not have effort/cost of running individual outlets
- spreading of risks
- statistics tend to suggest that franchise businesses generally do well.
Benefits of expansion through opening of own shops
- retain independence
- control of expansion
- will keep all profits
- avoids training and administration associated with
setting up franchises - can reap benefits from economies of scale.
Define horizontal integration
The merging of business which are at the same stage of production. Often the firms are both providing the same service and selling similar goods
Benefits of horizontal integration
- Removes some of the competition – possibly for defensive reasons.
- May benefit from increased economies of scale.
- Increases market power to compete with market leaders by spreading the brand.
- Synergy – the two businesses joined together may form an organisation that is more powerful and efficient than the two businesses operating on their own. It’s a quick way for a business to expand the business as opposed
to growing it internally. - Increased capital of merged businesses.
- Opportunity to cut costs, for example combining HR/ ICT services.
- Combination of new ideas/innovation.
Define franchises
A franchise is the legal right to use the brand name, products and business style of an existing business.
McDonald’s restaurants, for example, often operate as franchises. A business-person has paid McDonald’s a fee to open a franchise of McDonald’s. The franchisee (the person who has bought the franchise) now has the right to use the business model, brand, business style etc. in a specific area
Define vertical integration
The merging of two businesses at different stages of production. This can be Forward Vertical
Integration or Backward Vertical Integration.
Benefits of vertical integration
- Security of supplies and control of suppliers’ prices.
- Improves supply chain co-ordination.
- Can guarantee the quality of its raw materials.
- Security of distribution outlet for products.
- Can determine standard of outlets/shops.
- Use of outlets to determine brand image.
- Keeps all profit – no middlemen – increased profit margins means not having to buy raw materials from a third-party outlets.
- Control over quality.
- Possible benefits of economies of scale.
Types of integration
> Vertical Forward – when a business takes over another business further up the chain of production.
Lateral – when a business takes over a firm in the same sector but
in a similar industry
Horizontal – when a business takes over a firm in the same sector and in the same industry
Conglomerate – when a business
takes over another totally unrelated business.
Vertical Backwards – when a business takes over another business back down the chain of production.
Arguments for business growth
Eliminate competition; increase
market share; exploit new markets; benefit from economies
of scale.
Arguments against business growth
Costs involved; issues with HR;
diseconomies of scale; bad publicity.
Types of business growth
> Organic growth or internal growth is when a business expands by selling more of its existing products/expansion. This is a less risky but slower growth strategy. This can be achieved by:
* Expanding the product range
* Targeting new markets
* Expanding the distribution network, such as opening more stores or selling in new places.
External growth is growth by acquisition, takeover or merger. A quicker method of growth than organic growth. It can be via mergers, takeovers or acquisitions.
Reasons for takeovers and mergers
- Takeovers can help a firm grow. As a result, it can benefit from economies of scale such as bulk purchasing; manufacturing economies; use of specialists and marketing economies of scale.
- Increased market share leads to increased market power in the market and a reduction in competition.
- Diversification – businesses will benefit from spreading their risks across several products and markets.
- Acquiring new products and technology. A takeover is one way of acquiring technology that may be protected by patent or may be expensive or time consuming to
develop internally. - Strong brands also are likely to attract a high degree of customer loyalty, which also reduces risk and allows for long-term planning.
- Control of supply chain.
- Rapid growth.
- Higher returns to shareholders.
- Benefit from synergy – the two businesses fit together in a way that allows costs to be reduced and profits increased.
- Acquisition of technology and expertise.
- Underperforming management teams can be removed giving an immediate boost to performance.
Ansoff’s - Market Penetration
Concentrating on sales of existing products to existing markets.
* Attracting customers who have not yet become regular users, but are occasional users, by increasing brand loyalty.
* Taking customers from competitors (aggressive pricing). Internet service providers are continually trying to win customers from competitors through pricing
strategies and promotional activities.
* Persuading existing customers to increase usage perhaps by reducing the price or offering promotions e.g., Sky offers packages or bundles to get existing customers to increase their monthly subscription.
Ansoff’s - Diversification
Developing new products and new markets.
* It involves offering a new product in a different area. It is when a business expands its activities outside its normal range, for example, farmers starting up quad biking or Cadbury’s moving into the market for toilet bleach.
* Developing new products for new markets involves changes to both a business’s product and market.
Diversification may be attempted if a business sees a new opportunity and has investment funds available.
* Diversification carries the greatest level of risk (compared with market penetration, which is low risk and the other two options considered as medium risk strategies) because it involves changes in both the market and the product. Virgin Trains have had limited success, but Virgin Money has been more successful.
* Diversification spreads risk for a business as it allows a business to reduce its reliance on existing markets and products. If sales are falling for existing products or in
existing markets, then a successful launch and growth of a new product in a new market can help to maintain the overall performance of the business.
Ansoffs -Product development
Involves the development of new products for existing markets.
* Improve or relaunch the product into existing markets by changing an existing product (for example,
repackaging or adding extra ingredients).
* Developing new products (such as Mars ice cream).
* Requires businesses to innovate and look at new ways of extending the product life cycle of their existing products
Ansoff’s - Market development
Finding and developing new markets for existing products.
* There are two broad market development strategies. Identifying users in different markets with similar needs to existing customers (the market could be in a different country). This strategy can be risky as different counties have different tastes and needs – the product
may have to be adapted. Also new distribution channels may have to be used.
* Identifying new customers who would use a product in a different way. For example, using Lucozade as a sports drink rather than something to have next to your bed when you have flu or measles. Repackaging and resizing the product may open a new market.
For example, a business selling food to the hotel or restaurant market may start selling to consumers by repacking the product in small quantities.
Define ansoff matrix
The Ansoff matrix outlines the options open to businesses if they wish to grow, with a view to increase profitability and revenue. The Ansoff matrix considers
whether the marketing strategy is targeted at existing customers or new customers and if existing products should be used or alternatively, if new products should be developed.
Draw ansoff matrix
Products
Existing New
E MP PD
Market
N MD D
