Theme 3 Flashcards
All key definitions and analysis
What is a mission statement?
A mission statement sets out the purpose of a business, why it exists.
- Focuses on: value of business, scope of business, long-term aims.
- Influences include: values of founder(s), view of society, size of business and type of ownership.
What are corporate objectives?
The corporate objectives of a business quantify the mission of a business and sets measurable targets for the whole organisation- SMART
- Focuses on: market standing, innovation, sustainability, growth and social responsibility.
- Factor affecting it: economy, competition, business growth and culture, poor performance.
A.M- What is market penetration?`
Ansoff’s Matrix
- Existing products in existing markets.
- Approaches: build brand image, incentivise customer affiliations, change product model (if price sensitive).
✓- low risk
✓- familiar market and product.
X- potential limited growth potential
X- businesses becomes vulnerable if it doesn’t innovate.
A.M- What is product development?
Ansoff’s Matrix
- New products in existing markets.
- Approaches: market research to identify improvement/ innovation, use product portfolio to manage product range.
✓- familiar with customers
✓- responds to customer needs
X- can take time and be expensive
X- product cannibalism
A.M- What is market development?
Ansoff’s Matrix
- Existing products in new markets.
- Approaches: use penetration pricing, heavy promotion, strategic alliance or takeover of a business already operating in the market.
✓- potential for considerable growth
X- limited understanding of customer needs
X- competing with established businesses
A.M- What is diversification?
Ansoff’s Matrix
- New products in new markets. - typically for large, well established business with financial power.
- Approaches: business may have particular asset (e.g patent) that allows them to compete without particular expertise, could be achieved through inorganic growth.
✓- spreads risk in different markets
✓- businesses can utilise some core competencies and apply them to new market
X- high risk
X- no reputation or expertise in the market
What is the aim of portfolio analysis- Boston Matrix?
- Aim: categorise a company’s products with specific characteristics in order to make strategic decisions about them.
(market share= cash generation), (market growth rate = cash usage)
☆- high market share, high market growth rate.
?- low market share, high market growth rate.
£🐄- high market share, low market growth rate.
🐶- low market share,low market growth rate.
P.G.S- What is a cost-leadership strategy?
Porter’s Generic Strategy
- Achieve an advantage of being lowest cost operator.
Ways to achieve it: operate at a scale that keeps average costs low, have unique access to technology, skills or raw materials.
✓- helps high profit margins due to economies of scale.
✓- maintain market price and acquire market share.
X- few businesses can operate as cost leader.
P.G.S- What is a differentiation strategy?
Porter’s Generic Strategy
- Compete by offering USP to product for the market or niche.
Basis for differentiation: quality, speed and efficiency, customer service and experience.
✓- helps develop unique brand image.
✓- adds value so higher prices.
X- other businesses may be able to copy strategy if without copyright, or indefensible.
P.G.S- What is a segmentation strategy?
Porter’s Generic Strategy
Segmentation can be achieved through cost leadership or differentiation and involves targeting niches.
Basis of segment: unique needs, geographic or demographic characteristics.
✓- easier to narrow segment to focus communications and marketing.
✓- can better understand customer needs as segment has narrower interests.
X- customer loyalty is vital to maintain sales.
How to achieve a competitive advantage? (RAI)
- Innovation - the ability of a business to create new and unique processes and products, may also involve a patent.
- Architecture - relationships within a business that creates synergy and understanding between suppliers, customers and the employees .
- Reputation - brand values are hard to replicate and may take years to develop.
What is SWOT analysis- ✓ and X?
- SWOT analysis is a strategic tool that a business can use to analyse its current position and the external factors that might affect it.
Internal: Strengths, Weaknesses
External: Oportunites, Threats
✓- assists thinking in a structural way.
✓- low-cost, simple and can be combined with PESTLE.
X- subjective- depends on managers’ opinions.
X- doesn’t offer clear solutions.
What are ways a market may change?
Market changes include:
- new entrants- more competitive.
- new products- need for innovation to keep up with rivals.
- consolidation- when dynamic markets shifts, when a business fails and others take control of market share. Businesses may also merge or be taken over.
What is PESTLE analysis?
PESTLE looks at external influences that impact a business.
- Political- national/international authorities who maximise economic activity, while protecting businesses. They directly impact markets and international trade.
- Economic- general state of the economy.
- Social- changing demands of society for different goods and services and they way society spends money. Includes demographics and lifestyle changes.
- Technological- advanced tech creates opportunities for products/service and the production line- need to keep up.
- Legal- legislation businesses need to follow.
- Environmental- gov. ensures businesses pay for cost of production as well as external costs like pollution. Like with social- society is environmentally conscious so improves brand image.
What are Porter’s 5 forces?
Porter’s 5 forces presents a framework for analysing the competitive environment.
- Industry rivalry- X- profit decreases. So, businesses should lower costs of production or USP or consider external growth/ strategic alliance.
- Bargaining power of suppliers- few suppliers mean bargaining power is high, supplier is also able to integrate vertically forward. So, businesses should build strong relationship, consider backward vertical integration.
- Bargaining power of buyers- buyer power is high when there is little difference in products offered, products are price sensitive. So, businesses should develop USP, consider forward vertical integration (e.g if buyer is another business).
- Threat of substitutes- high threat if alternative products price fall and customers can easily switch. So, businesses should build switching costs into agreements, lower prices and promote benefits in comparison.
- Barriers to entry- initial entry cost to market is very high, customers have brand loyalty. X- if few barriers, then new competitors mean increased competition. So, businesses should innovate, build strong relationships with buyers and use economies of scale to keep prices low and make it difficult for new market entrants.
What are objectives to growth?
- Increased profitability
- Increased market power over customers and suppliers- economies of scope, when a business operates in a number of markets, reducing the costs and spreading risk.
- Increased market share/ brand recognition
- Economies of scale- occurs when unit costs fall as a business expands.
- Synergies, inorganic growth can bring businesses together that complement each other’s strengths.
(Internal and External)
What are types of economies of scale?
Internal:
- Purchasing- bulk buying
- Technological- invest in best tech
- Financial- large businesses (Plc) can raise more capital so can receive better interest rates and terms of payment.
- Managerial- employ specialists to manage aspects of business, which improves efficiency.
External:
- Labour- concentration of firms in one are may encourage build up of skilled labour force.
- Cooperation- when concentrated together, firms are more likely to collaborate.
What are problems arising from growth?
- Diseconomies of scale (unit costs rise as business expands)
- Communication problems
- To retain control, more organisational layers are added which slows decision-making)
- Less motivation as workers sees their work as less significant.
- Overtrading- when a business grows too fast and overstretches their financial resources and may also face logistical problems if they can’t manage operations.
May lead to: redundancies, discontinuing products, de-layering, outsourcing aspects of business operations.
What are the types of growth (e.g horizontal)? (4)
- Backward vertical- taking over supplier. ✓- allows business to acquire resources cheaply to reduce overall costs.
- Forward vertical- taking over customers, e.g retailers take over wholesalers. ✓- manufacturer can determine how products are promoted and build relationship with users, also can increase prices.
- Horizontal- merging with a business at the same level of the supply chain. ✓- economies of scale and sharing expertise (synergies).
- Conglomerate- taking over unused business in a different market. ✓- spreads risk and created new business opportunities.
Whats the difference between mergers and takeovers?
- Takeovers are when a business will acquire another long with its assets with 51% shareholding (sometimes even less). If hostile, the takeover is riskier for the acquiring business.
- Mergers are when two businesses come together in a joint venture for mutual benefit. This may be to share strengths or for business survival. It seeks synergies a new name may be created with the two businesses.
What is inorganic growth- ✓ and X?
Mergers and takeovers are examples of inorganic growth, growth outisde the business.
✓- speedy growth and greater profitability
✓- high remuneration for senior staff
✓- large payouts for those selling their company
X- regulatory intervention- if deemed anti-competitive behaviour
X- morale can be low when business is taken over
X- financial strain- especially in case of a bidding war.
What is organic growth (methods) - ✓ and X?
Organic growth is when a business grows internally, selling more products and revinvesting for areas of expansion.
- Methods include: new products, new markets, franchising (business licenses individuals or companies to trade under its brand using the goods/ services it provides).
✓- less risk
✓- business can steadily increase scale as and when its internal operations are ready.
✓- cheaper than external growth and diseconomies of scale are minimised.
X- may be too slow for shareholders who want dividends.
X- competition- business may be left behind by rivals that use external growth to dominate market.
Why may a business stay small?
- Personal service- owners are able to build relationships with small number of customers and convenience can be a USP. Large organisations find this difficult with economies of scale.
- Costs- smaller firms have cheaper running costs.
- Flexibility- smaller firms can make decisions quicker, adapt to competitive environment and respond the customer needs. (market leader?)
- Control and efficiency
- Owner’s preference- some owners may be satisfied with level of profit as increasing earning lead to more complicated accounts.
- E-commerce- smaller firms don’t need to operate on international scale and it can reach customers via their own or third-party e-commerce websites, where products can be distributed globally from a small distribution centre without need for expensive retail space.
- Product differentiaition- some customers may prefer to buy products different from mainstream mass market. Small firms have potential to offer customers specialist advice and accessories, further adding to its USP.
What is a time series analysis?
- Time series analysis is a way to predict future sale trends by using historical data.
✓- helps businesses work out whether there is an upwards or downwards trend or even constant trend in sales figures.
✓- helps businesses take into account seasonal variations and anticipate future sales figures with varying levels of accuracy.
