Unit 9 Flashcards
Strategic methods: how to pursue strategies (176 cards)
1
Q
Define growth
A
Growth is an increase in the scale (size) of operations of a business.
2
Q
Define retrenchment
A
Retrenchment is the downsizing of the scale (reduction in size) of operations of a business, usually with the aim of becoming more financially stable.
- It is likely to involve job losses and reductions in output and capacity.
- Some areas of the business may be sold off or demerged.
3
Q
What are the main reasons why businesses choose growth as an objective? (3 technical terms)
A
- To achieve economies of scale: when the unit costs fall as the business expands.
- To achieve economies of scope: when the costs fall as the business expands and sells a variety of products onto different markets.
- To achieve synergies: when the business expands by merging or taking over another business that complement its strengths.
4
Q
Explain ‘profit’ as a reason for growth
A
Shareholders and other business owners look for profit, so businesses have an existential need to seek out profit. If the business is profitable as it is, shareholders are likely to feel it should increase the scope of its operations in order to make more profit.
- Likely to lead to an increase in share price and greater returns to shareholders from the business having increased sales, revenue and profit.
- In turn, this leads to positive media attention and greater security for the CEO and board members.
5
Q
Explain ‘efficiency and profitability’ as a reason for growth
A
Profitability shows how capable a business is of turning revenue into profit (generally presented as a ratio).
Efficiency (making good use of resources) goes hand in hand with profitability.
- Businesses often achieve greater efficiency through economies of scale: by increasing its output, a business can decrease its average operating costs by purchasing raw materials in bulk, a business can decrease its total costs.
6
Q
Explain ‘market power over customers and suppliers’ as a reason for growth
A
Porter’s five forces model
- Businesses are constantly at odds with one another to gain power over their markets’ suppliers and customers.
- Having power over suppliers can mean leverage (negotiating power) which leads to lower costs, which can lead back to profitability, and better trade terms aiding cash flow.
7
Q
Explain ‘brand recognition’ as a reason for growth
A
Firms often increase their market share and brand recognition as a short- to medium-term tactic that supports the greater goal (strategy) of increased profitability.
- E.g. most supermarket chains, such as ASDA and Sainsbury’s, work tirelessly to increase their market share (by becoming the one name people think of when they need to do their weekly shop).
- Firms conduct market research on their customers (and potential customers) as well as push all manner of advertising and promotional campaigns.
- This brand recognition can be seen as an economy of scope, where the brand itself is an asset that draws customers in to buy from the supermarket’s vast range of products.
8
Q
Explain ‘manager’s personal objectives’ as a reason for growth
A
Business leaders themselves are often the most driven of people, are are looking to progress in their careers and earn more money.
- Boosting the size of the business they manage is one way of doing this for themselves personally.
9
Q
Explain ‘survival’ as a reason for growth
A
Sometimes growth is essential for the survival of a business.
- By remaining small, a business may not be able to benefit from economies of scale, resulting in high costs and a lack of competitiveness.
- Small businesses could more easily be taken over by larger rivals.
10
Q
Explain ‘reduce risk’ as a reason for growth
A
Growth in the form of diversification or moving into new markets can be used to reduce risk.
11
Q
Explain ‘achieve synergy’ as a reason for growth
A
Two businesses joined together (external growth) can achieve more than the sum of the two businesses operating separately.
12
Q
What are the main reasons why a business might pursue a strategy of retrenchment?
A
- Changes in the market: this might be because of changes in taste and fashion, technological development or the arrival of new, more competitive businesses.
- Failed takeover: it is not unusual for a takeover to fail and for a business to demerge part or all of the business taken over.
- Economic downturn: can sometimes lead to a business retrenching in order to better cope with the changed economic environment.
- To focus more closely on core competencies.
13
Q
What are economies of scale?
A
Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production.
- Fixed costs are spread over more units
- Variable costs are lower due to bulk buying
14
Q
What are the two overall categories for economies of scale?
A
INTERNAL
- Savings coming from the growth of the business itself.
- Arise from the increased output of the business.
EXTERNAL
- Savings coming from within the business’ environment or industry.
- i.e. all competitors benefit.
15
Q
What are the types of internal economies of scale?
A
- Bulk-buying
- Technical economies of scale
- Managerial economies of scale
- Marketing economies of scale
- Marketing economies of scale
- Specialisation of the workforce
16
Q
What is bulk-buying economies of scale?
A
The purchase by one organisation of large quantities of a product or raw material, which often results in a lower price because of their market power & because it is cheaper to deal with one customer & deliveries can be on a larger scale.
17
Q
What is technical economies of scale?
A
Large-scale businesses can afford to invest in expensive & specialist capital machinery.
- E.g. a supermarket chain such as Tesco or Sainsbury’s can invest in technology that improves stock control.
- It might not, however, be viable or cost-effective for a small corner shop to buy this technology.
18
Q
What is managerial economies of scale?
A
Large-scale manufacturers employ specialists to supervise production systems, manage marketing systems & oversee human resources.
19
Q
What is marketing & purchasing economies of scale?
A
A large business can spread its advertising & marketing budget over a large output & it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market.
- A good example is the major grocery retailers who use their buying power when purchasing supplies from farmers & other suppliers.
20
Q
What is specialisation of the workforce economies of scale?
A
Larger businesses split complex production into separate tasks to boost productivity.
- By specialising in certain tasks or processes, the workforce is able to produce more output at the same time.
21
Q
What are external economies of scale?
A
- Infrastructure improvement
- Suppliers concentration
22
Q
What is infrastructure improvement economies of scale?
A
Spending by a local authority on improving the transport network for a local town or city.
23
Q
What is suppliers concentration economies of scale?
A
Relocation of component suppliers & other support businesses to the main centre of manufacturing are also an external cost saving.
24
Q
What are economies of scope?
A
Arise when unit costs fall as a result of producing more than one product and/or operating in different markets.
- E.g. Cadbury, Kleenex and Proctor & Gamble are all companies that benefit from economies of scope because of their wide range of products they produce.
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What can economies of scope result from?
- The joint use of production facilities & other inputs.
- Joint marketing & administration.
- A particular product providing a by-product (e.g. a bread manufacturer could also produce sandwiches).
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What are diseconomies of scale?
Growth can also result in problems for a business, such as diseconomies of scale.
- This refers to a situation where economies of scale no longer occur & unit costs begin to increase rather than decrease.
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What can diseconomies of scale result from?
- Poor communication: larger firms often face communication problems because of their greater complexity, involving more people, layers, divisions, etc. This may slow the whole decision-making process & result in a less responsive & flexible business.
- Lack of control & coordination: a larger business is more complex, making it harder to monitor & making coordination between departments & divisions increasingly difficult.
- Alienation of the workforce: may be caused by job losses as a result of greater investment in technology, or by poor communication & workers feeling they are no longer valued. Whatever the cause, alienated workers become less engaged & motivated, leading to lower productivity & increasing unit costs.
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What is organic/internal growth?
Involves expansion from within a business, for example by expanding the product range, or number of business units & locations.
- It builds on the business' own capabilities & resources.
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Strategies of organic growth
- Developing new product ranges
- Launching existing products directly into new international markets (e.g. exporting).
- Opening new business locations - either in the domestic market or overseas.
- Investing in additional production capacity or new technology to allow increased output & sales volumes.
- Franchising
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Example of a business using organic growth
LEGO:
- The Lego business has never made an acquisition (bought another business) to grow.
- It focused on using product development, market development (international markets) & innovation as a way of increasing its revenues & profits.
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Key benefits of organic growth
- Lower risk due to slower pace of growth.
- No interference from the CMA.
- Easier to manage the increase in size as it allows the business to grow at a more sensible rate.
- Usually financed by retained profits (less debts).
- Builds on a business' strengths (e.g. brands, customers)
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Key drawbacks of organic growth
- No opportunity for synergy with another business or acquiring their customer base.
- Slow growth means less competitive than larger competitors - shareholders may prefer more rapid growth.
- Growth achieved may be dependent on the growth of the overall market.
- Hard to build market share if business is already a leader.
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What is franchising?
Arises when a franchisor grants a licence (franchise) to another business (franchisee) to allow it to trade using the brand / business format.
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Define franchisor
The franchisor is the business who sells the right to another business to operate a franchise.
- Depending on the business involved, the franchisor may provide training, management expertise & national marketing campaigns for the franchisee.
- They may also supply the raw materials & equipment.
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Who is the franchisee? - what is their role in franchising?
A franchise is bought by the franchisee (think employEE).
- Once they have purchased the franchise they have to pay a proportion of their profits to the franchisor on a regular basis.
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Example of a franchise
MCDONALDS:
- The chain has spread across the globe with a well-developed network of franchises, a legal agreement where a franchisor licences its intellectual property, trademarks & systems to a franchisee for a fee.
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Advantages of using franchising as a method of organic growth
- Accelerated growth: franchising allows rapid expansion without significant capital outlay by the franchisor.
- Reduced financial burden: franchisor avoids borrowing for expansion as franchisees finance their own operations.
- Lower HR costs: franchisees handle their own staffing, including recruitment, training & payroll, relieving the franchisor of these responsibilities.
- Reduced operational costs: day-to-day operational management, including inventory & staffing, is handled by franchisee.
- Revenue streams: franchisors receive initial franchise fee & percentage of ongoing profits from franchisee.
- Wider reach: can expand into new geographic areas or demographics, increasing brand recognition & potentially boosting sales at existing locations.
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Drawbacks of using franchising as a method of organic growth
- Loss of control: franchisors have less control over daily operations, staffing & quality control at franchisee locations. While some aspects like uniforms & branding can be mandated, maintaining consistency across all aspects can be challenging.
- Inconsistent brand experience: franchisees not adhering to brand standards can create inconsistent customer experiences, potentially damaging the brand's reputation & impacting all locations.
- Profit sharing: while receiving a cut of profits is a benefit, it also means the franchisor doesn't retain all the profits generated by the franchisee's branch.
39
Evaluation points of franchising - what does the decision depend on?
- Franchise fee: the size of the initial fee paid by franchisees significantly impacts the financial viability of franchising.
- Profit sharing percentage: size cut of profits.
- Level of control: balancing the benefits of franchising with the need for consistent brand standards requires careful consideration of the level of control retained by the franchisor. This includes establishing clear guidelines & monitoring franchisee performance.
- Franchisee quality: the success of a franchise depends heavily on the competence & commitment of individual franchisees. Assessing their entrepreneurial skills, business acumen, & experience is crucial. Factors like a well-developed business plan can indicate a potential franchisee's suitability.
40
What does the franchisor retain control over?
- Product range
- Interior of outlet
- Staff uniform
41
What is inorganic/external growth?
Occurs when a business expands the scale of operations through external means, e.g. through integration & acquisitions.
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What are the 3 key methods of inorganic growth?
- Mergers
- Takeovers
- Ventures
43
What are mergers?
A merger is a combination of two previously separate firms which is achieved by forming a completely new firm into which the two original firms are integrated.
44
Key features of mergers
- Involves a new firm being created.
- Less common than takeovers.
- Both businesses are likely to be equal, in terms of factors like size, scale of operations, customers, etc.
- Both businesses are likely to be in the same industry.
- Same dangers as takeovers.
- Potential for synergy.
45
What is synergy?
The combined performance of 2 or more business is greater than the performance of each business working separately.
- This is often expressed as 2 + 2 = 5
- It is the key objective associated with mergers (external growth).
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What are the 2 main kinds of synergy?
- Cost synergy: where cost savings are achieved as a result of external growth.
- Revenue synergy: where additional revenues are achieved as a result of external growth.
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Examples of cost savings synergy
- Better deals from suppliers (more purchasing economies of scale, the combined orders of merged businesses will be larger than the orders previously placed by each business separately)
- Lower management costs: for example before the merger each business had an HR director. After the merger only one HR manager will be needed meaning that one manager will be made redundant to avoid duplication of roles)
- Higher productivity & efficiency as the merged businesses share their assets (factories, warehouses, shops, IT equipment, systems, etc.) as well as their staff with their experience & expertise. As both businesses are merged the most effective members of staff are kept on while less effective ones are made redundant.
48
Examples of revenue synergies
- Cross-selling to customers of both businesses: mergers can share their customer database.
- Access to new geographic markets: for example the merger between a UK business with a business in China will enable the UK business to have access to the Chinese market & vice versa.
- New distribution channels: the merger enables the businesses to share their distribution channels or to acquire multi-distribution channels or to only keep the most effective parts of each business' distribution channel. E.g. Sainsbury's selling Argos stores & implementing Argos collection points in its own stores.
49
What are takeovers (acquisitions)?
A takeover describes the buying out of one company by another, which usually occurs through the purchase of shares.
- Once a person/company owns more than 50% of all shares in a business, they have successfully taken it over because they have overall control.
- A takeover may be agreed by the business being bought out, or it may be a hostile takeover where the purchasing of 50% is against the wishes of the firm.
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Example of a takeover
In January 2022, Microsoft acquired the world's largest video game maker for $95 per share, in an all-cash transaction valued at $68.7 billion, suggesting to many that this was the beginning of a new phase for the gaming industry.
- With the acquisition, Microsoft added a series of globally renowned games to its portfolio including Warcraft, Diablo, Call of Duty, Overwatch, and Candy Crush.
- Significantly, the deal also meant that Microsoft jumped into the world's third-largest gaming company by revenue slot, now just behind Tencent and Sony.
51
Define integration
Bringing 2 or more businesses together through a merger or takeover.
- It is possible to define the nature & type of integration based on the activities of each business and where they operate in the supply chain of an industry.
52
List the 4 types of integration
- Backward vertical
- Conglomerate
- Forward vertical
- Horizontal
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What is backward vertical integration?
This involves acquiring a business operating earlier in the supply chain.
- E.g. a retailer buys a wholesaler, a brewer buys a hop farm.
- Can result in greater control over suppliers & prices.
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Business example: backward vertical integration
Tesco, the UK's largest supermarket chain, acquired Booker Group, a wholesaler. (2018)
- The takeover strengthened Tesco's position in the food supply chain and expanded its market reach.
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What is conglomerate integration?
This involves the combination of firms that are involved in unrelated business activities, i.e. to diversify.
- E.g. a brewery taking over a cosmetics business.
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What is forward vertical integration?
This involves acquiring a business further up in the supply chain.
- E.g. a vehicle manufacturer buys a car parts distributor.
- Helps guarantee access to markets.
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What is horizontal integration?
This is when a business merges with or takes over another in the same stage of the production chain in the same industry.
- E.g. when a brewery merges with another brewery.
- It results in a larger presence & perhaps greater power in the market.
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Business example: horizontal integration
BOOHOO taking over PrettyLittleThing:
- Boohoo bought out PLT shareholders for $331 million.
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Benefits of a merger or takeover
- To achieve economies of scale.
- To increase market share.
- To secure point of sale (vertical forward)
- To secure suppliers (vertical backward)
- To reduce risks (operate on different products/markets)
- To acquire talent (staff)
- To acquire knowledge, IPP (patents on products) and improve product portfolio (Boston matrix)
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Reasons why takeovers may fail
- Risk of taking on significant debts to fund takeover.
- Difficulties & costs of integrating systems (e.g. software)
- Concerns over loss of profits may lower share price.
- Clash of cultures (different management styles, e.g. tell vs join - tannenbaum schmidt)
- Loss of key staff members (talent) - due to job losses, & customers.
- Paying too much for a takeover (window dressing)
- Bad timing (as the GDP starts to fall)
- Lack of experience & expertise in the case of conglomerate mergers & takeovers.
- Resistance from employees.
61
What is a joint venture?
A form of growth when 2 or more businesses agree to act collectively to set up a new business venture with all parties contributing equity to fund the set up & purchase of assets.
- The parties involved are usually looking to benefit from complementary strengths & resources brought to the venture, as well as sharing the risks & rewards involved.
- Often used as a method of one business entering international markets.
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How are joint ventures different from takeovers & mergers?
The risks & returns of the business formed as the joint venture are shared by all parties involved.
- Usually this is a 50:50 share, although that doesn't have to be the case.
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Business example: joint venture
Honda & Sony:
- Joined forces to complete a joint electric vehicle company to compete with other giant names such as Tesla.
- Honda focusing on its car-building power while using Sony's advanced technology.
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Benefits of joint ventures
- JV partners benefit form each other's expertise & resources (e.g. market knowledge, customer base, distribution channels, R&D expertise)
- Stronger together = achieving synergy.
- Each JV partner might have the option to acquire, in the future, the JV business based on agreed terms if it proves successful.
- Reduces the risk of a growth strategy - particularly if it involves entering a new market or diversification.
- Faster results = first mover advantage
- Enables diversification & economies of scales & scope.
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Drawbacks of joint ventures
- Risk of clash of organisational cultures (particularly in terms of management style).
- The objectives of each JV partner may change, leading to a conflict of objectives with the other.
- In practice, there turns out to be an imbalance in levels of expertise, investment or assets brought into the venture by the different partners (unequal contribution or commitment = conflicts)
- Potential loss of intellectual property protection (patent)
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What are the 4 ways a business can overcome diseconomies of scale?
- Analyse organisational structure (to redesign, to improve communication)
- Use of IT.
- Employee development, e.g. appraisal.
- Use of budgets (improve coordination & prevent overspending)
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What is overtrading?
Overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion.
- If suitable sources of finance are not obtained, overtrading can lead to business failure.
- It is a problem of growth.
- Can occur even if a business is profitable - it is an issue of working capital & cash flow.
- Particularly associated with retail businesses who attempt to grow too fast.
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When is overtrading most likely to occur?
Overtrading is most likely to occur if:
- Growth is achieved by making significant capital investment in production or operations capacity before revenues are generated.
- Sales are made on credit & customers take too long to settle amounts owed.
- Significant growth in inventories is required in order to trade from the expanding capacity.
- A long-term contract requires a business to incur substantial costs before payments are made by customers under the contract.
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Symptoms of overtrading
- High revenue growth but low gross & operating profit margins.
- Persistent use of a bank overdraft facility.
- Significant decrease in the current ratio.
- Very low inventory turnover ratio.
- Low levels of capacity utilisation.
- Significant increases in the payables days & receivables days ratios.
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Ways of managing overtrading
- Scaling back the pace of revenue growth until profit margins & cash reserves have improved.
- Leasing rather than buying capital equipment.
- Enforcing better payment terms with customers (e.g. through prompt-payment discounts).
- Obtaining better payment terms from suppliers.
- Reducing inventory levels.
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Business example: retrenchment
The Body Shop
- Closing down of large number of shops & cutting hundreds of jobs - redundancies.
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Reasons for retrenchment
- Changes in the market
- Failed takeover
- Economic downturn
- Improving performance
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How can changes in the market be a reason for retrenchment?
This might be because of changes in taste & fashion, technological development or the arrival of more new competitive businesses.
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How can a failed takeover be a reason for retrenchment?
It is not unusual for a takeover to fail and for a business to de-merge part or all of the business taken over.
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How can economic downturn be a reason for retrenchment?
Sometimes an economic downturn leads to a business retrenching in order to better cope with the changed economic environment.
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How can improving performance be a reason for retrenchment?
Sell of less profitable parts of the business to increase efficiency, reduce unit costs & improve overall performance.
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Retrenchment methods + their order of severity of the measures taken
LOWEST SEVERITY
- Recruitment freeze or voluntary redundancy.
- Delayering (removing a whole layer of management)
- Closing down a division or factory
- Making redundancies
HIGHEST SEVERITY
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Advantages & disadvantages of recruitment freeze or voluntary redundancy as a method of retrenchment
ADVANTAGES:
- A non-threatening strategy that will not affect morale.
- Can be seen as fair.
DISADVANTAGES:
- No opportunities to restructure the business.
- Good people always leave & need to be replaced.
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Advantages & disadvantages of delayering as a method of retrenchment
ADVANTAGES:
- Should not affect the production line.
- May empower or enrich remaining jobs.
DISADVANTAGES:
- May intensify work of remaining managers.
- Could lose a generation of managers.
- Fewer promotional prospects for those who remain.
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Advantages & disadvantages of closing down a division or factory as a method of retrenchment
ADVANTAGES:
- Reduced fixed costs immediately, which can lower breakeven output.
- Capacity utilisation may rise in remaining factories.
DISADVANTAGES:
- Once closed it is difficult to reopen when economic conditions allow.
- May lose many good staff.
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Advantages & disadvantages of making redundancies as a method of retrenchment
ADVANTAGES:
- Opportunity to re-shape the organisation to meet future demand.
- Keeping good staff; their average quality level may rise.
DISADVANTAGES:
- Can have problems of perceived fairness.
- Job security issues - 'who is next?'
- Low staff morale for a period afterward.
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What will the success of retrenchment depend on?
The circumstances, scale & implementation of the retrenchment:
- Small scale, incremental (slow & gradual) retrenchment will have a limited impact.
- Significant & rapid retrenchment will have more impact & is more likely to be unsuccessful.
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Impact of growth on the marketing department
Rapid growth will require this department to keep up with any new markets the business is moving into, or the business risks losing sight of what customers want or how to reach them.
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Impact of retrenchment on the marketing department
When a business shrinks, this department will need to ensure it focuses on the promising & profitable areas that the business is refocusing on.
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Impact of growth on the operations department
Maintaining quality in production (including service levels in service industries) will always be a key requirement for this department, and at no time more than when the business is growing.
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Impact of retrenchment on the operations department
Ensuring that the business remains efficient in production terms with the loss of specific markets, factories, etc. will be a key challenge.
- The change in scale might make it necessary to reorganise & rationalise operations to match.
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Impact of growth on the finance department
Cash flow is a key consideration here. Periods of rapid growth are dangerous times for a business:
- Maintaining liquidity is crucial & working capital is always going to be stretched at this time.
- In addition, ensuring the cost of any finance needed for expansion is tolerable.
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Impact of retrenchment on the finance department
Challenges will involve ensuring the business can meet its costs while managing reducing revenue, retaining share value & managing shareholder expectations.
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Impact of growth on the HR department
Maintaining & developing appropriate training programmes & ensuring the business complies with regulations in any new countries it is operating in.
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Impact of retrenchment on the HR department
This department will face the challenge of reassuring & motivating staff.
- They will struggle to retain & attract the best staff, unless they can convince them that the retrenchment, which may be seen as the last resort of a sinking ship, will be a success.
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Define innovation
The process of converting an invention into a good, service or process that creates value (financial gain) for a business.
- The 'commercially successful exploitation of ideas'.
- Imagination (creative ideas) + practical application = innovation
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What are the 2 types of innovation?
- Process innovation
- Product innovation
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What is process innovation?
The development of new ways of making or providing a product or service.
- The competitive market environment means businesses are looking for more efficient ways of producing & providing goods & services, resulting in greater use of technology in production.
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What is product innovation?
The creation of new or improved products.
- The world we live in is constantly changing & consumers have come to expect new products & services.
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What are the external pressures for innovation?
- Political change: may alter regulations around products, opening up new opportunities or forcing businesses to amend current products to meet new requirements.
- Economic change: during economic downturn there is pressure to improve efficiency & lower costs, as well as a need to produce cheaper products.
- Social change: trends & tastes continually developing - businesses have to keep up with consumers' expectations.
- Technological change: keeping up to date in order to compete.
- Competitive change: as competitors innovate, businesses must be able to match this if they want to maintain market share.
- Shareholders: businesses under pressure from shareholders to perform well in order to increase revenue & profit, innovation is one way to achieve this.
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The value of innovation: benefits
- Improved productivity & reduced costs (process)
- Better quality (process)
- Building a broader product range (product)
- To handle legal & environmental issues & laws.
- More added value.
- Improved staff retention, motivation & attracting higher calibre of candidates.
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Explain innovation benefit: improved productivity & reduced costs
A lot of process innovation is about reducing unit costs.
- This might be achieved by improving the production capacity and/or flexibility of the business to enable it to exploit economies of scale.
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Explain innovation benefit: better quality
Better quality products & services are more likely to meet customer needs.
- Assuming that they are effectively marketed, that should result in higher sales & profit.
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Explain innovation benefit: building a broader product range
A business with a single product or limited product range (portfolio) would almost certainly benefit from innovation.
- A broader product range provides an opportunity for higher sales & profits and also reduces the risk for shareholders.
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Explain innovation benefit: to handle legal & environmental issues and laws
Innovation might enable the business to reduce its carbon emissions, produce less waste or perhaps comply with changing product legislation.
- Changes in laws often force businesses to innovate when they might not otherwise do so.
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Explain innovation benefit: more added value
Effective innovation is a great way to establish a unique selling proposition (USP) for a product - something which the customer is prepared to pay more for (added value) and which helps a business differentiate itself form competitors.
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Explain innovation benefit: improved staff retention, motivation & attracting higher calibre of candidates
Not an obvious benefit, but often significant.
- Potential good quality recruits are often drawn to a business with a reputation for innovation.
- Innovative businesses have a reputation for being inspiring places in which to work.
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Drawbacks or problems of innovation
- Competitors copying innovative products & processes.
- Uncertain commercial returns & no guarantee of success or time scale.
- May require high financial investments.
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Explain innovation drawback: competitors copying innovative products & processes
An innovation only confers a competitive advantages if competitors are not able to replicate it in their own businesses.
- Whilst patents provide some legal protection, the reality is that many innovative products & processes are hard to protect.
- One danger is that one research-driven, innovative company makes the initial investment and takes all the risk, only to find it is competing with many 'me-too' competitors riding on the coat-tails if the innovation.
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Explain innovation drawback: uncertain commercial returns & no guarantee of success or time scale
Much research is speculative & there is no guarantee of future revenues & profits.
- The longer the development timescale the greater the risk that research is overtaken by competitors too.
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Explain innovation drawback: may require high financial investments
Like other business activities, R&D has to compete for scarce cash.
- Given the risks involved, R&D demands a high required rate of return.
- That means that for businesses that have limited cash resources, the opportunity cost of investing in R&D can be very high.
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Example of innovation
Voice technology is redefining the way we interact with machines.
- Communicating via voice is entirely natural for consumers.
- When voice powered devices are there, ready and waiting in the background, there's no need to rely on intrusive screens to retrieve information or complete a task.
- This makes it easier for consumers to engage with products & services in a seamless & enjoyable way.
- E.g. Amazon Alexa, Google Home, Siri.
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Benefits of product innovation
- Opportunity to build early customer loyalty & benefit from 'first-mover advantage'.
- Premium or skimming pricing strategy (high profit margin)
- Publicity
- Varied product portfolio (Boston matrix, PLC)
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Benefits of process innovation
- Greater efficiency
- Improved quality
- Faster production time
- Reduction in unit cost
- Enables mass customisation
- Greater flexibility
- Better customer service
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What is an innovative organisation?
An innovative organisation is one where the culture encourages employees to take risks & does not criticise failure.
- Resources including time & money must be allocated to encourage innovation.
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Ways of becoming innovative
- Research & development
- Intrapreneurship
- Kaizen
- Benchmarking
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Define research and development (R&D)
Work directed towards the innovation, introduction & improvement of products & processes.
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What is intellectual property protection (IPP)?
The ownership of ideas.
- Unlike tangible assets to a business such as computers or the office, intellectual property is a collection of ideas & concepts.
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How can innovation be protected?
Innovation is costly, therefore businesses will want to protect the innovation to stop other businesses from copying it.
- This can be achieved through intellectual property protection (IPP).
- IPP gives the business an opportunity to recoup the cost of the innovation.
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What are the ways of protecting intellectual property?
Through the use of:
- Patents
- Trademarks
- Copyrights
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What are patents?
A government licence that gives the holder exclusive rights to a process, design or new invention.
- Exclusive rights to use of their invention for 20 years and prevents other parties from copying or selling the invention without the permission of the inventor.
- The exclusivity associated with a patent enables a business to charge higher prices & recoup the R&D costs.
- HOWEVER, a patent does not prevent firms from introducing their own version of a product so, in time, prices tend to fall.
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What is a trademark?
A recognisable name, logo, slogan or design that denotes a specific product or service and legally differentiates it from others.
- Trademarks must be registered and go through a rigorous process before acceptance. Once registered, however, a trademark gives exclusive rights to its use.
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What is are copyrights?
The legal protection provided for the work of authors, composers and artists.
- creative content
- a copyright may be used for computer programs or blueprints.
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Why do businesses seek to protect intellectual property?
- To keep control of it.
- Maintain a USP.
- Maximise return on investment.
- Reduce the threat of competition.
- Charge a premium price.
- Offer opportunity to sell licensing right for manufacturing or selling the product.
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How does product innovation lead to higher profit margins?
1) R&D efforts result in the creation of new & improved products. These enhanced offerings are better suited to satisfy customer needs & preferences.
2) This superior product offering allows businesses to command higher prices due to several factors:
- an improved brand reputation
- greater perceived added value compared to competitors.
3) This increase in price directly translates to higher sales revenue (turnover).
4) Assuming costs do not increase proportionally, the higher turnover results in improved profit margins.
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How does process innovation lead to higher profit margins?
1) Process innovation (another key outcome of R&D) targets improvements in the production process itself. The goal is to reduce the unit cost of producing each item.
- This can be achieved by identifying & implementing more efficient manufacturing methods.
2) Process innovation can lead to various forms of waste reduction, including raw materials, components, labour and time.
3) By streamlining the production process, businesses can reduce costs without necessarily impacting sales volume.
4) This cost reduction directly contributes to enhanced profit margins.
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How do patents lead to higher profit margins?
1) A patent grants a business exclusive rights to its intervention, preventing or delaying competitors from copying it.
2) This protection establishes a competitive advantage, reducing the threat of rivals & providing greater market control.
3) Because competitors cannot legally replicate, the business holding the patent gains pricing power.
4) This ability to increase prices without fear of immediate imitation directly contributes to higher profit margins.
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Value of patents
- The inherent difficulty in securing a patent further amplifies its strategic importance.
- The rigorous process of acquiring a patent protection signifies a truly novel & valuable invention, solidifying its competitive edge & potential for increased profitability.
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What is intrapreneurship?
Enabling staff to behave like entrepreneurs in their work to the benefit of the business.
- Involves people within a business creating or discovering new business opportunities, which leads to the creation of new parts of the business or even new businesses.
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What is an intrapreneur?
An intrapreneur is someone within an existing business that takes risks in an effort to solve a given problem.
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Business example: intrapreneurship
GOOGLE: best-known intrapreneurial initiatives.
- Its "20% Time" programme encourages engineers to spend 20% of their work time on projects that interest them.
- Among the products created as a result of that initiative are Gmail, Google News, Adsense, and Google Now.
- The reason why "20% Time" works is because it allows Google engineers to be creative without the usual organisational bureaucracy & bottlenecks. And because none of the ideas have to be cleared with a boss, it allows good ideas to spread fast & encourages collaboration.
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Ways to encourage intrapreneurship
- Structured time away from work to allow employees & managers to develop business ideas.
- Build cross-functional teams to lead innovation projects.
- Secondment of staff to smaller businesses or startups.
- Staff competitions & innovation days (e.g. hackathons).
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Why are large businesses less likely to have intrapreneurial initiatives compared to smaller ones?
- Complacency / arrogance
- Bureaucracy (stifling initiative)
- Reward systems do not provide an incentive to innovate.
- Short-termism (discouraging long-term thinking or risk-taking)
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What is Kaizen?
'Continuous improvement'
- A lean production technique that focuses on constantly introducing small incremental changes in a business in order to improve quality and/or efficiency.
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What is benchmarking?
Involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels, and to understand the processes they use.
- A strategic & analytical process of continuous improvement by measuring the performance of an organisation against the best in an industry (best practices).
- Learning from others, using their knowledge & experience to improve.
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Benefits of benchmarking
BENEFITS:
- More efficient
- Cost effective
- Quicker
Way of making improvements & generating innovations.
HOWEVER, it is not about copying other businesses; it is about adapting the best practices to the needs, culture & systems of the organisation in order to establish the best way of doing things.
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Impacts of innovation on HR
- Encouraged to be innovative
- Kaizen groups
- Entrepreneurial culture rewarding risk taking
- Opportunities to come up with new ideas
- Rewards for innovative suggestions
- Recruitment process designed to identify creative & problem solving skills as well as willingness to take risks.
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Impacts of innovation on marketing
- New products: question marks or problem children
- Strong USP based on innovation
- Extension strategies
- Skimming pricing strategies
- Premium pricing
- First mover advantage
- Extensive market research
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Impacts of innovation on finance
- Significant R&D budget needed
- Increased revenue if successful
- Higher profit margins
- Potential cash flow issues
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Impacts of innovation on operations
- Well resources R&D department
- Kaizen practices
- Benchmarking practices
- Use of IPP
- Need for technology, e.g. CAD.
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What is disruptive innovation?
Refers to an innovation that creates a new product or new market that eventually disrupts an existing market.
- E.g. digital photography or music downloads.
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Define internationalisation
The increasing interdependence of businesses within international markets.
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Globalisation impacts
- Creation of employment opportunities
- Ability to buy & sell products internationally.
- Logistics of goods & services.
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Reasons for greater globalisation of business
- Better technology: internet - make it easier & cheaper for businesses to trade worldwide.
- Fewer trade barriers: rules like tariffs reduced, so businesses can sell more easily in other countries.
- Big companies leading the way: multinational companies like Tesco or Unilever operate in many countries, creating global supply chains & sharing ideas.
- New markets: fast-growing countries like China & India has given UK businesses, such as Jaguar Land Rover, opportunities to sell more.
- Cheaper production: bigger scale - cuts costs.
- Better transport: improvements in shipping, made moving goods around quicker & cheaper.
- Shared cultures: global media & travel mean similar tastes worldwide.
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Importance of globalisation for business
- Bigger markets, bigger sales: growing global population. E.g. Primark could sell clothes in Europe and beyond, boosting its profits.
- Access to resources: raw materials or energy. E.g. car manufacturers like Nissan might get parts from suppliers worldwide.
- Skilled workers at lower costs: skilled labour in different countries, often at cheaper wages. E.g. tech companies may hire software developers from India to save on costs.
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What are emerging markets or economies?
Countries that are experiencing rapid population & economic growth & industrialisation.
- Often transitioning from being low-income to middle-income economies.
- E.g. China, India, Brazil.
- BUT volatile.
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Benefits of emerging economies for UK businesses
- Large & growing markets: expanding populations & rising incomes, creating new customer bases.
- Access to resources: many emerging countries are rich in natural resources, e.g. Brazil - major supplier of agricultural products & minerals.
- Cheaper production costs: outsourcing or setting up operations in emerging economies where wages are lower, e.g. Bangladesh or India.
- Opportunities for partnerships: emerging economies often welcome foreign investment - joint ventures. E.g. BP has partnered with Indian firms to develop renewable energy projects.
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Drawbacks of emerging economies for UK businesses
- Intense competition: from local companies in emerging economies. E.g. Chinese tech firms like Huawei.
- Economic & political risks: emerging economies can be unpredictable, with risks such as currency fluctuations, political instability, or sudden policy changes.
- Cultural & regulatory barriers: navigating different cultural norms & strict regulations, which can be costly & time-consuming.
- Ethical concerns: using cheaper labour in emerging economies - ethical concerns about working conditions, potentially harming a business' reputation.
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What is a multinational company (MNC)?
A business that has operations in more than one country.
- The key to being an MNC is that the business has business operations in two or more countries.
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Factors influencing the attractiveness of international markets
- Size of the market
- Economic growth / levels of disposable income
- Ease of doing business / political environment
- Exchange rates
- Domestic competition
- Infrastructure
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Factors to consider when looking to enter international markets
- Risk, e.g dealing with different languages & cultures, potential for IP theft, problems in assessing the creditworthiness of customers, potential transport & delivery issues.
- Competition
- Market potential: size, GDP growth rate.
- Legal & political environment: overseas policies, stability?
- Economic factors: exchange rates, inflation, GDP growth rate.
- Costs
- Culture
- Methods of entry
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Methods of entering international markets (methods of entry)
- Exporting
- Direct investment
- Alliances
- Licencing
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What is exporting?
The selling domestically produced goods & services in different countries, directly to consumer.
- The operations will stay in the domestic country.
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Key benefits of exporting
- Using existing systems (warehousing, website, staff, etc)
- Low investment
- Direct contact with customers
- Entire profit margin
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Key drawbacks of exporting
- Exposure to exchange rate fluctuations
- Cost of transportation
- Lack of local knowledge
- Exposure to trade barriers
- Exporting red-tape
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What is direct investment?
A business makes a strategic move to set up operations or sales outlets in another country. This requires heavy investment.
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Key benefits of direct investment
- Avoids trade barriers
- Full financial returns received
- Control over quality & customer service
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Key drawbacks of direct investment
- Cost of initial investment
- Highly risky
- Requires understanding of overseas' ways of doing business
- Requires understanding of local markets & customers
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What are alliances?
Two or more businesses from different countries work together on a venture sharing the investment & the risk.
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Key benefits of alliances
- Reduces risk of failure
- Benefit of overseas partners' expertise & local knowledge
- Sharing of some of the costs
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Key drawbacks of alliances
- Setting up legal agreement & contract.
- Potential for disagreements, e.g. on costs & profit sharing.
- Limited return (shared with partner)
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What is licencing?
When a business gives permission to another business to produce or sell their products in another country in return for a fee & share of the profits.
- This is often linked to an exclusivity deal for a specific country or region.
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Key benefits of licencing
- Source of income (initial fee & royalties on each product sold)
- Avoids trade barriers
- The outsourcing business will have better knowledge leading to higher sales.
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Key drawbacks of licencing
- Limited income (only a share of the profits)
- Loss of control over the production & the way the business is sold.
- Potential loss of intellectual property (patent).
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What is offshoring?
The relocation of business activities from the home country to a different international location.
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What is outsourcing?
The transfer of business functions from being done within the business to be provided by a supplier.
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What is reshoring?
Involves a business returning production or operations to the host country that had previously been moved to a different international location (previously been offshored).
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Distinction between offshoring & outsourcing
- Offshoring: the work is done overseas (about where the work is done)
- Outsourcing: someone else does the work for us (about who does the work)
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Reasons for offshoring
- Skilled labour: e.g. India & China produce far more IT graduates than UK
- New markets
- A business-friendly framework: it may be that overseas country has more business-friendly framework with more liberal labour & employment rules, subsidies, tax breaks and less regulation.
- Overcome trade barriers: beat protectionist measures such as tariffs & quotas.
- More natural resources
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Potential drawbacks of offshoring
- Ethical issues: if production is moved overseas there are job losses in home country. Also, it may be moved for cheaper labour but where employees are exploited. - These could damage brand reputation.
- Control & quality: difficulties in communication due to distance, time zones, language barriers. Quality can become an issue which is harder to address from a distance - can damage reputation.
- Intellectual property theft
- British reputation: having a 'made in Britain' label carries with it a certain reputation, which is lost by offshoring.
- Political instability
- Employee-employer relations (CSR)
- Poor infrastructure
- Labour costs are starting to rise abroad
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Reasons for reshoring
- Greater certainty around delivery.
- Reduce duration & complexity of supply chain.
- Easier to work with domestic suppliers.
- Better control over product quality
- Low-cost emerging economies are experiencing rising production costs.
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Difficulties in managing international business
- Differences in culture
- Language barriers
- Legal & political differences
- Exchange rate fluctuations
- Economic conditions
- Supply chain complexity
- Competition in foreign markets
- Ethical issues
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What are the two opposing pressures that businesses can face when operating in multiple countries? + the importance of these
- Pressures for local responsiveness
- Pressures for cost reduction
Businesses must balance efficiency with meeting local needs. Achieving this balance affects profitability, competitiveness & customer satisfaction. Different industries & markets create different levels of pressure.
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What does pressures for local responsiveness mean?
Refers to the need for businesses to adapt their products, services and operations to meet the unique needs & preferences of customers in different countries.
- This is often essential in markets with significant cultural, legal or economic differences.
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Why do pressures for local responsiveness matter?
Adapting to local demands can help a business:
- build customer loyalty
- comply with local regulations
- compete with domestic forms.
However, tailoring products & processes can increase costs & complexity.
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Business example: pressures for local responsiveness
McDonald's: adapts its menu to suit local tastes.
- E.g. in India, where many people avoid beef for religious reasons, McDonald's offers a range of vegetarian options like the McAloo Tikki burger & chicken-based dishes.
- This localisation has helped the company thrive in a highly diverse market.
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What does pressures for cost reduction mean?
Refers to the need for businesses to minimise expenses to remain competitive, especially in industries with intense price competition.
- This often involves standardising products & processes across markets to achieve economies of scale.
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Why do pressures for cost reduction matter?
Reducing costs helps businesses:
- offer competitive prices
- increase profit margins
- survive in markets where customers prioritise affordability
However, it can limit a business' ability to adapt to local needs.
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Business example: pressures for cost reduction
Apple:
- Centralises the production of its iPhone in a few factories, primarily in China, to benefit from lower manufacturing costs & economies of scale.
- The standardised design of iPhones helps keep production efficient & costs controlled.
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How can pressures for local responsiveness & pressures for cost reduction be balanced?
1) Use a transnational strategy
- Decentralising certain operations (e.g. product customisation), while keeping core processes centralised (e.g. production & supply chain).
2) Collaborate with local partners who understand the market better.
3) Utilise digital tools
- Invest in AI tools for demand forecasting & inventory management, reducing waste while meeting local preferences.
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