Unit 3 - Strategy and Implementation Flashcards

Question

Explain supplier bargaining power.

Answer 1

Supplier bargaining power concerns whether suppliers can increase their prices or not. If there are fewer suppliers for raw materials and components which then leads to decreased competitive advantage and increased costs which can therefore lead to lower profits. Some strategies which businesses could use include longer contracts, maximise EoS, potentially move to JIC (just in case) and offer to merge (guarantees buyers and sellers) Factors which affect supplier power include presence of alternative suppliers, cost of switching suppliers and use of backward vertical integration.

Answer 2

The threat of substitutes refers to the extent to which alternative products or services from outside the industry can replace a firm's product, limiting its price and profitability. An increase in substitutes, will lead to a fall in demand for a particular product and a fall in prices. Some strategies which businesses could use to offset this includes increasing brand loyalty, better meet customer needs and cost leadership Factors which affect the threat and level of substitutes includes the rate of change in technology, capital for investment and switching costs.

Answer 3

Rivalry refers to the intensity of competition between existing firms in an industry, which affects prices, costs and profitability. An increase in competition will lead to a fall in prices. Strategies which firms could use to offset this is cost leadership, differentiation and an increased investment in marketing Factors which determine the competitiveness of a market include level of collusion, industry concentration and the strength of the brand

Answer 4

The Ansoff matrix is a strategic direction model used by businesses - it shows the options to a growing business of how it can compete with its rivals and to also increase overall profitability and revenue. The matrix suggests that a firm can compete in two ways: products and/or markets.

Answer 5

. Market penetration . Product development . Market development . Diversification

Answer 6

X-axis shows increasing risk from left to right Y-axis shows increasing risk from top to bottom On the left of the matrix has markets (existing at the top and new on the bottom) On the top of the matrix has products (existing on the left and new on the right) Market penetration - top left Product development - top right Market development - bottom left Diversification - bottom right

Answer 7

Market penetration is where existing products are sold in existing markets. This type is the least riskiest of them all as there is no new product, so no need for R&D, and there is no new market, so no need for market research. Some reasons why firms may adopt this is to increase market share by means of selling more of the same product, advertising, sales promotions and extension strategies. The main aim of firms is to attract customers who haven't become regular customers and increase overall consumption amongst users. However, the issue is that this can be very difficult in an already saturated market.

Answer 8

This is where new products are sold in existing markets. This form usually incurs medium risk as R&D is required for the production and selling of new products. Selling new products to the same audience can be achieved in many ways such as through brand loyalty, market leader, increased cash flow which can finance R&D, lean design to achieve price skimming and achieve first mover advantage However, there is still the issue of market research as firms still need to be able to meet customer needs

Answer 9

Market development is where existing products are sold in new markets. Again, this incurs a medium level of risk as firms have to invest in market research. Investing in market research does not guarantee sales. Firms can achieve this by using advertising and using omni/muliti channel distributions e.g. e-commerce Two broad market development strategies include identifying users in different markets with similar needs to existing customers and identifying new customers who could use a product in a different way

Answer 10

Diversification is the selling of new products in new markets. This form incurs the highest amount of risk due to both R&D and market research costs. Businesses identify opportunities and usually have investment funds available. However, diversification can also help spread risk as it can reduce reliance on existing markets and products.

Answer 11

Businesses use its existing resources to grow and will not involve any other businesses/means of financing its growth. It is achieved by selling more of its products. Organic growth strategies include: . Expanding product range . Targeting new markets . Expanding distribution network - this allows products to be more widely available . Benefit from EoS Adv: . Less risky form of growth as it is more likely to be funded by retained profits . Less threat of brand dilution . Steady growth . Less loss of control Disadv: . Opportunities may be missed from acquisitions . Potential for growth may be limited . Lack of shared expertise . Dissatisfaction from shareholders if they believe that they are losing out on the return on their investment.

Answer 12

External growth is used and achieved via takeovers (acquisitions) or mergers. . Takeover - the acquisition of one business by another, either on an agreed or hostile basis. Vulnerability of a company to takeover depends on who controls the majority of shares, which shares have the voting rights, values of shares and the overall performance of the business. . Merger - process by which two companies become one. Usually businesses are equal in size and will agree on the share ownership of the business. Adv: . Rapid growth - useful in highly competitive/mature markets . Increased market power - influence prices, gain greater supplier bargaining power . EoS . Reduced competition Disadv: . High cost - may require large amounts of borrowing, increasing financial risk . Integration problems such as cultural clashes and management conflicts . DoS .Regulatory issues

Answer 13

. Backwards vertical integration . Forward vertical integration . Horizontal integration . Conglomerate integration

Answer 14

It is essentially where 2 merged businesses will always be more profitable together than apart/separate.

Answer 15

This is a merger/takeover where a business joins with another earlier in the supplier chain e.g. a manufacturer buying a supplier Adv: . Improved control of quality and supply . Reduced supplier bargaining power and helps reduce the risk of suppliers raising prices . Potential cost savings Disadv: . Inefficiency in managing a new production stage . Capital-intensive investment may be required

Answer 16

This is a merger/takeover where business joins with another later in the supply chain e.g. a manufacturer buying a retailer/distributor Adv: . Direct access to the final customer - better control over pricing, merchandising and customer experience . Improved market information . Strengthened brand presence Disadv: . Retailing expertise may be lacking which could lead to managerial inefficiencies . Higher fixed costs associated with running retail or distribution operations

Answer 17

This type of integration includes mergers/takeovers between firms at the same stage of production in the same industry e.g. supermarkets joining together. Adv: . EoS (bulk buying, shared marketing, reduced overheads overall) -> stronger cost competitiveness . Increased market share and reduced competition which can then also increase pricing power . Combined expertise through shared tech and staff etc. Disadv: . Risk of DoS . Regulatory scrutiny . Cultural clashes

Answer 18

This is a merger/takeover between firms in completely unrelated industries/markets. Adv: . Risk diversification - reduced exposure to downturns in one sector . Create corporate stability as revenue streams become less volatile . Internal cross-subsidisation - profit from one division can support investment in another Disadv: . Lack of industry expertise which can then increase the likelihood of strategic mistakes . Difficult to manage a highly diversified organisation and often means coordination becomes complex

Answer 19

Franchising is a business model when the franchisor licenses a business idea/method/system/trademark to a franchisee (an independent business). The franchisor gets an initial fee (given from the franchisee) and then also receives an ongoing loyalty (percentage of profits) The franchisor often pays for training and marketing. On the other hand, the franchisee leverages and makes use of the established brand and receives aid from the franchisor through training and support with marketing. Adv: . Cheaper way to grow due to reduced capital investment . Allows a business to grow faster Disadv: . Hard to ensure consistent quality across all franchisees . Unethical/poor behaviour of franchisees can impact the entire brand reputation which can then increase the risk and need for contingency planning.

Answer 20

Adv: . Fast growth with lower risk as franchisee finances growth in the long run . EoS can occur very quickly due to bulk buying . Increased income from franchisee fees - upfront payments and on-going royalty payments . Extra commitment from the franchises which increases motivation Disadv: . Loss of control - too many franchisees could be hard to manage . Not all profits return back to the franchisor . Loss of reputation? . Disputes . DoS

Answer 21

Adv: . Supported by national advertising/promotions . Reduced risk of failure as they are selling an already established product/service . Improved access to loans . Support offered by franchisor . Retain some degree of independence Disadv: . Less freedom . Cannot sell the business without permission . Franchisors could end the franchise without reason or compensation . Royalty fees - regular payments must be made

Answer 22

The main objective is to improve profitability and improve profit margins. Growth allows businesses to achieve EoS, increase market power and to improve long-term competitiveness. However, all forms of growth involve risk

Answer 23

(Expansion using internal resources) Management and control issues - an increased size which means that there is more time spent on managing employees, administration and paperwork. There is less focus on core competencies and what made the business successful originally. There is an overall divorce of ownership and control as managers replace owners. There is also the stakeholder impact through negative externalities such as pollution and traffic congestion. This can cause businesses to lose their local identity and to also lose close customer relationships

Answer 24

If profits are insufficient, funding is required for growth. Some examples of sources of finance include banks, shareholders and venture capital firms etc. Problems with finance include: . Loss of control, especially in equity finance . High interest costs (debt finance) . Increases financial risk . Reduced dividends for shareholders if profits are reinvested

Answer 25

. Strategic risks - growth may be mistimed, poorly planned and overpriced . External environment uncertainty - rapid changes in economic conditions, tech and consumer tastes can make future performance unpredictable

Answer 26

It is a strategy where a business reduces or reorganises its operations in order to lower costs and improve efficiency, often following external growth or during poor performance

Answer 27

. Growth can lead to inefficiencies and diseconomies of scale . Some parts of the business become less profitable . Markets change, leaving redundant resources . Loss of EoS due to poor location decisions . After mergers/takeovers, duplication of resources occur

Answer 28

Adv: . Improves efficiency . Turns around poor performance . Allows a business to focus on its core activities . A business can sell off unprofitable divisions . Remove duplicate resources Disadv: . Job losses . Employee resistance . Lower morale and insecurity . Risk of industrial action

Answer 29

Location refers to the geographical position where a business chooses to operate, which affects its costs, access to markets, labour, infrastructure and long-term competitiveness

Answer 30

. Influences operating costs (rent, wages and transport) . Determines access to customers and suppliers . Affects availability and quality of labour . Impacts efficiency and profitability . Often difficult and expensive to change, making it a long-term strategic choice.

Answer 31

This is when a firm moves some or all of its operations to a different geographical location in order to reduce costs, improve efficiency or increase competitiveness.

Answer 32

. Cost reduction - businesses can benefit from lower labour costs, rent and land prices and utility and operating costs (common reason for international relocation) . Access to markets - firms wish to move closer to customers and growing/emerging markets - this can reduce transport costs and improves responsiveness . Labour factors - availability of cheaper raw materials and more skilled labour . Infrastructure - business may relocate if there are better transport links, digital infrastructure and access to suppliers and finance . Government incentives - grants, subsidies and tax breaks (often used to attract firms in deprived regions)

Answer 33

. Offshoring (International relocation) - moving operations overseas; usually motivated by low labour costs, overcome domestic regulation and globalisation. However, there is the risk of cultural and political differences. . Reshoring/onshoring (domestic relocation) - this is where businesses who have previously moved business functions offshore bring these back to the country of origin. This is often driven by reasons such as lower regional costs, government regional policy, costs savings become no longer significant etc.

Answer 34

Adv: . Lower costs -> higher profitability . Improved efficiency . Access to new markets . Better labour availability . Increased competitiveness Disadv: . High one-off costs such as moving equipment, redundancy payments and setting up new premises . Loss of experienced staff - employees may refuse to relocate which can lead to loss of skills and knowledge . Disruption to operations . Damage to reputation - usually seen as unethical due to job losses and community impact . Cultural and quality issues - language barriers, quality control issues and different working practices

Answer 35

. Employees - job losses, insecurity . Local community - reduced employment . Government - loss of tax revenue . Shareholders - potentially higher profits

Answer 36

. Access to new markets - retailers locate near customers, trade restrictions/trade blocs and congestion and rising wages can reduce access and force relocation . Infrastructure - transports, digital networks, finance and training . Cost and nature of factors of production . Gov grants and subsidies . Social factors - management preferences such as schools, crime and lifestyle . Historical - firms may remain in locations even though the original advantages no longer exist

Answer 37

. Maximising EoS - higher output results in lower average costs . Access to international markets - firms may locate inside trading blocs to avoid tariffs and other trade barriers . Tax advantages - firms may locate to areas where corporation tax is lower . Freedom from restrictions - some countries may have less regulations and weaker employment laws

Answer 38

It is a business which isn't tied to a specific location or country and can relocate easily across borders in response to changing economic conditions. Key characteristics include: . Common in manufacturing and multinational firms . Usually locate where costs are lowest . Attracted by cheap capital, low-cost labour and tax advantages . They maintain flexibility through leasing factories on a short-term basis, negotiate temporary tax incentives and get host governments to fund infrastructure

Answer 39

Outsourcing is when a business contracts out certain activities or processes to an external organisation, often to reduce costs, improve efficiency and/or focus on core activities

Answer 40

. Domestic outsourcing - using another firm within the same country . Offshore outsourcing (offshoring) - using firms in other countries to reduce costs

Answer 41

. Cost reduction . Access to specialist skills and expertise . Improved efficiency and productivity . Allows focus on core activities . Allows for greater flexibility and scalability

Answer 42

Adv: . Lower costs which enables higher profit margins . Improved quality from providers . Increased flexibility . Faster implementation than developing in-house capabilities . Reduced management workload Disadv: . Loss of control over quality and operations . Dependence on external suppliers . Risk to brand reputation if standards fall . Communication difficulties . Hidden costs (monitoring, negotiation and switching supplier) . Employee demotivation and job losses . Ethical concerns such as low wages and poor working conditions

Unit 3 - Strategy and Implementation Flashcards

(66 cards)