What are the ways that businesses can increase efficiency by gaining more experience? (With an example)
- Labour efficiency - workers make less mistakes therefore less waste (less materials used)
- Labour specialisation - workers become specialised in certain tasks and therefore produce at a faster rate.
- Input mix - over time inputs such as raw materials may be optimised to reduce the cost of production.
- Ford cut Model T’s costs by 3/4 by integrating vertically, dividing labour and eliminating model changes.
What’s the benefit of the experience curve?
Increasing efficiency can reduce unit costs, therefore the business can get a cost advantage. This could mean you can decrease prices which will increase demand and therefore market share. Increasing market share can also lead to becoming a monopoly.
What is the experience curve?
The idea is that as a business increases its experience in producing a product, it becomes better at it, increasing efficiency.
What is offshoring?
Business activities or processes moved abroad. E.g manufacturing in China or IT services in Poland.
Why would a business choose to offshore?
To reduce costs
- Production costs
- Raw material costs: location
- Labour costs: lower wages
- Labour skills - better quality
Increase revenue
- Gloser to a growing market
- Overcome protectionism
What are the disadvantages/problems with offshoring?
- Initial transition costs
- CSR risks
- Exchange rate risks
- Logistics pressures (lead times?)
What is reshoring?
Bringing business activities back tot he home country (e.g UK).
Why would a business re-shore?
- To avoid offshoring risks:
CSR, exchange rate, transition costs, logistics risks.
How can overtrading occur?
- When growth is achieved through a significant capital investment in production or operations capacity before revenues are generated
- Sales are made on credit and customers take too long to settle amounts owed
- A long term contract requires a business to incur substantial costs before payments are made by customers under the contract
What is overtrading?
Overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion
What are some symptoms of overtrading?
- High revenue growth but low gross and operating profit margin
- Persistent use of overdraft
- increase in payables and receivable days ratios
- increase in current ratio
- low inventory turnover ratio
- low levels of capacity utilisation
How can a business avoid overtrading?
- Reduce inventory levels
- Scaling back the pace of revenue growth
- Leasing rather than buying capital equipment
- Enforcing better payment terms with suppliers and customers
What are the six phases and five crises in Greiner’s model?
Creativity
Direction - Leadership -> Business now too large for leader to get involved in everything
Delegation - Autonomy -> Business now has functional management
Coordination - Control -> More formal management structure in place but new layers of hierarchy needed to keep control
Collaboration - Red Tape -> A dangerous growth in organisational bureaucracy, slowing decision making and missing external changes
Alliances - Growth -> Growth slowing as business runs out of ideas
What is synergy?
Synergy happens when the value of two businesses brought together is higher than the sum of the value of two individual businesses. eg when 1+1 equals more than 2
What are the two sources to create synergy/lead to synergy?
Cost savings
- eliminate duplicated functions and services
- better deals from suppliers
- higher productivity and efficiency from shared assets
Revenues
- cross selling to customers of both businesses
- access to new distribution
- brand extensions
- new geographic locations open up
What is retrenchment?
Retrenchment means the reduction in costs or spending in response to economic difficulty eg making employees redundant
What are some examples of retrenchment?
- Reducing outfit and capacity
- Job losses
- Product/market withdrawal
- ## Disposal of business unit
What drives retrenchment?
- Costs too high
- Low roce
- high gearing
- loss of market share
- failed takeover
- economic downturn
- change of ownership
What are some retrenchment actions and the possible implications for change?
Change in organisational structure
- changed responsibilities, greater workloads, higher stress, new team and colleagues
New leadership or ownership
- uncertainty, different leadership style, new priorities, aims objectives.
Fewer people
- Loss of morale and increased demotivation, bad news for some external stakeholders
What are the two methods of growth?
Organic growth and external growth
What is organic growth?
Involves expansion from within a business
What are some benefits of organic growth?
- less risk than external growth
- can be financed through internal funds eg retain profits
- builds on a brands strengths
- allows the business to grow at a more sensible rate (avoid overtrading)
What are some drawbacks of organic growth?
- growth achieved may be dependent on the growth of the market
- hard to build market share if business is already a leader
- slow growth
- franchises can be hard to manage effectively
What are some benefits of franchising?
Running your own business
easier to raise finance
lower risk method of market entry + lower failure rate
