Business Strategy & Stakeholder Analysis PDF

1.3 Business strategy: - A plan to achieve a strategic objective - 1.4 Stake holders Stakeholder: are any individual or groups of indidviudals who have a direct interest in a business because the actions of the business will affect them directly. Stakeholders can be categorized three dif...

1.3 Business strategy: - A plan to achieve a strategic objective - 1.4 Stake holders Stakeholder: are any individual or groups of indidviudals who have a direct interest in a business because the actions of the business will affect them directly. Stakeholders can be categorized three different ways 1.\ \ market stakeholders: organization has a commercial relationship with, includes customers, suppliers, and lenders\ non-market stakeholders: money does not change hands like media or community 2. Primary stake holders: those directly affected by or affecting the organization Secondary stakeholders: indirect relationship with organization like the media, government or NGO's 3. **Internal stakeholders:** individuals or groups that work within the business Interests of internal: - Shareholders focus on returns on their investments - The CEO or managing director focuses on coordinating the business strategy and delivering profits and returns that satisfy the shareholders - Senior managers focus on the strategic objectives for their functional areas - Middle managers focus on the tactical objectives for their functional areas - Supervisors focus on organizing tactical objectives and formulating operational objectives - Employees and their unions focus on protecting their rights and working conditions. **External stakeholders:** are individuals or groups that are outside the business Interests of external: - Government focuses on how the business operates in the business environment - Suppliers focus on maintain a stable relationship - Customers and consumers focus on the best product that meets their needs - People in the local community focus on the impact of the business in the local area - Financiers focus on returns on their investments - Pressure groups focus on how the business has impact on their area of concerns - The media fofcuses on the impact of the business in terms of new stories Grey areas exist between internal and external stakeholders' example: Employees live in the community where the business is located. As employees, they are internal stakeholders; as residents of the community, they are external. Competitors are considered to be stakeholders because they can affect the operation of the business. Conflict between stakeholders' interests Groups of people with a common interest such as a business may have differences of opion. Any decision of imiportance will elicit different reactions from different stakeholders. Friction may result in allicances as each stakeholder group tries to achieve their desired outcome. Successful businesses is that the interest of stakeholder are sufficiently satisfied most of the time. Sole trader: - Small shope with relatively few internal stakeholders - External stakeholder typically have such a small take in the business that the decisisions of the shop eare relatively inconsequential - Satisfying the interests of the stakeholders is not complicated Larger business: Stakeholder analysis: Large businesses with complicated stakeholder intrestes often preform a stakeholder analysis Step 1: - Priotiritze or rank the interest of various takeholders, this is done to determine how close each stakeholder is to decision-making the business A page of a book Description automatically generated As you go in you're more central to decision making Stakeholder maping: Level of interest LOW HIGH ------ ------------------------- ------------------------ LOW Group a: minimal effort Group B: keep informed HIGH Group C: keep satisfied Group D: key players Group A: - Can igrnore these tstakeholders or devote limited energy and attention to satisfy their interests Group B: - Making this group feel included is important through newslettters, events and other ways of conveying a sense of belonging Group C: - ,ist ne kept satisfied as they have the power to influence other groups, business ned to flatter the self-esteem of the members of group C Group d: - MOST IMPORTANT - Consult with them before any major decisions - Focus on their needs the most - Failure to satisfy these stakeholder can have major negative consequences 1.5 **[Internal & External economies and diseconomies of scale:]** **Economies of Scale** enable a business to benefit from lower average costs (the cost per unit) by increasing the size of its operations. - Economies of scale is when average costs of production decrease as the organization increases the size of its operations. - Companies obtain cost advantage when they increase production -- their costs per unit decrease the more they produce. Diseconomies of scale is when an organization becomes too large, causing productive inefficiencies that result in an increase in average costs of production. - As the scale of production increases more than a certain level, the average cost will increase. - The increase in pair unit production cost as output or activity increases (expanding without limits) Average Total Cost Formula - What Is It, How To Find, Examples TC = TFC + TVC Total Cost = Total Fixed Cost + Total Variable Cost Types of **internal economies of scale**: 1. *[Technical economies:]* - Large firms can use sophisticated capital and machinery to mass produce their goods. - The high fixed cost of their equipment and machinery are spread over the huge scale of output. - The results in the reduction of average costs of production. 2. *[Financial economies:]* - Large firms can borrow large sums of money at lower rates of interest. - "Lower Risk", banks prefer large businesses as they would have established payment records. - This results in the reduction of the costs of borrowing finance. 3. *[Managerial economies:]* - Large firms divide managerial roles by employing specialist managers. - Small firms are less able to do so. - E.g., a sole trader often has to fulfil the functions of a marketer, accountant and production manager. - This results in the fall in average costs due to higher productivity. 4. *[Specialization economies:]* - These are the results from the division of labor of the workforce. - By using mass production techniques, manufacturers benefit from having specialist labor. - These specialists are responsible for a single part of the production process. - This results in the fall in average costs due to higher productivity. 5. *[Marketing economies:]* - Large firms benefit from selling in bulk. (Quantity increases, Cost decreases) - High costs of advertising can also be spread by large firms through using the same marketing campaign across the world. 6. *[Purchasing economies:]* - Large firms benefit from buying resources in bulk. - Discounts are usually given on bulk purchases. - Large firms are able to purchase enormous quantities, so they get the biggest discounts. 7. *[Risk-bearing economies:]* - Conglomerates can spread fixed costs across a wide range of business operations. - Unfavorable trading conditions for some products can be offset by more favorable trading conditions in their other products. - A father company may lose money from one company, however, can gain profit from other companies. Examples of **internal** **diseconomies of scale:** 1. *[Lack of control and coordination]* 2. *[Poorer working relationships]* -- Disagreements between different departments. 3. *[Lower productive efficiency from outsourcing]* (products from an outside supplier) 4. *[Bureaucracy]* - A complex structure with many layers and procedures. 5. *[Complacency]* - When employees begin becoming too confident in their work and attempt shortcuts in their tasks, making them perform in a lower quality. Types of **external economies of scale**: 1. *[Technological progress:]* - Technological innovations increase productivity within an industry with significant cost savings. - E.g., the internet has revolutionized businesses by offering e-commerce. - This offers cost savings as the location of premises can be in more affordable areas. 2. *[Improved transportation networks:]* - Globalized transportation networks have enabled firms to import raw materials and finished goods that have been manufactured at much lower costs. - Increases convenience from improved logistical networks allow for faster deliveries at lower costs. 3. *[Abundance of skilled labor:]* - Certain locations may benefit from reputable education and training facilities. - Local businesses benefit from this by having a suitable pool of educated and trained labor. - This reduces the costs of recruitment and training. 4. *[Regional specialization:]* - Certain locations or countries have established reputations for specializing in specific goods and services. - Firms in those locations benefit from having access to specialist labor, sub-contractors and suppliers. - They are also able to charge a premium price for their products. - Example: cars in germany Examples of **external** **diseconomies of scale:** "The company CANNOT control it" 1. *[Higher rents]* -- If a company has a rented property, they will be obliged to pay higher rents if prices increase. 2. *[Local market conditions for pay and financial rewards]* -- In other countries, there are different minimum wages and laws when operating a business. 3. *[Traffic congestion]* -- When traffic increases, transportation cost increases and cost of time increases, this specifically impacts companies with delivery services. 4. *[Context specific problems]* -- Specific problems can include governmental, political, economic, etc. **[Reasons for Businesses to grow:]** Measuring **the size of a business**: - The size of a business can be measured in several ways: - Market share - Total sales revenue - Size of workforce - Profit - Capital employed ***Benefits*** of being a large business: - Economies of scale - Lower prices - Brand recognition - Brand reputation - Value-added services - Greater choice - Customer loyalty **[Reasons for a business to stay small:]** ***Benefits*** of being a small business: - Cost control - Loss of control - Financial risks - Government aid - Local monopoly power (monopoly: the market form when one singular business controls or is dominant in a specific segment/location) - Personalized services - Flexibility - Small market size The difference between **internal and external growth**: ***[Internal growth (without a third-party provider):]*** - This occurs when a business grows by using its own capabilities and resources to increase the scale of its operations and sales revenue. - Using *internal* funds such as: - Selling assets - Profits - Personal capital ***[External growth:]*** - External growth occurs through dealing with outside organizations. Such growth usually comes in the form of alliances or mergers with other firms or through the acquisition of other businesses. - External funds from banks or financiers - Selling shares to gain finance ***Methods*** of internal growth: 1. *Changing prices* -- when a company sees that they are capable of raising their prices to increase their profits, companies either do this if their competitors have higher prices, or when the company can see the high demand for their products or services 2. *Effective promotions* -- companies making advertisements to reach more customers 3. *Product innovation* -- companies developing their products, where customers, specifically loyal ones purchase the developed product more often (example: apple) 4. *Increased distribution* -- opening multiple branches to be more accessible to customers 5. *Preferential credit for customers* -- allowing customers to benefit when purchasing 6. *Capital expenditure* -- the funds that are used by a company to acquire, upgrade, and maintain their physical assets 7. *Staff training and development* -- when a company developed and improves their staff and employees, their company value and quality increases 8. *Providing overall value for money* -- ***Advantages*** of internal growth: - Better control and coordination - Relatively inexpensive - Maintains corporate culture - Generally, less risky ***Disadvantages*** of internal growth: - Diseconomies of scale - Restructuring of the form of ownership may be needed - May lead to dilution of control and ownership - Slower method of growth ***Methods*** of external growth: 1. *[Mergers and acquisitions (M&As):]* - **Mergers** take place when two firms agree to form a new company with its own legal identity. - Agreement between shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business. - **Acquisitions** occur when a company buys a controlling interest in another firm with the permission and agreement of its board of directors. - A company purchases more than 50% shares of another company, which makes it the controlling owner. - "hostile takeover" -- when a company buys a controlling interest (majority stake) in another company, without the permission and agreement of the purchased company. ***Benefits and Drawbacks*** of M&As: - ***Benefits:*** - Greater market share - Economies of scale - Synergy -- the concept that the value and performance of two companies' combined will be greater than the sum of the separate individual parts. - Survival - Diversification (new market, new product) - Gaining entry into new markets - Weaken or eliminating the competition in the market - Achieve growth and expansion and maximize profits - ***Drawbacks:*** - Redundancies - Conflict - Culture clash - Loss of control - Diseconomies of scale - Regulatory problems ***Horizontal and Vertical*** M&As: i. ***Horizontal M&As:*** - When a merger or acquisition occurs between two or more companies operating within the same industry. ii. ***Vertical M&As:*** - *Backward vertical M&A:* When a business at a certain stage of production integrates or merges with another business at an earlier stage. - *Forward vertical M&A:* When a business in a certain stage of production integrates or merges with another business in a larger stage of production. iii. ***Conglomerate M&A:*** - When two businesses in unrelated industries engage in a merger or takeover. ***Advantages*** of M&As and takeover: - These are relatively quick growth methods, especially if the organization wishes to enter new markets (with new/existing products in new/existing markets). They are all faster methods of expansion than internal growth and evolution. - Growth through M&A enables the newly formed company to benefit from greater economies of scale. For example, backward vertical integration enables the firm to gain from having direct access to its supplier, thereby cutting average costs of production (third party suppliers charge higher prices as they need to earn a greater profit margin). - M&As enable the larger organization to spread its fixed costs and risks, and to share its resources and expertise. This can improve the larger company's chances of success. - The cost savings and synergies created by a merger or acquisition enable the organization to earn greater profits, gain market power, and increase its market share. Customers also benefit from the possibility of lower prices arising from the cost savings and synergies. This helps to enhance the company's competitiveness. - M&As provide opportunities for businesses to diversify, which enables them to enter new markets as well as to spread risks. For example, Coca-Cola's acquisition of Costa Coffee in 2018 allowed the soft drinks company to diversify into the mainstream coffee retail market during a time when there has been growing perception that its signature soft drinks are unhealthy. - A takeover can be friendly, rather than hostile, if the target company wishes to sell its controlling stake in the business to the buyer. This is usually because the target company is experiencing liquidity problems. ***Disadvantages*** of M&As and takeovers: - M&As are typically very expensive. For a company to buy out a rival firm is often unaffordable. - There is a potential loss of management control of the company, especially in the case of a hostile takeover of the business. M&As often cause redundancies of senior management. For instance, there is no need to have two separate marketing or finance directors from the integrated companies. - M&As are unsettling for many stakeholders. There is likely to be resistance of change from the workforce and trade union members, especially if an acquisition results in mass-scale job losses due to purchasing company's desire to cut costs. - The newly formed company can be too large to manage efficiently, i.e. it may experience diseconomies of scale. - As the firm becomes larger through M&A, there could be a deterioration in customers loyalty due to less personalized / individualized service due to growth of the company. 2. *[Joint Ventures (JVs):]* - A joint venture occurs when two or more businesses split the costs, risks, control and rewards of a business project. - In doing so, the parties agree to set up a new legal entity. - As a result, a separate business is created with funding by the two parent businesses. - At the end of the pre-determined time period for the joint venture, a few possible outcomes can occur, such as: - The two parent companies might extend the time period - One of the parent companies might purchase the whole joint ventured company - The company may dissolve, and close ***Advantages*** of Joint Ventures: - Both firms enjoy greater sales, while neither of them loses their legal identity. - Bringing together different areas of expertise, creating a powerful combination. - Joint ventures are generally cheaper than M&As, as Mergers and Acquisitions involve high lead and administrative costs. - It is a quicker process to set up a Joint Venture company rather than M&As. - Joint ventures can also create synergies from working with a partner company (such as the transfer of specialist skills), thus strengthening the position of both firms in the market. - For international joint ventures, the partner company can provide local knowledge to cope with any problems related to cultural differences and business etiquette in overseas markets. ***Disadvantages*** of Joint Ventures: - It is possible not to produce the desired outcome, or a company. - A company can realize that what the joint venture is doing could have accomplished without having to share the profits with the other company. - Similar to a partnership, there is a risk of conflict between the parent companies. This might be due to different organizational cultures and management styles. This can create communication and productivity problems, thus jeopardizing the joint venture. - In the case of poor performance, a joint venture is more difficult to terminate than a strategic alliance. This is partly due to the legally binding responsibilities committed by the parent companies of the joint venture. - Many joint ventures are short-lived as they don't succeed. - For the joint ventures that do succeed, the parent companies have to share the profits. 3. *[Strategic alliances:]* - Strategic alliances are created when two or more organizations join together to benefit from external growth *without* having to set up a new separate entity or to make major changes to their own business models. Such examples are: - Apple and MasterCard (the first credit card company to offer Apple Pay) - Spotify and Uber (riders can listen to their own playlists) - For a strategic alliance to work, information sharing and genuine willingness to support other companies is vital. This includes a commitment to a common goal, the exchange of knowledge, and joint company events (partly to promote the SA). Strategic alliances are built on trust and a true desire to grow together. 4. *[Franchises:]* - Franchising is a form of business ownership whereby a person or business buys a license to trade using another firm's name, logos, brands and trademarks. - The Franchisor is the owner of the business. While the franchisee is the person who buys the logo, the name and the marketing methods. - The Franchisee can separately decide which form of legal structure to adopt. - Franchises are a rapidly expanding form of business operation. ***Advantages*** of Franchisors and Franchisees: 1. ***[Franchisors:]*** - *Cheaper and faster than internal growth* - it is advantageous for the franchisor to use partner firms to purchase, own and run additional franchised outlets. This means franchising can be cheaper than internal methods of growth for the franchisor. - *Enter new local and international markets* -- franchising allows businesses to enter new markets in a low amount of time and effort. (market development) - *Income from royalty payments* -- royalty payments are the payments for using the franchise or the license of a company, therefore the franchisor would gain income from opening more franchises. 2. ***[Franchisees:]*** - *Low risk or failure rate* -- when a franchisee buys into a franchise, they're joining a successful business, as well as a network that will offer them support and advice. - *Relatively lower start*-up costs -- the franchisor will help financially to build the business. - *Training and advice on financial management* -- the franchisee will be able to gain advice or support from the franchisor at any point in time. - *Large scale advertising performed by franchisors* -- the franchisee could avoid doing advertisements as the franchisor will be doing very large scale advertising operations that spread around the world. ***Disadvantages*** of Franchisors and Franchisees: 1. ***[Franchisors:]*** - *Risk damage to brand name if franchises are unsuccessful* -- since the reputation of the franchisor relies on all the smaller franchisees around the world. - *Monitoring quality standards of franchisees can be difficult* -- franchisors are unable to monitor the quality of all their franchises around the world. - *Slower growth method than M&As* -- since a franchisee would be entering a new market, the franchisor may not make sufficient profit in a short amount of time. Mergers and Acquisitions do not have to spend time to build the company, while franchisors take lots of procedures before becoming open to business. 2. ***[Franchisees]***: - *Stifled creativity due to many franchisor rules and requirements* -- franchisors normally set many rules and requirements for each franchise to ensure that the business runs smoothly. - *Can be very expensive to buy a franchise with no guarantee of a return of investment* -- the cost of purchasing a franchise is extremely high and there is no guarantee that the franchisee will meet their break-even point. - *Significant percentage of revenues paid to the franchisor* - the franchisor is paid a percentage of the total profits the franchise generates.