Theme 3 LOA

• Market penetration - benefit:

  1. Existing products in existing markets
  2. Lowest risk approach for growth according to Ansoff
  3. Least amount of investment in market research
  4. As existing markets already understood by business
  5. Business has high current assets
  6. High current ratio
  7. Good liquidity LOA
• Market penetration - drawback:

  1. Existing products in existing markets
  2. Least amount of growth
  3. As business is not extending product portfolio or targeting additional market segments
  4. Sales are likely to grow slowly compared to other Ansoff strategies
  5. Less likely to achieve EOS
  6. Lack of EOS LOA
• Product development - benefit:

  1. New products in existing markets
  2. e.g. updated versions of previous products
  3. Help improve customer loyalty
  4. Customers return to purchase improved version
  5. More loyal customers so less sensitive to price change
  6. Price inelastic LOA
• Product development - drawback:

  1. New products in existing markets
  2. e.g. updated versions of previous products
  3. Requires business to invest in R&D regularly
  4. Requires experienced engineers
  5. Increasing cash outflows in wages
  6. Poor liquidity LOA
• Market development - benefit:

  1. Selling existing products in new markets
  2. Allows a business to spread their risk
  3. Makes them less vulnerable to PESTLE factors
  4. Fall in incomes in one country can be offset by another country
  5. Consistent cash inflows from stable countries
  6. Good liquidity LOA
• Market development - drawback:

  1. Selling existing products in new markets
  2. Requires valid market research
  3. To understand customer wants and needs
  4. As cultural differences in countries need to be understood
  5. Increased expenses
  6. Reduces operating profit, retained profit so less to reinvest
• Diversification - benefit:

  1. Selling new products in new markets
  2. Greatest growth opportunity
  3. Increase size of product portfolio and target new segment
  4. Increased sales
  5. Link to EOS
• Diversification - drawback:

  1. Selling new products in new markets
  2. Greater risk according to Ansoff
  3. More investment in marketing to diversify
  4. New markets needs to be identified through valid market research
  5. Product developed through R&D
  6. Poor liquidity LOA
• SWOT (strengths) - benefit:

  1. If a business completes SWOT analysis
  2. May be able to find their strengths
  3. Can focus resources onto that strength
  4. Increasing the level of differentiation
  5. Gain a competitive advantage (Porter)
  6. Price inelastic LOA
• SWOT (weaknesses) - benefit:

  1. If a business completes SWOT analysis
  2. May be able to identify their weaknesses
  3. Able to focus resources on the weakness
  4. Consistent cash inflows
  5. Good liquidity LOA
  6. Reduced chance of business failure
• SWOT (opportunities) - benefit:

  1. If a business completes SWOT analysis
  2. May be able to identify future opportunities
  3. Could mean the business increases their capacity
  4. Increasing output
  5. Link to EOS
• SWOT (threats) - benefit:

  1. If a business completes SWOT analysis
  2. May be able to identify potential future threats
  3. Allocate resources to reduce threat
  4. e.g. diversifying product portfolio
  5. Allowing the business to spread risk
  6. Making them less vulnerable to external threats a
  7. Reduce selling price OR increase in gross profit
• SWOT (general) - drawback:

  1. If a business completes SWOT analysis
  2. Significant investment in market research
  3. Increases expenses
  4. Reducing operating profit margin
  5. Less profit to retain for reinvestment
• High barriers to entry - benefit:

  1. If a business operates in a market with high barriers to entry
  2. More investment in R&D and have to meet legislation
  3. Reduced threat of new businesses entering the market
  4. Reduced level of competition
  5. Market more price inelastic
  6. Price inelastic LOA
• High barriers to entry - drawback:

  1. If a business wants to compete in a market with high barriers to entry
  2. Require significant investment into R&D
  3. May need to source additional capital
  4. e.g. bank loan
  5. More cash outflows
  6. Poor liquidity LOA
• Low level of substitutes/competition:

  1. If a business operates in a market with little threat of substitutes
  2. Due to having a highly differentiated product
  3. Reduce threat of consumers switching to alternative businesses
  4. Reduced level of competition in the market
  5. Market is more price inelastic
  6. Price inelastic LOA
• High level of substitutes/competition:

  1. If a business operates in a market with high threat of substitutes
  2. Due to not having a highly differentiated product
  3. Increase opportunities for customers switching to alternatives
  4. High level of competition in the market
  5. Market is more price elastic
  6. Price elastic LOA
• Higher supplier power:

  1. If the market has high power of suppliers
  2. Due to a limited number of suppliers
  3. Suppliers will be able to negotiate higher prices for goods
  4. Supplier will demand short credit periods
  5. High cash outflows for business
  6. Poor liquidity LOA
• Low supplier power:

  1. If the market has suppliers with low bargaining power
  2. Due to high amount of choice for businesses
  3. Businesses will be more price elastic
  4. Supplier needs to lower prices to attract customers
  5. Lower gross profit margin, operating and retained profit and total equity
• High buyer power:

  1. If the market has buyers with a lot of bargaining power
  2. Due to high amount of choice in the market
  3. Businesses will be more price elastic
  4. Pressure to lower prices
  5. Price elastic LOA
• Low buyer power:

  1. If the market has little bargaining power
  2. Little choice from who to buy from
  3. Businesses more price inelastic
  4. Can increase prices without customers switching to alternatives
  5. Increased gross, operating, retained profit and total equity
• External EOS - labour:

  1. As industry grows more people are attracted to work within industry
  2. Improved overall skill level of employees within industry
  3. When businesses recruit, employees already have necessary skills
  4. Increased productivity and output
  5. Fixed costs of production spread over more units
  6. Lower fixed cost per unit
  7. Increased operating, retained profit and total equity
• External EOS - outsourcing:

  1. As an industry grows more specialist businesses support industry
  2. Increased opportunities to outsource to specialist
  3. Experts in their field
  4. Increased productivity
  5. Fixed costs of production spread over more units
  6. Lower unit fixed cost
  7. Increased operating, retained profit and total equity
• Diseconomies of scale:

  1. Causes unit costs to rise as output rises
  2. Gross OR operating profit margin may fall
  3. Forced to increase the selling price
  4. Leads to significant fall in demand in price elastic market
  5. Fall in sales revenue, gross, operating, retained profit and total equity
• Overtrading:

  1. If a business grows too quickly
  2. Risk of overtrading
  3. Will have funded a large volume of new businesses without sufficient resources
  4. Significantly depletes cash reserves
  5. Low current assets
  6. Low current ratio
  7. Poor liquidity and so chance of business failure
• Organic growth - benefit:

  1. Business grows organically
  2. Business has not merged or taken over another business
  3. More likely to maintain a strong culture
  4. Growth has come from within the business
  5. Employees should already share business values
  6. Employees are motivated to work towards goals
  7. Link to benefit of motivated workforce
• Organic growth - drawback:

  1. Business grows organically
  2. Business has not merged or taken over another business
  3. Growth is likely to take over longer period of time
  4. Reduces a businesses ability to achieve EOS
  5. In comparison to merging or taking over
  6. Fixed costs spread over less units so higher fixed cost per unit
  7. Decreased operating, retained profit and total equity
• Mergers/takeovers (EOS) - benefit:

  1. If business takes over or merges with another
  2. Significantly increases business scale
  3. Without having to invest in non-current assets
  4. As business has increased scale
  5. Link to appropriate EOS
• Mergers/takeovers (competition) - benefit:

  1. Merger or takeover is within the same industry
  2. Reduce the level of competition within a market
  3. Reducing choice for consumers
  4. Market is more price inelastic
  5. Price inelastic LOA
• Mergers/takeovers - drawback:

  1. If a business mergers or takes over another business
  2. Both companies workforces will need to join
  3. If workforces joined together and are unable to agree on values
  4. Business will develop a weak or toxic culture
  5. Employees will not be motivated to work towards the same goals
  6. Link to drawback of demotivated workforce
• Mergers/takeovers (intellectual property) - drawback:

  1. Access to intellectual property
  2. Use unique ideas to produce unique products
  3. Without investment into more R&D
  4. Increased differentiation
  5. Price inelastic LOA
• Joint venture - benefit:

  1. Two companies collaborate
  2. Shared knowledge and experience in their respective industries
  3. Do not have to agree with the wider shared values of the other business
  4. Maintain strong culture
  5. Lower labour turnover so less recruitment costs
  6. Good liquidity LOA
• Joint venture - drawback:

  1. Business will remain as separate entities
  2. Smaller overall scale
  3. Compared to global merger
  4. Less opportunities for expansion
  5. Unable to achieve EOS on a larger scale
  6. Drawback of less EOS
• Global merger - benefit:

  1. Two global companies merge
  2. Less competition in the market
  3. Less choice for consumers
  4. Less sensitive to price changes
  5. Price inelastic LOA
• Global merger - drawback:

  1. When two global companies merge
  2. Employees from each company may have different values
  3. Clash of values between employees
  4. Poor working relationships according to Herzberg
  5. Demotivated employees so higher labour turnover
  6. Poor liquidity LOA
• Decision trees - benefit:

  1. Allows businesses to make decisions that will return the highest profit
  2. As costs, revenues and risks are considered before decision-making
  3. Correct decisions will lead to increases in retained profit
  4. Increase in total equity
  5. Can reinvest into further expansion of the business
  6. Business can increase capacity
  7. Link to EOS
• Decision trees - drawback:

  1. Future returns and probabilities are based on predictions
  2. Vulnerable to changes in external factors
  3. e.g. changes in PESTLE factors
  4. Could lead to predicted profitability being lower than estimated
  5. The outcome may be inaccurate
  6. Business makes decisions that lead to a lower profit or potential loss
  7. May be forced to use cash reserves
  8. Poor liquidity LOA
• Prioritising shareholders - benefit:

  1. Prioritising shareholders when making business decisions
  2. Focus on lowering costs
  3. Ensure that the business is profitable
  4. So that profits can be returned to shareholders as dividends
  5. Share price will remain high
  6. Generate lots of share capital
  7. Can build scale and benefit from EOS
  8. Link to EOS
• Prioritising shareholders - drawback:

  1. Prioritising shareholders when making business decisions
  2. Focus on lowering costs to remain profitable
  3. Negative impact on the long-term
  4. Business may neglect investments in R&D or market research
  5. May lose competitive advantage over rivals if continued pursuit of short-term profits
  6. Reduction in sales volume
  7. May lead to operating loss and forced to use cash reserves
  8. Poor liquidity LOA
• Prioritising customers (service) - benefit:

  1. Prioritising customers when making decisions
  2. Employees offer excellent customer service
  3. Strong brand reputation
  4. Increased level of differentiation (Porter)
  5. Price inelastic LOA