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Theme 3 LOA
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Amirah A
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Cards (53)
Market penetration - benefit:
Existing
products in
existing
markets
Lowest
risk approach for growth according to
Ansoff
Least
amount of investment in market
research
As existing markets alrea
dy underst
ood by business
Business has high
current
assets
High
current
ratio
Good
liquidity
LOA
Market penetration - drawback:
Existing
products in
existing
markets
Least
amount of
growth
As business is not
extending
product portfolio or targeting
additional
market segments
Sales are likely to grow
slowly
compared to other Ansoff strategies
Less likely to achieve
EOS
Lack of
EOS LOA
Product development - benefit:
New products in
existing
markets
e.g. updated versions of
previous
products
Help improve customer
loyalty
Customers return to purchase
improved
version
More
loyal
customers so less sensitive to
price
change
Price
inelastic
LOA
Product development - drawback:
New products in
existing
markets
e.g.
updated
versions of
previous
products
Requires
business
to invest in R&D regularly
Requires
experienced
engineers
Increasing cash outflows in
wages
Poor
liquidity LOA
Market development - benefit:
Selling
existing
products in new markets
Allows a business to spread their
risk
Makes them less vulnerable to
PESTLE
factors
Fall in
incomes
in one country can be offset by another country
Consistent cash inflows from
stable
countries
Good
liquidity
LOA
Market development - drawback:
Selling
existing
products in
new
markets
Requires
valid
market research
To understand customer
wants
and
needs
As
cultural
differences in countries need to be understood
Increased
expenses
Reduces
operating
profit,
retained
profit so less to
reinvest
Diversification - benefit:
Selling
new
products in
new
markets
Greatest
growth
opportunity
Increase
size
of product
portfolio
and target new
segment
Increased
sales
Link to
EOS
Diversification - drawback:
Selling
new
products in new markets
Greater
risk
according to
Ansoff
More
investment
in marketing to
diversify
New markets needs to be identified through
valid
market
research
Product developed through
R
&D
Poor
liquidity LOA
SWOT (strengths) - benefit:
If a business completes
SWOT
analysis
May be able to find their
strengths
Can focus
resources
onto that strength
Increasing the level of
differentiation
Gain a
competitive
advantage (Porter)
Price
inelastic
LOA
SWOT (weaknesses) - benefit:
If a business completes
SWOT
analysis
May be able to identify their
weaknesses
Able to focus resources on the
weakness
Consistent cash
inflows
Good
liquidity
LOA
Reduced chance of business
failure
SWOT (opportunities) - benefit:
If a business completes
SWOT
analysis
May be able to identify future
opportunities
Could mean the business
increases
their capacity
Increasing
output
Link to
EOS
SWOT (threats) - benefit:
If a business completes
SWOT
analysis
May be able to identify
potential
future
threats
Allocate
resources
to reduce threat
e.g.
diversifying
product
portfolio
Allowing the business to spread
risk
Making them
less
vulnerable to external threats a
Reduce selling price OR increase in gross profit
SWOT (general) - drawback:
If a business completes
SWOT
analysis
Significant
investment
in market
research
Increases
expenses
Reducing
operating profit
margin
Less
profit
to retain for
reinvestment
High barriers to entry - benefit:
If a business
operates
in a
market
with
high
barriers to entry
More investment in R&
D
and have to meet
legislation
Reduced
threat
of new businesses entering the market
Reduced level of
competition
Market more price
inelastic
Price
inelastic
LOA
High barriers to entry - drawback:
If a business wants to compete in a market with
high
barriers to entry
Require significant
investment
into R&D
May need to source additional
capital
e.g. bank
loan
More cash
outflows
Poor
liquidity
LOA
Low level of substitutes/competition:
If a
business
operates in a market with little
threat
of
substitutes
Due to having a highly
differentiated
product
Reduce
threat
of consumers switching to
alternative
businesses
Reduced level of competition in the market
Market is more price
inelastic
Price
inelastic LOA
High level of substitutes/competition:
If a business
operates
in a market with high threat of
substitutes
Due to not having a highly
differentiated
product
Increase
opportunities for customers switching to
alternatives
High level of competition in the market
Market is more
price
elastic
Price
elastic LOA
Higher supplier power:
If the market has
high
power of suppliers
Due to a
limited
number of suppliers
Suppliers will be able to negotiate
higher
prices for goods
Supplier will demand short
credit
periods
High cash
outflows
for business
Poor
liquidity
LOA
Low supplier power:
If the market has suppliers with
low
bargaining power
Due to
high
amount of choice for businesses
Businesses will be more
price
elastic
Supplier needs to
lower
prices to attract customers
Lower gross
profit
margin, operating and
retained
profit and total
equity
High buyer power:
If the
market
has
buyers
with a lot of
bargaining
power
Due to high amount of
choice
in the market
Businesses will be more price
elastic
Pressure to lower
prices
Price
elastic
LOA
Low buyer power:
If the market has little
bargaining
power
Little
choice from who to buy from
Businesses more price
inelastic
Can increase
prices
without customers switching to
alternatives
Increased
gross
,
operating
, retained
profit
and total
equity
External EOS - labour:
As
industry
grows more people are
attracted
to work within
industry
Improved overall
skill
level of employees within
industry
When businesses recruit,
employees
already have necessary skills
Increased
productivity
and
output
Fixed
costs
of production spread over more
units
Lower fixed
cost
per
unit
Increased
operating
, retained
profit
and total
equity
External EOS - outsourcing:
As an
industry
grows more
specialist
businesses support
industry
Increased opportunities to
outsource
to
specialist
Experts
in their
field
Increased
productivity
Fixed
costs of production spread over more
units
Lower unit
fixed
cost
Increased
operating
, retained
profit
and total
equity
Diseconomies of scale:
Causes
unit
costs to rise as
output
rises
Gross
OR
operating profit
margin may fall
Forced to increase the
selling price
Leads to significant
fall
in demand in price
elastic
market
Fall in
sales revenue
,
gross
,
operating
,
retained profit
and
total equity
Overtrading:
If a business grows too
quickly
Risk of
overtrading
Will have funded a large volume of
new
businesses without sufficient
resources
Significantly
depletes
cash reserves
Low current
assets
Low current
ratio
Poor
liquidity
and so chance of business
failure
Organic growth - benefit:
Business grows
organically
Business has not
merged
or taken over another business
More likely to maintain a strong
culture
Growth
has come from
within
the business
Employees should already share business
values
Employees are
motivated
to work towards
goals
Link to benefit of
motivated
workforce
Organic growth - drawback:
Business grows
organically
Business
has not
merged
or taken over another business
Growth is likely to take over
longer
period of time
Reduces
a businesses ability to achieve
EOS
In comparison to
merging
or taking over
Fixed
costs
spread over less
units
so higher
fixed
cost per unit
Decreased
operating
, retained
profit
and total
equity
Mergers/takeovers (EOS) - benefit:
If business takes over or
merges
with another
Significantly
increases
business scale
Without having to
invest
in non-current assets
As
business
has
increased
scale
Link to appropriate
EOS
Mergers/takeovers (competition) - benefit:
Merger
or takeover is within the same
industry
Reduce the level of
competition
within a market
Reducing
choice
for
consumers
Market is more price
inelastic
Price
inelastic LOA
Mergers/takeovers - drawback:
If a business
mergers
or takes over another
business
Both companies workforces will need to
join
If
workforces
joined together and are unable to agree on
values
Business will develop a
weak
or
toxic
culture
Employees
will not be
motivated
to work towards the same
goals
Link to drawback of
demotivated
workforce
Mergers/takeovers (intellectual property) - drawback:
Access to
intellectual
property
Use
unique
ideas to produce
unique
products
Without
investment
into more R&D
Increased
differentiation
Price
inelastic LOA
Joint venture - benefit:
Two
companies collaborate
Shared
knowledge
and
experience
in their respective industries
Do not have to agree with the wider shared
values
of the other business
Maintain strong
culture
Lower labour
turnover
so less
recruitment
costs
Good
liquidity
LOA
Joint venture - drawback:
Business will remain as separate
entities
Smaller
overall scale
Compared to global
merger
Less
opportunities
for
expansion
Unable to achieve
EOS
on a larger scale
Drawback of less
EOS
Global merger - benefit:
Two
global
companies
merge
Less
competition
in the market
Less
choice
for consumers
Less sensitive to
price
changes
Price
inelastic
LOA
Global merger - drawback:
When two
global
companies merge
Employees from each company may have
different
values
Clash of
values
between
employees
Poor working
relationships
according to
Herzberg
Demotivated
employees so higher labour
turnover
Poor
liquidity
LOA
Decision trees - benefit:
Allows businesses to make
decisions
that will return the
highest profit
As
costs
, revenues and
risks
are considered before decision-making
Correct
decisions
will lead to
increases
in
retained profit
Increase in
total equity
Can reinvest into further
expansion
of the
business
Business can increase
capacity
Link to
EOS
Decision trees - drawback:
Future returns and probabilities are based on
predictions
Vulnerable
to changes in
external
factors
e.g. changes in
PESTLE
factors
Could
lead
to predicted
profitability
being lower than
estimated
The outcome may be
inaccurate
Business
makes decisions that lead to a
lower
profit
or potential
loss
May be forced to use cash
reserves
Poor
liquidity
LOA
Prioritising shareholders - benefit:
Prioritising
shareholders
when making business
decisions
Focus on
lowering costs
Ensure that the business is
profitable
So that profits can be returned to shareholders as
dividends
Share
price
will remain
high
Generate lots of
share capital
Can build scale and benefit from
EOS
Link to
EOS
Prioritising shareholders - drawback:
Prioritising shareholders
when making business
decisions
Focus on lowering
costs
to remain profitable
Negative impact on the
long-term
Business may neglect investments in
R&D
or
market
research
May lose
competitive
advantage over rivals if continued pursuit of short-term profits
Reduction
in
sales volume
May lead to operating
loss
and forced to use
cash reserves
Poor
liquidity
LOA
Prioritising customers (service) - benefit:
Prioritising customers when making
decisions
Employees offer
excellent
customer service
Strong brand
reputation
Increased level of
differentiation
(Porter)
Price
inelastic
LOA
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