Theme 3 Knowledge

• Market penetration - Existing products sold to existing markets
• Market development - Existing products sold to new markets
• Product development - New products sold in an existing market
• Diversification - New products sold in new markets
• Market penetration strategy:

  • Reduce the selling price to increase sales
  • Increased promotion to increase sales
  • Risk is not spread
  • Lowest for sales growth (EOS)
  • Lowest risk as little R&D or market research
• Market development strategy:

  • Significant investment into market research
  • Spread risk by selling in other markets or countries
  • Can achieve economies of scale
• Product development strategy:

  • Significant investment in R&D
  • Aim is to increase customer loyalty (price inelastic)
• Diversification strategy:

  • Requires R&D and market research
  • Largest growth opportunity
  • Ability for highest EOS
• SWOT Analysis - Allows a business to make decisions based on its strengths, weaknesses, opportunity and its threats
• Perfect competition - Business cannot influence the market price and cannot do anything to differentiate from rivals
• Imperfect monopolistic competition - Differentiation comes from the quality of the product and the strength of brand image (high prices can be set)
• Oligopoly - No real advantage to firms for having price wars so stable price is set with price competition limited
• Monopoly - When there is no real competition and only one or few companies can charge high prices
• Porter's five forces:

  • Threat of new entrants
  • Threat of substitutes
  • Bargaining power of buyers
  • Bargaining power of suppliers
  • Rivalry among existing competitions
• Threat of new entrants:

  • Barriers to entry e.g. legislation
  • If barriers to entry are high then there is less competition
  • Price inelastic market
• Threat of substitutes:

  • If there are lots of substitutes (alternatives)
  • Price elastic market
• Bargaining power of buyers:

  • Consumers influence prices
  • If there is more buyer power
  • More choice in the market
  • Price elastic market
• Bargaining power of suppliers:

  • Suppliers can dictate terms to the business
  • If supplier power is high
  • Less choice when buying raw materials
  • Suppliers can charge higher prices
  • Damages liquidity
• External economies of scale - Reduction in costs due to industry growth
• Diseconomies of scale - As output rises, unit costs rise
• External economies of scale features:

  • As industry grows, the workforce will likely work in this industry
  • More skilled labour for industry
  • More outsourcing opportunities
• Internal diseconomies of scale features:

  • Too many levels in the hierarchy
  • Wider spans of control
  • Loss of control by management
  • Employees may be less involved in decisions
  • Coordinating multiple suppliers
• External diseconomies of scale features:

  • Overcrowding in industrial areas
  • Cost of land, labour and materials may rise if firms compete for a limited amount of resources
• Overtrading - Business runs out of working capital as it is growing too quickly
• Features of overtrading:

  • High sales revenue but low gross and operating profit
  • Heavy use of overdraft
  • Increase in payables compared to receivables
  • Significant increase in current ratio
  • Low levels of capacity utilisation
• Working capital cycle:

  • Cash from sales
  • Purchase stock from supplier
  • Finished goods made by business
  • Sell to customers
• Organic growth - When a business grows using its own resources
• Mergers - Two firms of similar size agree to join forces permanently
• Takeovers - When one firm buys a majority of shares in another so achieves full management control
• Horizontal integration - Business merges or takes over another business at the same point in the supply chain e.g. retailer buys retailer
• Forward vertical integration - Business takes over another business at the next stage of the supply chain e.g. supplier buys a retailer
• Backward vertical integration - Business merges or takes over another business at the previous stage of the supply chain e.g. retailer buys a supplier
• Benefit of horizontal integration:

  • Purchasing EOS
  • Reduced competition
  • Access to intellectual property
• Drawback of horizontal integration:

  • Could be blocked due to competition policy
• Benefit of forward vertical integration:

  • Better control of customer experience
  • Link to PED
• Drawback of forward vertical integration:

  • May need to invest into training
• Benefit of backwards vertical integration:

  • Buy raw materials without a mark-up
• Drawback of backwards vertical integration:

  • May need to invest in R&D to become more innovative
• Joint venture - When two businesses collaborate to complete an agreed goal
• Benefits of a joint venture:

  • Shared knowledge and experience of industry
  • Strong culture