Theme 3

• A SWOT analysis helps a business assess its competitive strength and the nature of its external environment.

  Strengths, Weaknesses, Opportunities, Costs.
• A PESTLE analysis is a framework for assessing the key features of the external environment.

  Political, Economic, Social, Technological, Legal, Ethical/Environmental.
• Examples of Political features of the external environment.

  Tax policies, government spending, competition policy, industry regulation.
• Examples of Economic features of the external environment.

  Interest rates, consumer spending and income, exchange rates, business cycle.
• Examples of Social features of the external environment.

  Demographic change, impact of pressure groups, consumer tastes, changing lifestyles.
• Examples of Technological features of the external environment.

  Adoption of mobile technology, new production processes, disruptive technologies.
• Examples of Legal features of the external environment.

  Employment law, minimum/living wages, health and safety laws, environmental legislation.
• Examples of Ethical/Environmental features of the external environment.

  Sustainability, tax practices, ethical sourcing, pollution and carbon emissions.
• The Ansoff matrix is a model that helps businesses determine its product and market strategy.
• Ansoff matrix - market penetration.

  Existing products in an existing market.

  • Focus on what the business knows.
  • Little market research needed.
  • Harder to reach growth.
• Ansoff matrix - product development.

  New products in an existing market.

  • Being first in a market is important.
  • Market research required - time and money.
• Ansoff matrix - market development.

  Existing product in a new market.

  • Helpful when existing markets are saturated.
  • More risky than product development.
  • Existing products may not suit new markets.
• Ansoff matrix - diversification.

  New product in a new market.

  • If successful, risk is spread.
  • Very risky.
  • No economies of scale.
• Porter's strategy matrix identifies strategies a business might adopt.

  Cost leadership, differentiation, cost focus, differentiation focus.
• Porter's strategy matrix - low cost strategy.

  Cost leadership = low cost, broad target.

  Cost focus = low cost, narrow target.

  Economies of scale, keep costs low (fewer employees, smaller store, reduced product range).

  • High productivity and capacity utilisation.
  • Economies of scale (lower cost per unit from bulk buying).
• Porter's strategy matrix - strategy focus & differentiation.

  Differentiation = differentiation, broad target.

  Differentiation focus = differentiation, narrow target.

  Offer a distinctly different product, adds value.

  • Superior quality.
  • Branding = recognition.
• Porter's five forces.

  Threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of customers.
• Porter's 5 forces - threat of new entrants.

  New entrants will gain market share - increased rivalry. Low barries to entry = high threat of entrants.
• Porter's 5 forces - threat of substitutes.

  If there are substitutes, the business will lower price and reduce profits. Customer loyalty and substitute availability will limit the extent of this threat.
• Porter's 5 forces - bargaining power of suppliers.

  If firm's suppliers have bargaining power they might sell products at a higher price, therefore reducing profits for the business. Suppliers are powerful when there are only a few of them, resources are scarce, or the cost of switching supplier is high.
• Porter's 5 forces - bargaining power of customers.

  Powerful customers may exert pressure for the business to lower their prices.
• Reasons why firms might grow.

  To increase profits, to achieve economies of scale (cost per unit falls, increases competitiveness), increased market power, increased market share.
• Problems arising from growth.

  Diseconomies of scale, poor internal communication, poor employee motivation, poor managerial coordination.
• Diseconomies of scale.

  With growth, total costs rise, and cost per unit rises.
• Poor managerial coordination.

  The bigger the firm is, the harder it is to delegate and control effectively.
• Poor employee motivation.

  Reduced contact, so staff feel that their efforts aren't noticed.
• Poor internal communication.

  Low motivation as verbal communication is very important, but this is harder in a large company.
• Reasons for mergers and takeovers.

  Growth, cost savings (economies of scale from operating on a larger scale), diversification (avoids being dependent on current products/customers), market power.
• A merger is when two firms of equal size agree to come together.
• A takeover is when a bidder acquires 50.1% + of shares, and they takeover. Can be friendly or hostile.
• Forwards integration is when a business comes into contact with customers in the supply chain. For example, a car manufacturer begins going to showrooms to interact with consumers.

  • Direct contact with customers.
  • Potentially lower quality.
• Backwards integration is when a business moves backwards in the production process and starts supplying their own raw materials.

  • Absorbing supplier's profits may cut supply costs.
  • Job losses from duplicate employee roles.
• Horizontal integration is when a business buys out another business at the same stage in the supply chain.

  • Cost cutting and economies of scale opportunities.
  • Potential conflict and may be more difficult to manage.
• Conglomerate integration is when a business expands into a completely new area. For example, Ferarri making clothing.

  • Diversification (spread risks across different markets - if one faces challenge, they can focus on the other).
  • Shift in focus.
• Organic growth.

  • Safer and minimises financial risk.
  • Secure career path through steady development and regular career opportunities.
  • Maintain control.
  • Slow.
  • Market barriers could limit growth.
• Reasons for staying small.

  Product differentiation and USPs (easier for smaller businesses), flexibility in responding to customer needs, better customer service, e-commerce (less need for expansion when operating online).
• Decision trees use estimates and probability to calculate likely outcomes. Help decide if net gain is worthwhile.

  • Logical.
  • Use of probabilities means risk of options is addressed.
  • Decision making technique doesn't reduce risk.
  • Only estimates - errors can always arise.
• A critical path analysis is a project analysis and planning method that allows a project to be completed in the shortest possible time. It calculates the longest path of planned activities to the end of the project. It can identify the activities that are 'critical' (on the longest path) and which have 'total float' (can be delayed without making project longer).
• Uses of critical path analysis.

  Estimate and minimise project time, support project costing and evaluation, plan and organise resources, prioritise tasks, provides direction.
• Evaluation of critical path analysis.

  • Reduces risk and cost of projects.
  • Identifying float means resources can be transfered.
  • Reliability based on estimates and assumptions.
  • Resources may not be as flexible as management hope.