by Sophia Abramchuk

Making Business Decisions!

Unit 4a Business Studies

4.3.1 What is a Mission Statement!

Are Mission Statements useful

The mission statement of a business sets out what the main

purpose of a business is e.g. why it exists !
The mission is likely to be determined by the values of
organisation (i.e. its culture)!

YES

NO

Can give stard a sense of

common purpose and
direction

Can just be a PR exercise,

design to create a good
public image

The aims of the business expressed in qualitative terms

such as the desire to be the best in the industry!
They highlight the culture, values and beliefs of the business !
Should be short, specific and convey to everyone the value of
the brand and why it exists!
It will include information for all stockholders!
A more inspirational and motivating version of a corporate aim!

Can increase motivation

Usually impossible to prove

Can help stakeholders

understand the main aim of
the business

May be rather vague

Can inform the consumer

It is impossible to sum up
what a business is all about
in a few sentence

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Corporate aims are broad long term ideas on how the

business should develop. Can be very vague e.g. to be
profitable/successful in the future!

An effective Mission Statement !

Identifies the reason why the business exists !
A good mission statement will help to develop SMART
corporate objectives, and be supported and adhered to in all
levels of the business!
Ensures that everyone is focused and working towards
achieving goals!
Many believe that a Mission Statement should have a grand
scale, be socially meaningful and be measurable !

Stakeholders and objectives

Stakeholder

Objectives

Conflict

Consumers

Good value vs. price products!

Buying experience (service and
support)!
Safe Product

Shareholders !
Managers !
Employees

Shareholders

Maximisation of profits and return

on investment!
Decreasing costs and improving
revenues

Consumers- product
qualities!
Government- cutting taxes
reducing costs!
Local Community- ethics !
Employees-wages !
Managers- salaries!
Suppliers- costs reduction

Suppliers

Paid in time for supplies !

Best deals- profit maximisation !
Consistency !
More orders !
Fair prices

Managers !
Shareholders

Employees

Good working conditions !

Fair wages !
Fair treatment, motivation and
rewards !
Good public image !
Job satisfaction!
Promotion

Shareholders- reduced
costs !
Managers- reduce costs

Managers

Clear objectives and guidelines

from the directors and
shareholders !
Profit maximisation for
shareholders !
Training

Employees !
Shareholders !
Directors!
Suppliers

Government
!

Regular tax payment !

Creation of jobs !
Follow the legislation !
Pollution!
FDI

Shareholders !
Managers!
Directors !
The Local Community

The Local
Community

Employment !
Pollution!
Environment !
Local conditions !
No illegal practices

Shareholders !
Government!
Managers!
Customers

A pyramid of terms!
Corporate objectives !
Derived from mission statement/corporate aims!
General objectives that refer to the business as a whole !
Need to be practical and effective, e.g. relating to survival,
profit, market standing, social responsibility!
They are specific, measurable,r elastic and measurable
(SMART) goals which an organisation plans to achieve within
a given time period. These goals will influence its internal
decisions !

Strategy !
A plan of actions that has been designed to fulfil an objectives.
A strategy cannot be formed until an objective has been
defined !

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Mission
statement!
Corporate
aims!
Corporate objectives !
Corporate strategy !
Functional objectives!
Functional strategy

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by Sophia Abramchuk
Supermarket wants to open a new superstore on a
greenfield site- Local community can have the conflict with
shareholders of the business. This is due to the interest of
shareholders to maximise sales and do whatever they need to
attract as many customers, without ethical considerations.
The local community will be interested in preserving the
greenland and environment, because building of a
supermarket implies a lot of pollution, distraction of natural
habitat and the rural area around it. It might be possible that
local community will benefit from cheap food supply from the
supermarket as well as this will create jobs and improve
employment in the area, but on the other hand it can be
argued that there is urban space in the city that can be used
and which will not have the same environmental impact with
the same benefits. And shareholders will want to minimise the
costs of wages and production, so it is possible that the local
workers will be paid less as well as more pollution and waste
will be implemented. !
A meat processing business wants to open a new abattoir
close to a residential area- restaurants and residents of the
area. For restaurants the suppliers will be closer, the transport
costs and fresh produce, but the local residents will feel
uncomfortable with the meat production. !

Corporate Social Responsibility!

Social Responsibility and business ethics are not
the same things!
Social-responsibility- broad concept that concerns the
impact that the business has on society as a whole !
Ethics relates to the way a individual or group behaves and
the way society judges this as right or wrong!

Means taking decisions that take account of all

stakeholder interests.
Because
Desire to behave responsibly!
Positive public image
Smokescreen to hind behind Spin-offs:
Good public relations exercise
Can increase sales
Reduces potential stakeholder conflict!

Ethical Decisions making conflict

Following codes of practice that embody moral values:
What to manufacture eg arms & cigarettes make profit but
both are destructive
Where to manufacture eg movement of production overseas
to reduce costs causing unemployment
Capital and labour ie machinery or more jobs
Pay & working conditions eg trade off between beVer
standards and lower costs
The environment trade of between controlling pollution and
lower costs

Summary!
Despite the apparent number of conflicts most stakeholders
will have some common ground, e.g. long term profitability !
BUT!
There are some irreconcilable differences e.g. local residents
will never be keen on a new runway/airport near their home. !

Ethical Behaviour and Profitability

Trade off between ethical behaviour and profitability?
However companies with ethical behaviour still make profit eg
Kraft foods, PepsiCo, Dell, IBM!

Conflicts between ethical objectives and profitbased objectives !

Argument- being ethical/socially responsible increases costs !
BUT !
Some ethical companies- highly profitable !
Can avoid need for outsider regulation (which can be costly)!
Can improve motivation/leadership !

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Drawback to behaving ethically!

Labour costs increase
Supplies and materials higher costs
Controlling environmental damage increase costs
Change in organisation culture expensive
If Competitors less ethical so lower costs/prices!

Advantages to behaving ethically:

Favourable media attention
Improved public image can lead to increased sales and brand
loyalty
Ethically produced products can carry a premium price without
damaging sales
More motivated workforce and possible increases in
productivity
Improved relationships with suppliers leading to beVer quality
service
Can actually be profitable!

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by Sophia Abramchuk

Corporate culture!
Organisational culture!
The way we do things around here- a result of tradition,
history and structure!
The values, attitudes and believes of the people working in an
organisation that control the way they interact with each other
and with external stakeholder groups !
!
Google organisational culture!
It comes from !
People and talent and skills, collection of special people !
Corporate aims !
Atmosphere and environment !
No bureaucracy !
Freedom to work !
Different background !
Multicultural food, sports, care for workers !
Working habits !
No dress code, casual and open plan office !
Multinational culture !

Sources of organisational structure!

Sources of
organisational culture

Quote

School Examples

Symbol

In my job management
have their own parking
spaces and their own
offices

Student artwork, Head

Boy/Girl board, sports
trophies, new 6th form
block

Stories

In my workplace
Mr.Wenview is a legend
he sold his house to set
up the business. He
had so much faith it
would work!

Stories about teachers,

students and directors

Organisational
Structure

In my job decisions are

made centrally. We
dont get much say in
what goes on. Head
Office makes most of
the decisions

Hierarchy, bureaucracy,
a lot of layers in
organisation,
centralised decision
making by directors

Formal controls

In my job my colleague
was given a formal
warning because he
was 5 minutes late
twice in 1 month

Lesson lates, high/low

levels, dress code,
code of conduct,
clocking in and out,
detentions, exclusion,
cameras

Power structures

In my job we can
challenge management
views. In fact
challenging
management us
encouraged

Student council,
debates with teachers,
rep meetings

Rituals and myths

In my job start every

day with a company
meeting where we sing
the company song

School hymn,
assemblies, Student
Council, year book,
prize giving evening,
graduation, Moves
show, musicals, cake
stalls, houses

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Weak and Strong Culture !

Weak !
Employees dont support the corporate culture!
Productivity and motivation likely to be low !
Danger of us and them mentally !
Capable staff may move on, leaving disaffected discontent
staff behind !
Staff need to be forced to comply with company rules!
End results to be poor performance !
Strong !
Employees believe the corporate culture and strongly support
it !
Staff tend to be more loyal!
Staff turnover is reduced !
Mutual respect between management and employees grow!
Motivation tends to be high!
Productivity tends to be higher!
Good communication exists !
A strong culture may encourage superior performance !
Success depends upon !
People in the organisation; their skills and their ability to work
independently or as part of a team !
Situation facing the business- do cultures need to change in
difficult times e.g. recession !
Products/services being sold !

Problems of changing organisational culture !

Demotivation of employees that need to adopt to a new way
of doing things around here!
Takes time and effort, reduces productivity and motivation if
new culture is more strict and allows less freedom !
Need to invest in training !
Cultural clashes between different groups inside the business
(Mergers and takeovers) !
International businesses, diversity, scale, size, geographical
spread of the organisation !
Current management/leadership styles !
Current organisational structure !
Lack of experience in managing cultural change !
Negative outcomes of change !

Types of Culture!
Power!
This type of culture has few rules- so decisions can be made
quickly !
Centralised and concentrated between few people culture
control bus!
Role !
Traditional business structure- often reflected in an
organisational chart !
A hierarchy will exist with delegated authority- it comes from a
persons position in the structure
Task !
Involves forming teams to address specific task- reflected by a
Matrix organisational structure !
Person!
Where individual employees focus on themselves that the
business- which can create problems !
This type of culture is more common where employees have
similar qualifications- e.g. accountants !

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by Sophia Abramchuk

Corporate Strategy !

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Once the corporate objectives have been decided, a busies

must begin to plan how they will be achieved !

Focus on market share and market growth ignores other

issues such as developing a sustainable competitive
advantage!
Useful when comparing with the product life cycle !
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What is Corporate Strategy?!

Long term plan to achieve corporate objectives!
Can be implemented in a number of ways e.g.!
Entering/leaving certain markets!
Acquiring new companies!
Introducing/phasing out products and services etc.!
No one way to do this but different approaches which can be
used which are looked at in this presentation!

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Developing Corporate Strategy Portfolio Analysis!

The Boston Matrix
An attempt by the Boston Consulting Group to analyse the
product portfolio of a firm!
Market share does the product being sold have a low or
high market share?!
Market growth are the numbers of potential customers in the
market growing or not!

The Boston Matrix Analysis !

Stars are high growth products competing in markets where
they are strong compared with the competition. !
Often Stars need heavy investment to sustain growth.
Eventually growth will slow and, assuming they keep their
market share, Stars will become Cash Cows !
Question marks are products with low market share
operating in high growth markets. !
This suggests that they have potential, but may need
substantial investment to grow market share at the expense of
larger competitors. Management have to think hard about
Question Marks - which ones should they invest in? Which
ones should they allow to fail or shrink? !
Cash cows are low-growth products with a high market
share. These are mature, successful products with relatively
little need for investment. !
They need to be managed for continued profit - so that they
continue to generate the strong cash flows that the company
needs for its Stars !
Unsurprisingly, the term dogs refers to products that have
a low market share in unattractive, low-growth markets. Dogs
may generate enough cash to break-even, but they are rarely,
if ever, worth investing in. Dogs are usually sold or closed.!

How Useful is the Boston Matrix?!

Balanced portfolio needed!
Stars and problem children potential !
Cash cows will eventually fade away so stars/problem
children need nurturing.!
Helps to think about balance in product range!
BUT!
Only a snapshot of current position!
No real predictive value!
High market growth doesnt mean the market is attractive!
High market share does not mean the product is able to
generate cash!

Achieving Competitive Advantage through Distinctive

Capabilities!
Competitive Advantage!
Any feature of a business that enables it to complete
effectively. May be based on price, quality, service, reputation
or innovation.!
Distinctive Capabilities!
The ideas, resources and capabilities that a business
possesses that are better than those of its competitors.!
Goal of business strategy is to achieve competitive advantage
that is sustainable for as long as possible. The more
distinctive capabilities a business has, the more likely it is to
create a competitive advantage and to make it last!

Impact of Strategic and Tactical Decisions!

Strategic Decisions!
Made in order to meet the objectives of the business. They
are usually long term in nature. For example, should we enter
a new market?!
Tactical Decisions!
Shorter term steps taken to achieve the strategy. For
example, what price should we charge?!
Both types of decisions will impact upon human resources,
physical resources and financial resources.!

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by Sophia Abramchuk

Porters 5 Forces Analysis !

Threat of New Entrants!

If businesses can easily come into an industry and leave it
again if profits are low, it becomes difficult for existing
businesses in the industry to charge high prices and make
high profits!
Existing businesses are constantly under threat that is their
profits rise too much, this will attract new suppliers into the
market who will undercut their prices.!
Businesses can counteract this by creating barriers to entry
e.g. patents/copyright or creating strong brands which will
attract customer loyalty and make customers less price
sensitive!
Large amounts of advertising can be a deterrent because it
represents a large cost to a new entrant which might have to
match the spending to grow some market share. !
Large sunk costs (costs which have to be paid at the start but
are difficult to recoup if the business leaves the industry, can
deter new entrants !

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(Michael Porter, a key business management author)!
A way to look at the competitive environment!
5 forces (factors) which determine the profitability of an
industry!
Ultimate aim of competitive strategy is to cope with and ideally
change those rules in favour of the business!
When the collective strength of those 5 forces is favourable, a
business will be able to earn above average rates of return on
capital!
When they are unfavourable, a business will be locked into
low returns or widely fluctuating returns!

The Bargaining Power of Suppliers!

Suppliers want to maximise profit!
The more power a supplier has over competitors the higher
the prices they can charge!
Limiting the power of the supplier will improve the competitive
position of a business!
To do this it can: !
Grow vertically!
Seek out new suppliers!
Minimise the information provided to suppliers in order to
prevent the supplier realising its power over the consumer!

The Bargaining Power of Consumers!

The less customers there are, the more power they have !
Buyers want to obtain supplies for the lowest price!
If buyers or customers have enough market power they are
able to beat down prices offered by suppliers!
One way a business can improve its competitive position
against buyers is to extend into the buyers market through
forward vertical integration!
It could encourage other businesses to set up in its
customers market to reduce the power of existing customers!
It could try to make it expensive for customers to switch to
another supplier e.g. games console manufacturers keep up
the price of computer games for their machines by making
them technically incompatible with other machines!
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Substitutes!
The more substitutes there are for a particular product the
fiercer the competitive pressure on a business making the
product!
A business making a product with few or no substitutes is
likely to be able to charge high prices and make high profits!
A business can reduce the number of potential substitutes
through research and development and then patenting the
substitutes itself!
Sometimes a business will buy the patent for a new invention
from a third party and do nothing with it simply to prevent the
product coming to market!
Businesses can also use marketing tactics to stop the spread
of substitute products e.g. a local newspaper might use
predatory pricing if a new competitor come into its market to
drive it out again!

Rivalry Amongst Existing Firms!

The degree of rivalry among existing firms in an industry will
also determine prices and profits for any single firm!
If rivalry is fierce, businesses can reduce the rivalry by forming
cartels or engaging in anti-competitive practices (in UK/EU
law this is illegal but not uncommon)!
Businesses can reduce competition by buying up their rivals
(horizontal integration)!
In industries where there are relatively few businesses, often
businesses dont compete on price!
This allows them to maintain high profitability!
Instead they tend to compete by bringing out new products
and through advertising, thus creating strong brands!
As a result their costs are higher than they might otherwise
be, but they can also charge higher prices than in a more
competitive market creating high profits!

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by Sophia Abramchuk
Porters Generic Strategies!
3 generic strategies that businesses could follow in order to
gain a competitive advantage.!

Cost Leadership Tesco, Ryanair !

Competitive Advantage comes from:!
Providing a Basic Good at Minimum Cost (i.e. to become the
lowest cost producer)!
Must have the lowest costs in the industry to succeed at this
strategy.!
Can be achieved by a range of methods e.g. economies of
scale, best technology, increased productivity, more skilled
workers etc.!
This gives pricing flexibility: Could have very low prices and
increase market share OR could keep prices at industry
average and have large profits.!
Must keep their source of low cost savings secret from rivals
to maintain an edge!!

Differentiation - apple!
Competitive Advantage comes from:!
Creating products which are unique!
Could be in terms of functions, design, features, after-sales
support or durability.!
Requires an effective R&D dept. and a highly skilled
workforce to make top quality products!
Enables the business to charge higher prices and achieve
higher profit margins!

Competition vs co-operation!
Competition!
Traditional way compete and maintain a competitive
advantage!
Globalisation/trade liberalisation more competition!
Internet increases competitive pressure!
Corporate strategy more difficult as level of competition and
speed of change increase!
Strategic decisions need to be flexible in order to cope with
competitive threats !
Co-operation!
Factors which may persuade a business to co-operate:!
Avoid the pressures of competition (e.g. Ba and Iberia run
some routes jointly)!
Resources can be shared for mutual benefit!
Managerial time and effort can be put towards pushing the cooperative venture rather than fighting off the opposition!
Co-operation may be a legal requirement (e.g. in India and
China a joint venture might be required by law before MNCs
can enter a domestic marketplace)!

Political, Legal and Other Influences on Strategy!

Political!
E.g. economic policy!
MNCs operating under different Governments may face
different regulations!
Legal!
Changes in law may mean businesses have to change the
way they operate e.g. working time directive/minimum wage!
Other!
E.g. social/technological can alter strategy as some objective
become easier or obsolete!

Economic policy to achieve economic growth !

Fiscal policy taxes + expenditure of the government !
Monetary policy control of money supply and interest rates !
Supply side policy managing supply through education/
training !
Inflation costs rise or demand increase !

Focus !
Competitive Advantage comes from:!
Offering a specialised product in a niche market!
Business targets a particular segment or segments within the
market and focuses on satisfying their needs. Cost focus
focus on cost and price. Differentiation focus - concentrate on
distinctive nature of the product.!
Businesses using focus strategies aim their products at niche
markets, e.g./ SAGA = over 50s. They can tailor their
products to meet their customers exact needs.!

The Key to Success with Porter!

Firms must choose one of these 4 strategies, they will not
succeed if they try to follow some middle course.!

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by Sophia Abramchuk

4.3.2 Making strategic decisions !

Ansoffs Matrix!
Ansoffs Matrix is a ways of classifying marketing strategies in
terms of existing and new products in existing and new
markets !
The degree of risk involved in each strategy is an important
element of the analysis!
Strategies!
Market penetration!
This is about increasing market share by concentrating on
existing products in existing markets. This strategy arises by: !
Finding new customers!
Taking customers from competitors !
Persuading existing customers to increase usage e.g. cereals
to be eaten as a snack during the day and just for breakfast!
New product development !
This is about launching new products into your editing market.
Strategies may include: !
Changing an existing product !
Developing new products !
Market development !
This is about finding new markets for existing products. This
can be carried out in the following ways: !
Repositioning the product to target a different market segment
e.g. Land Rovers traditional market was farming and military
use; it has now repositioned the product to appeal to town
dwellers!
Moving into new markets e.g. opening branches abroad !

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Diversification !
Developing a new product in a new market. This is the most
risky strategy but can also lead to the most extraordinary
success. !

by Sophia Abramchuk

Investment Appraisal !
The importance of investment !
Investment in capital (e.g. medium to long term assets)
features;!
Substantial financial resources required !
Opportunity and financial costs: therefore risk !
Should aim to achieve financial as well as corporate
objectives !

Investment appraisal !
The process of analysing the financial merits of a possible
future investment !
Investment appraisal is a decision making tool which
examines whether capital investment is worthwhile, or which
from a range of options is the best to undertake !

Payback period !
This method calculates how long it takes a project to pay back
the initial investment involved !
It concentrates on cash-flow, highlighting projects that quickly
recover their initial investment !
Regard payback as one of the first methods you use to
assess competing projects- an initial screening tool, but
inappropriate as a basis for sophisticated investment
decisions!
This formula is used to find the month when payback occurs: !
Remaining cash needed to payback/net inflow expected in
that year x 12 months !
Advantages!
Helps to see how long the capital will take to payback !
Very simplistic and easy to use !
Quick !
Disadvantages !
Doesn't look at profitability of the capital in long term !
Only a forecast, other tools should be used to complement to
make the decision!

Steps to calculate Payback!

Create a table of cash inflows and outflows over the life of the
investment!
Identify in which year investment cost is recouped!
Narrow down the month using the formula:!
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Remaining cash needed to payback!!
x
12
months!
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Net inflow expected in that year!
Express result as Payback of x achieved in x years and x
months!
Cash outflow
!

Cash inflow

Net cash
flow

Balance

Year 0!

310,000

(310,000)

(310,000)

Year 1

15,000

125,000

110,000

(200,000)

Year 2

15,000

127,000

112,000

(88000)

Year 3

15,000

140,000

125,000

37,000

Year 4

15,000

140,000

125,000

162,000

Year 5

15,000

130,000

115,000

277,000

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88,000/125,000 x 12= 8.448, 2 years and 9 months !

Average Rate of Return!

This method calculates the expected annual return from the
investment, expressed as a percentage of the capital invested
in the project.!
Quantitatively the higher the rate of return, the better the
investment is!!
ARR Pros and Cons!
Simply and relatively easy to understand!
Expressed in percentage terms which may make it easier for
managers to use!
Focus on profit / return!
ARR doesn't take account of the project duration or the timing
of cash flows over the course of the project!
A subjective tool there is no definitive signal given by the
ARR to help managers decide whether or not to invest!

Steps to calculate ARR!

Create a table of cash inflows and outflows over the life of the
investment!
Calculate the total profit from the investment!
Divide the profit over the life of the investment to give an
annual profit rate!
Calculate the average rate of return using the following
formula:!
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Average annual profit!
x100%!
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Initial investment!
Express result as % return!

Net Present Value (NPV)!

This method calculates the present value of all future cash
flows from each investment project.!
To do this, firstly the future cash flows are set down in a table,
year by year!
Future cash flows are discounted to arrive at a present
value, using a discount factor (given in the exam) that relates
to the cost of capital or borrowing for the company!
NPV Pros and Cons !
Makes an allowance for the opportunity cost of investing!
Takes into account cash inflows and outflows for the duration
of the investment!
Choosing the discount rate is difficult especially for longterm projects!
A complex method to calculate and easily misunderstood!
Choosing the discount rate is difficult especially for
long-term projects!

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by Sophia Abramchuk
Steps to calculate NPV!

Create a table of cash inflows and outflows over the life of the
investment!
Multiply the inflows by the given discount factor (e.g. 5%,
10%)!
Calculate the total value of the investment (discounted
inflows discounted outflows)!
Express the result as a monetary value in today's terms!
Investment Appraisal The Reality!
The main idea with investment appraisal is to evaluate the
likely success and value of capital investments to help the
company succeed in the long term.!
In reality, financial considerations are only part of the story
when it comes to making investment decisions. !

Decision Tree!
The tree is a diagram that compares all possible outcomes of
multi-stage decisions!
In order to make a decision it is necessary to calculate
the expected value (EV) of every decision- this considers
the estimated value and probability of each event !
To calculate the expected value using a diagram- work
backwards from right to left; subtract the original cost of each
option !
The option with the highest expected value would normally be
chosen !
Advantages!
The diagram may highlight possibilities that had not previously
been considered!
It requires numerical values to be placed upon decisions- this
tends to require research, and thus improves results !
It takes into account the risks involved in decisions, and
makes the decision-maker aware of them!
Disadvantages !
Time-lags may mean data used is out of data as process is
time-consuming !
It does not consider non-numerical factors, e.g. laws!
The probabilities used are often estimated !
The diagram can quickly become complex and unmanageable !

Bear in mind these facts when answering questions!

Politics Permeate Decisions are ultimately made and
influenced by humans, who think well beyond the figures
(unless they are boring accountants). They will consider their
own objectives (especially if there is a divorce between
ownership and control) and will favour projects giving them,
for example, more power and reward.!
Corporate Objectives: Companies may undertake
investments for reasons other than profit maximisation. For
example, they may be trying to protect their long term security,
or deny competitors an opportunity!
Mistakes and Errors: Its actually really difficult to accurately
estimate future cash-flows for most projects, and indeed the
actual cost / time required to complete an investment. This
undermines the accuracy of all quantitative methods. !

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by Sophia Abramchuk

Critical Path Analysis !

CPA is a planning tool- not a decision making tool !

A method of organising the activities in a project to find the
most efficient method of completing the project without
wasting resources (time, money, materials.) !

Aims of CPA !
To plan complex operations !
To identify when a project must commence !
To illustrate the order of activities !
To identify critical activities which are those activities which
must be completed first !
To identify the times when resources can be reallocated !

The float !
With the network complete you can now identify any idle time. !
This spare time is known as the float. !
Resources can be allocated to other duties during the float
time. !
To make an Analysis !
A list of activities assign each a letter and length !
Information on the order of tasks to be completed !
The time it takes to complete each task !
Any constraints on completing !

Assessing the value of CPA !

Efficiency: shows those tasks, which can be carried out at the
same time. Shows critical tasks and ones that can be delayed. !
Decision making: estimating the length a project will takeanalysis of the tasks involved should lead to deadlines being
met more effectively as the implications of delays can be
assessed, identified and prevented. !
Time based management: ensure project is done as quick as
possible !

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Working capital control: identifying when resources will be

required can help a business to manage its working capital
cycle. Especially important if a business operated in a just in
time system of stock control. !

Advantages:!
Maximises efficiency in the use of time !
Improve efficiency and generate costs saving in the use of
recourse !
Beneficial to monitoring cash flow !
Identify potential problems in implementing operation !
Identifies where and when recourses (including human ones)
are needed !
Disadvantages: !
Usefulness may be limited in complex and large scale
operation !
Necessity of having clear and reliable information !
Skilled management and team philosophy is essential!

Although critical path analysis is clearly of value a business

must not assume that simply because it produces a network
its project will be completed without delay!
Information used to estimate times in networks may be
incorrect!
Changes sometimes take place when new projects are carried
out; unforeseen events such as weather!

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Special order/ unexpected

contribution!

Contingency planning !

Total contribution- the difference between a products sales

revenue and its variable costs !

Non-financial factors to consider before accepting the

order!
Capacity- a business must ensure that it has enough
recourses to complete the order e.g. are workers prepared to
work extra hours? Is there enough space in the factory, etc. !
Customer response- if existing customers find out that
products have been sold to other at a lower price this may
cause resentment !
Future orders- sometimes up-profitable orders are accepted
in anticipation of future, more profitable orders from the new
customers!
Current utilisation- an unprofitable order might be accepted
to keep employees occupied !
Retaining customer loyalty- A business might accept an
unprofitable order from a regular customer as a favour in
order to retain them loyal. !

Question :!
Single product manufacturer has this cost structure: !
Materials 25 per unit !
Direct labour 28 per unit!
Variable overheads 12 per unit !
Fixed overheads total 420 000!
Product price 120 !
Annual output 80% of the total capacity is 20 000 !
DIY store wants to buy extra 4000 units per annum, to sell
as own label !
Price 85 !
10 000 of set up costs !
For the business: !
Profit- Rev - TC !
Rev= 120 x 20 000= 2 400 000 !
TC= FC + VC !
= 420,000 + (65 x 20 000) !
=1 300 000!
BE= 420 000/ 55 (present contribution= 120- (25+28+12)) =
7,636 !
Margin of safety is 20 000-7 636= 12 364 !
Forecast profit is 680 000 (12 364x 55) and revenue 916
000 (120 x 7 636)!
For DIY store order: !
Contribution= 340 000 (sales revenue)- 22x4000!
= 80 000 -10 000 (set up production costs) !
= 70 000!
BE= 420 000/ 20= 21,000 units of the DIY order will have to
be sold without other orders to break even !
Capacity of 80% out of 20 000= spare !

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Contingency planning- preparing for unwanted and nonroutine possibilities such as:!
A severe recession !
Bankruptcy of a major customer !
A sudden change in demand !
!
A contingency plan ensures that a business is proactive
rather than active !
Managers are forced to look for potential; changes in the
environment rather than merely dealing with changes
when they occur !

Contingency plans could include: !

Ensuring that new products are in development if there is a
sudden fall in demand for existing products !
Training employees to be multi-skilled so that they can
perform many jobs to cover absence or meet changes in
demand !
Using more than one supplier to ensure that a problem with
one supplier will not jeopardise production !

!
!

Contingency planning uses variable resources such as

time and money, presenting an opportunity cost !
To decide on which events to plan for a firm may
consider: !
Likelihood- how likely is a particular event is to happen? !
Impact- what is potential damage if it does occur?!
The greater the likelihood and potential damage of an event
the more likely a firm is to prepare a contingency plan for it !

When good times go bad, the impacts of a crisis: !

When an unexpected event does happen a contingency plan
should allow effective crisis management. Decisions will not
have need rushed, and there is a clear process to deal with
the crisis.!

When managing a crisis it is important to: !

Identify the key factors as quickly as possible- what is the
scale of the crisis, people involved etc!
Have a suitable and effective communication system in place
(the schools emergency closure line for example) !
Ensure all communication with third parties outside of the
organisation is clearly co-ordinated to ensure the business
creates an impression that they are in control of situation !
Have authority and recourses available to make decisions
quickly !

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Liquidity, profitability ratios,

balance sheets!
Concept/Stages of Ratio Analysis!
Ratio Analysis: a method of assessing a firm's financial
situation by comparing two sets of linked data.!
Stages in using ratio Analysis!
Identifying the reason for the investigation, is the info needed
to decide wether to become an investor,customer or supplier
or is it being used by the organisation to improve efficiency.!
Decide on relevant ratio to achieve purpose of the user.!
Gather info required and then calculate the ratio.!
Interpret the ratio. what is the meaning of the results?!
Make appropriate comparisons in order to understand!
significance of ratio.!
Take appropriate actions then reevaluate with same process
after implementation.!

Ratio Comparisons
Ratios alone are meaningless therefore we compare them
with other results.!
Inter-firm Comparisons - Between 2 companies, a company
should compare to rival competitors, in order to assess its
relative performance. these should be selected as the ones
with the most in common in order to take into external factors
which should effect the both.!
Intra-firm Comparisons - Within a company. the efficiency of
different divisions or areas of a company can be compared.
Should also be between similar areas.!
Comparisons to a Standard - Certain levels are seen as
efficient, a company can compare to these standards to
assess objectively!
Comparisons Over Time - Whatever basis is used, a
company ratio should be compared over time to see trends in
efficiency and to allow for exceptional events.!

Users of ratios
Managers - Identify efficiency of the firm and its different
areas, to plan ahead and see effectiveness of policies!
Employees - Whether the firm can afford wage rise and to
see if profits are being fairly distributed!
Government - To review success of its economic policies and
find ways to improve efficiency overall.!
Competitors - To compare their performance against rival
firms and discover their relative strengths and weaknesses.!
Suppliers - To know the sort of payment terms that are being
offered to other suppliers, and can they afford to pay.!
Customers - Know the future and make sure guaranties and
after sale services are secure!
Shareholders - Compare financial benefits with other
investments.!

Types of Ratio!
Profitability Ratio - These compare profits with the size of
the firm, as profit is often primary aim of a company (ROCE)!
Liquidity Ratios - These show whether a firm is likely to be
able to meet its short-term liabilities. although profit shows
long-term success its vital to hold sufficient liquidity to avoid
difficulties in paying debts. (Current Ratio & Acid Test Ratio)!
Gearing - Focuses on long-term liquidity and shows whether
a firm's capital structure is likely to be able to continue to meet

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interest payments on, to repay long term debts. (Gearing

Ratio)!
Financial Efficiency Ratio - Focuses on management of
working capital, used to asses the efficiency of firm in
managing assets and short- term liabilities. (Asset turnover,
Inventory turnover, Payables days & Receivables days)!
Shareholders Ratios - Focus on drawing conclusions about
financial shareholder benefits from their company shares.
(Divided per Share & Divided Yield)!

Measuring profitability !
Gross Profit Margin !
The amount of profit a business makes on its cost of sales. !
The mark up profit on each item sold. !
The higher the margin the better!
A high gross profit may suggest a USP adding value to the
items sold, low material costs or a high selling price. !
This can be improved by reducing raw material costs or
increasing the selling price. !

Net Profit Margin !

The amount of profit a business/product generates after
paying expenses, as a percentage of turnover !
The higher the profit margin the better!
A failing net profit margin may suggest that the business is
wasting money through unnecessary expenditure!

Profitability Ratio Return On Capital Employed

The capital employed is a measure of the value of the
resources used by a business and is an excellent guide to its
size. Profit targets are often expressed as a ROCE which
uses the formula below:!
ROCE = Operating Profit /Capital Employed x 100!
Measures the efficiency with which the firm generates profit
from the funds invested in the business. !
Compares net profit to the amount of money in the business !
A higher percentage figure is better !
Can be compared with: previous figures; alternative
investments, e.g. bank rates.!

Liquidity Ratios!
Liquidity: the ability a business has to repay its debts !
Current assets: what you own - stock cash debtors !
Current liabilities: what you owe short term loans
Two liquidity ratios - Current ratio & Acid test ratio used in
order to assess the ability of an organisation to meet its shortterm Liabilities.!

Current Ratio: In order to meet liabilities a firm can draw on

its current assets,bank balance,debtors and stock that is sold.
Generally, higher numbers are better, implying that the firm
has a higher amount of current assets when compared to
current liabilities and should easily be able to pay off its shortterm debt.!
Current ratio = Current assets/current liabilities
Company should aim to be between 1.5:1 and 2:1 as an ideal
ratio!

Acid Test Ratio: Firms cannot be sure that their inventories

will sell quickly so acid test is used as an alternative. Acid test
ignores inventories in its calculation considering only cash,
bank balances and receivables.!

by Sophia Abramchuk
ATR= Current assets - Inventories/current liabilities !
The ideal Acid Test Ratio is between 0.75:1 and 1:1!

Gearing!
Gearing examines the capital structure of a firm and its likely
impact on the firm's ability to stay solvent.!
Gearing (%) = Non-current Liabilities/ (Total equity + Noncurrent liabilities) X 100!
Non-current liabilities normally take the form of loans, such as
debentures or long-term loans from the bank!
High Gearing is greater than 50%. High gearing ratio shows
that a business has borrowed a lot of money in relation to its
total capital.!
Low Gearing is below 25%. Low gearing ratio indicates that a
firm has raised most of its capital from shareholder, in the
form of share capital and retained profit.!
Gearing Benefits
Benefits of High Gearing!
There are relatively few shareholders, so it is easier for
existing shareholders to keep control of the company.!
The company can benefit from a very cheap source of finance
when interested.!
In times of high profit, interest payments are lower than
shareholders' dividend requirements, allowing greater retained
profit.!
Benefits of Low Gearing!
Is permanent share capital avoids creditors pushing them into
liquidation.!
A low gearing company avoids the problem of having to pay
high levels of interest on borrowed capital when interest rates
are high.!
The company avoids the pressure facing highly geared
companies that must repay their borrowing at some stage.!

Financial Efficiency Ratios!

Asset Turnover: This ratio measures how well a company
uses its assets in order to achieve sales revenue.!
Asset Turnover = Revenue / Net Assets!
High AT shows the business is using assets efficiently to
achieve sales.!
Low AT shows the business is not using assets efficiently to
achieve sales.!
Capital intensive firms will have lower asset turnover than
labour intensive firms, because capital owned is included in
net assets where labour is not.!

Stock Turnover!
This ratio measures the number of times a year a business
sells and replaces stock. !
Stock turnover= Cost of Goods Sold/Avg Stock Held!
the stock turnover figure represents the number of times in a
year that a firm sells the value of its stock. 3 time a year =
once every 4 months!
The stock turnover can be improved by: !
Reducing the average level of stocks held, without losing
sales !
Increasing the rate of sales without raising the level of stocks !
In different industries the rate of stock turnover will be
different, e.g. greengrocer would have a ration of 250 to 300
days of turnover due to the need of his stock to be fresh,
whereas a business operating in service would have a zero
turnover as no stock is held.

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Factors influencing the rate of Stock Turnover!

The Nature of the Product - Perishable products or products
that become dated, e.g. (newspapers) have high stock
turnover.!
The Importance of Holding Stock - Clothes retailers need to
hold high levels of stock to encourage shoppers!
The Length of the Product Life Cycle - Fashionable
products are expected to sell quickly and products with short
life cycles must also have a rapid turnover.!
Stock Management System - Just-In-Time stock control =
low levels of stock so stock turnover is faster.!
Quality of Management - Poor market research may lead to
inappropriate stock levels = low stock turnover.!
The Variety of Products - Company with 20 products will
hold greater levels of stock than a company with 1.!

Limitations of Ratio Analysis!

Accounting information is historic in nature !
Not easy to make accurate projections of future performance
from the data!
Only focused on monetary items- what about changes in staff/
strength of product portfolio/future new product pipeline/age of
key assets etc. !
Does not take into account the nature of the business: the
qualitative factors: size; market penetration/business activity/
objectives !
Take a look too at the chairmans directors for further
guidance!

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Human Recourses
Competitiveness!

Efficiency can be measured by calculating the productivity of a

firm !
Productivity- the amount that can be produced with the
resources that are available!

Factors that affect efficiency!

Labour intensive- relatively few machines are neededcommon where specialist skills are required; in the service
sector!
Capital intensive- relies more upon machinery- e.g. where
identical products are produced !

Capital or labour intensive!

The size of the business!
Capital equipment can be expensive!
Small firms may be unable to afford to buy machinery!
Even if they can afford it, they will have to calculate whether
the cost can be justified !
The relative costs of inputs!
New technology is expensive !
It may be cheaper not to automate !
Even if a job can be automated it may not be cost-effective !
This depends on the wage demands of staff !
The product of service!
Products which can be mass produced will be capital
intensive- e.g. cars!
Whilst custom-made product, and many services will be
labour intensive- e.g. hairdressing !

Labour Turnover !

New staff may bring new ideas and new ways of working !
Negative!
Recruiting new workers is expensive!
New staff will need training and induction, which is costly and
time consuming!
It can have a negative impact on staff morale, if lots of staff
are leaving!

Voluntary Labour Turnover- sometimes workers will leave a

job voluntarily, due to retirement; finding another job and
volunteering for redundancy !
This can be helpful to a business that is looking to decrease
their labour costs- since they may not have to replay the staff
that leave!

Internal and external influences on workforce

planning !
The process of anticipating in advance the human resource
requirements of the organisation, both in terms of the number
of individuals required and the appropriate skill mix.
Recruitment and training policies are devices with a long-term
focus, in order to ensure the business is able to operate
without being limited by a shortage of appropriate labour!

Internal influences!
The are of rise in workforce productivity- automation can
improve productivity, as well as motivating employees through
job enrichment, agreeing financial objectives and other
appraisal systems; there is a lot evidence that this is
expensive, but little that it is effective!
The business strategy itself-expansion strategies- if
proven to be success, a business can double pressure to
employ and train new stuff!
The attitude of the leadership towards the structure of
hierarchy- if a new leader decides to delayer the
organisation, the job losses and the retaining needs will cause
work (and stress) for the HR department; this will need to be
built into the workforce plan!
The attitude of the leadership towards a diverse
workforce- there is a tendency to hiring white males,
educated in the private sector; diversity strategy is the
preferable, as this practice could benefit from greater
understanding among the staff of the lives of people from
other cultures. !

!
This is the measure of how quickly the staff in the workplace
change !
Ideal rate!
It depends upon!
The level of unemployment in the region !
Whether staff are full or part-time !
The level of skills required by staff!
E.g. Private sector- 16.8%!
Public sector- 12.6%!
Voluntary sector- 16.4%!

Why is Labour turnover important!

Positive!
New workers may be more enthusiastic !
A firm can employ staff who have the specific skills required
for different jobs !

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External influences!
External opportunities-such as the period when a
developing country moves from commodity based purchasing
(rice, chicken, oranges) towards modern products, services
and brands!
Legislation- now the legistalition towards the requirements to
get hired and discrimination became more laissez-fair; now
businesses can decide on what sex, different race or age of
workers to hire; this is reversed by more restrictions on
migration policies, some firms making use of the inflow of
skilled workers and some putting extra training and time into
British workers to get the required skills that can be in short
supply!

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by Sophia Abramchuk

4.3.4. Company growth!

Business size can be measured in many ways- e.g.
assets, sales revenue, operating profit, market share,
value added, number of employees!
Growth implies increase in one or more of the above metrics!

Large companies enjoy!

Great volume of sales!
Higher sales revenue!
Larger profits!
Higher market share!
Greater influence over market prices!
Economies of scale!
Greater stability- they are more robust and better able to cope
with economic problems!

Aims of business growth!

To increase profit!
To achieve market leadership/dominance !
To enjoy economies of scale and therefore lower unit costs!
To control outlets and/or suppliers!
To spread risks by diversifying !
To reduce the range of takeover!
To increase security!
To remain competitive !
To ride fluctuations in the economy !
For survival!
As a defensive strategy !
To increase status!
To obtain the benefits of synergy !
Reasons of personal ambition!

!
!

Economies of scale- an advantage of producing on a large

scale; unit costs fall as the scale of production rises!
Financing growth by borrowing (this has consequences for
gearing and interest cover); share issue (consequences for
control); and internal finance (reinvestment of past profits but
at the expense of dividends)!

Profits are essential for growth!

The ploughing back of past profits is a major source of funds
for growth!
Only profitable firms generate the funds for reinvestment !
Debt finance for expansion is usually dependent upon a track
record of successful and profitable operations!
The success of a share issue is also dependent on past and
current performance !

Obstacles to growth!
Financial constraints- lack of vince for investment !
Market size limitations- the market is too small for the firm to
grow!
Lack of personal ambition in the owner !
Internal resistance to change- e.g. from middle
management and workforce!
Organisational inflexibility- inability to cope with a new,
larger organisation !
Competitor activity- aggressive competition prevents
acquisition of a large market share!
Resource constraints- capacity constraints or lack os
physical assets!
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Problems of growth!
Cash flow problems!
Danger of overtrading- expanding with insufficient working
capital!
Diseconomies of scale- paper work and problems
associated with large scale!
Personnel problems- employee motivation and employee
problems!
Risk of loss of direction and control!

Organic growth!
This is expansion from within!
Organic/internal growth arises from within the business either
by selling more of existing products or by launching new ones!
Growth by- reinvesting profits back into the business to
increase capacity; using the existing, internal resources of the
business!

The mechanism for organic growth!

Profits are re-invested !
This increases capacity!
As a result output and sales rise!
Increased product leads to a rise in the capital (balance sheet)
value of the business!

Favourable conditions for organic growth !

When the market is growing fast !
When one firms performing better than others and therefore
gains market share!
When new firms enter the market!

Reasons for pursuing organic growth!

Absence of suitable acquisition targets might make this the
only route for expansion !
Involves less risk and disruption that external growth !
Can be planned more carefully than external growth!
Can b financed from own resources without need to raise
external finance !
Same style of management and organisational culture can be
maintained !
Economies of scale available from more efficient use of
central head office functions!

Advantages !
Makes best use of existing resources !
Consistent with existing culture!
Leads to economies of scale!
Easier to control!
Can be planned carefully !
Can be financed from retained profits !
Involves less risk !
Long term, working relationships maintained !
Capitalises on existing expertise !
Disadvantages!
Takes place slowly as the firm builds capacity and grows
markets!
Firms have to acquire resources!
Organic growth is limited by growth in the market!
It can result in an over-cautious approach!
Handicapped by limitations of existing skills and expertise!
May be too slow for the dynamics of the market!

by Sophia Abramchuk

External growth!
Growth by acquisition/take-over or merger!
Instead of build up resources internally the firm seeks to
acquire additional resources from other businesses !
Resources acquired include capacity, a workforce, tangible
assets, technology, and a consumer base !
It is a much used strategic option!
A voluntary joining together of companies is known as a
merger, a forced acquisition of one company by another
known as a take over (or acquisition) !

When is external growth is a preferred strategy !

Existing products are in the later stages of its life cycle!
Business lacks knowledge or resources to develop internally!
Speed of growth is a high priority!
Costs are more favourable than those of organic growth!

Advantages!
Quick access to resources the business needs !
Overcome barriers to entry!
Helps spread risks!
Wider range of products and greater geographical spread!
Provides cost saving opportunities!
Reduces competition !
Economies of scale!
Provides benefits of synergy (the interaction of elements that
when combined produce a total effect that is greater than the
sum of the individual elements, contributions)!
Disadvantages !
High cost involved!
Problems of valuation!
Clash of cultures!
Upset customers; customers might not remain loyal!
Involves high risk !
Problems of integration!
Problems of implementing the changes !
Resistance from employees!
Problems in achieving the benefits !
Incompatibility of management styles, structure and cultures!
Negative synergy (2+2=3!)!
Often driven more by personal ambition !
Forms rarely take non-financial factors in to account!
High failure rate!
Diseconomies of scale!

Mergers!
Defined as a voluntary and permanent combination of
businesses whereby one go more firms integrate their
operations and identities with those of another!
Or a combining and pooling of business organisations to form
a new business!
Shareholders come together to share the resources of the
enlarged or merged organisation !
It usually involves the two existing businesses surrendering
independence, shareholders exchanging their existing shares
for shares in the merged company and the new business
taking on a new identity !

Acquisition!
One firm (the acquirer) purchasing and absorbing the
operations of another (the acquired)!
The purchase of a controlling interest in another firm!

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The acquired business becomes either a subsidiary of or fully

absorbed by the other!
The word takeover means the same as acquisition although
the rem is often used in the case of a hostile takeover!
A hostile takeover is made agains the advice and
recommendations of the directors of the company being taken
over!

Reasons for making an acquisition !

To gain economies of larger scale !
To acquire intangible assets (patents, trade marks, brands) !
To acquire assets that can be profitably sold off (a practice
known as asset stripping) !
To secure access to suppliers of distribution channels!
To spread risks by diversifying !
To increase market share !
To reduce competition in the market!
To overcome barriers to entry to new markets !
To defend itself agains a takeover threat !
To buy-in a new product range !
To eliminate competition !
To acquire skills, knowledge, competency !

Synergy !
Synergy occurs when the combined results produce a better
rate of return than would be achieved by using the same
resources independently !
The benefits of combining exceed the aggregate i.e. 2+2=5 !
Synergy is an example of the whole is greater than the sum of
its parts!
Synergy is any unrealised potential open to a group from
mixing and matching resources better !
The resulting firm is more efficient and effective than the
aggregate of the previous firms!

Acquisitions usually fall!

The results of external growth are often disappointing- in fact
external growth is notoriously difficult to achieve successfully!
At least 50% of all mergers and acquisitions fail to add value
to the existing firms!
The benefits of synergy are often elusive. Rather than
performing better than the previously independent enterprises
it is quite common for the enlarged company to perform less
well than prior to acquisition or merger !
Porter found that in a study he undertook 53% of related
acquisitions were soon followed by divestment (selling off).
The figure rose to 74% in the case of unrelated acquisitions!
Reasons for failure of acquisitions !
Cultural incompatibility !
Lack of communication !
Loss of key personnel !
Price paid for acquisition was too high!
Lack of research prior to acquisition !
Personnel ambition over-ruled business !
Increased bureaucracy !
The creation of a lumbering giant that is soon outpaced by
smaller rivals!
Many mergers fail because the new companys management
underestimated, ignoring or mishandled the integration tasks!

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Impact of competition legislation in the UK!
Monopolies are considered to be against the interests of
consumers!
Competition legislation seeks to ensure that firms with a large
markets share do not abuse their position !
A dominant firm is one with a 25% (or greater) market share!
The commission can rule agains a merger or, alternatively,
impose conditions !

Ansoffs Growth Matrix!

Ansoff identified four growth strategies which are in order of
increasing risk:!
Market penetration- selling more of the same product to the
same type of customer !
Market development- selling the existing product to a new
type of customer !
Product development- selling new products to existing
customers !
Diversification- selling new products to new customers !

Directions of growth!
Related growth!
The joining of firms in the same industry !
Vertical integration: different stage in production chain !
Horizontal integration: same stage in the production chain !
Diversification !
Joining together of two forms in different industries!
Centric diversification- linked by some feature in common
such as transferable skills!
Conglomerate diversification: where there is no obvious risk !

Alternatives to organic and external growth !

Consortia- formal agreement between companies to
collaborate !
Joint venture with another firm !
Licensing- allowing other firms to produce goods!
Franchising- allows the franchisee to undertake part of the
business !
Sub-contracting/outsourcing non-core activities !

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Internal Growth

External
Growth

Improving supply chains by consolidating already existing 79

in-store bakeries into regional retail network!
Efficiency in logistic solutions !
Organic: In 2013 (close 68 shops), relocate 17 and open 51
in a new catchment area.!
In 2012 Greggs opened 48% of its net new shops in locations
away from high streets, to make Greggs even more
accessible to people at work, travelling and at leisure!
On the Go and Local bakery format shops !
Planning additional 600 retail bakeries !
Refurbishment of existing stores!
Greggs the Bakery!
Greggs newest local bakery concept shops give customers a
more traditional bakers shop experience, offering new lines
including artisan breads, new and traditional cake ranges and
exciting shop window displays, all alongside their best-loved
products!
Greggs moment!
This is a new coffee shop format where customers can relax
in a modern, contemporary environment and enjoy a menu of
outstanding bakery food with a wide selection of freshly
ground coffees and teas!
Wholesale!
Greggs supply a range of 21 savoury and sweet lines (the
bake at home range) in dedicated Greggs cabinets sold in
over 750 Iceland frozen food stores around the UK and
abroad!

New 10 Moto
shops with
franchise
license. (This is
a partnership
with Moto which
brings together
Britains biggest
operator of
motorway
service areas
and Britains
biggest bakery
retailer. There
are plans for 30
Greggs at Moto
service areas
across the UK
in the future)!
Bakers Oven
take over by
Greggs in 1994

Existi
ng
mark
et

Existing product

New product

A Market Penetration Strategy: Organic

Growth!
This option is about increasing market share in its
core bakery markets!
Greggs would focus on:!
Opening up the potential for an additional 600
retail bakeries in high quality locations in the UK !
Further development of the segmented targeting
strategy including on the go and local bakery
formats !
Keeping prices very competitive (as they are now) !
Continuing to improve the range and quality of
bakery products !

Product Development
Strategy: Coffee at
Greggs...!
This option is about
developing upon the current
retail capability and
developing a coffee
business in response to
customer needs!
Greggs would need to!
Develop a wider sourcing
strategy (for coffee) and
develop its supply chain
network !
Undertake market research
to find ways to beat the
large number of existing
competitors in the coffee
market !
Design shop formats which
are bigger and different
from the current bakeries
(with eat in and seating) !
Train the staff in providing
customer service in the new
shop format !
Construct a strong
marketing campaign for the
new product line

A Market Penetration Strategy: Growth by

Acquisition!
This option is about generating immediate and
significant growth in market share by acquiring a
competitor bakery retailer by way of horizontal
integration!
Greggs would need to!
Conduct appropriate market research to identify a
suitable target company !
Ensure that the Competition Commission had
approved the acquisition (if it was a large chain
with significant market share, such as Costa) !
Ensure that the necessary funding was in place in
conjunction with shareholders and/or the banks !
Prepare a plan for corporate integration and the
generation of synergies
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A Market Development Strategy: Targeting new

customers in airports, train stations, motorway
service areas and business parks...!
This option involves replicating and extending the
successful Greggs business model and using the
on the go branding to tap into customers who are
hungry, busy and on the move!
Greggs would need to:!
Conduct market research to understand the
specific requirements of these new markets !
Build new stores in target areas !
Develop relationships, joint ventures and franchise
agreements with local partners such as Moto in
selected territories !
Build upon the on the go marketing strategy

Suitability of the growth options !

Greggs and Growth !

A Diversification Strategy:
A wholesale business?!
This option involves
diversifying its sales
strategy via wholesale
arrangements with existing
multiple retail chains (such
as Iceland) to target
customers who know
Greggs as a High Street
retailer and who trust the
brand sufficiently to want to
buy frozen products in a
supermarket retail
environment!
Greggs would need to!
Do its financial calculations
carefully because wholesale
margins selling through
supermarkets are likely to
be quite tight !
Put together deals with
leading supermarkets !
Develop its supply chain
and delivery operations

The options can be assessed against three key criteria:!

Suitability: - does the chosen strategy:
Build on strengths and/or solve weaknesses?
Exploit opportunities and/or respond to potential threats?
Satisfy the goals and objectives of the business?
Fit the culture of the business?!
Acceptability:
Depends on the views of the key stakeholders
What level of risk does the business want to take?!
Feasibility:!
What resources are available to support the strategy? (e.g.
finance, experience; management resources)!

Strategic Option: Organic Growth!

Suitability!
Fits well with existing strategy and objective of store roll outs "
Greggs has considerable experience of this approach
Good fit with the corporate growth objectives!
Acceptability!
Enables Greggs to protect and develop its USP
Low risk because this is core business more of the same "
Could be considered as an essential strategy!
Feasibility!
A favourable option, but the market remains competitive!
Probably possible to finance this option using internal finance
(as they have done up to now)!

Strategic Option: Growth by Acquisition!

Suitability!
Limited previous experience of growth by acquisition but
Logical to expand through horizontal integration in this market!
Acceptability!
Shareholders might be supportive if the right opportunity
arises
Medium to high risk because acquisitions and the anticipated
synergies are!
hard to deliver in practice!
Feasibility!
Would require an integration strategy
Would require significant capital to purchase the competitor,
but Greggs does!
have a strong balance sheet and low gearing!
Could work if they bought a regional bakery to plug some of
the current gaps in UK coverage!

Strategic Option: Product development of a Coffee Chain!

Suitability!
Supports the corporate growth objective
Builds upon Greggs current strengths at extending their
product lines with!
low prices!
Would need to be certain that competitors did not have
something better, but it may well become essential in this
market in the future to adopt this strategy in order to flourish!
Acceptability!
Low/Medium risk this is new ground for Greggs, but many
competitors already have coffee shop formats!
Feasibility!
Greggs can move into this product space quite quickly!

by Sophia Abramchuk
Some more work may be required to set up the distribution
and delivery networks and to integrate it within their core
business!

Strategic Option: Market Development at Transport Hubs!

Suitability!
There probably are gaps in the market in new territories,
especially for food on the go!
The strategy is a good fit with their growth objective and it has
synergies with the local bakery proposition!
Acceptability!
Greggs is very experienced at developing new markets
Low/Medium risk with the prospect of good returns for early
success!
Feasibility!
Financial investment is probably available for a phased
expansion into new territories from internal finance because
the Balance Sheet is strong!
Requires significant up front work building joint ventures and
local partnerships /franchises with companies such as Moto!

Strategic Option: Diversification into Wholesale Frozen

Food at home and abroad!
Suitability!
Greggs has some experience of the frozen food sector
through its arrangements with Iceland!
Plays to Greggs strengths as a food manufacturer
Greggs does not have an international business model at the
moment!

Supplier Power (Low)

Numerous, diluted suppliers
Suppliers sell commodities
(wheat, dough)
Relatively easy for Retailers
to switch suppliers if they
want to

-Organic growth, continue with their expansion plan on

reaching new places in the UK as its a more secure as they
already know the UK market due to their experience and their
brand is already known, therefore no massive advertisement .!
-Also another option thats appropriate for Greggs is the
movement into transport hubs and business parks because its
still UK and they would need to operate in the same way,
more applicable to their food on the go business model !
-Continue with their diversification plans in Iceland and
franchise with Motto!

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Threats of Substitution (Low/Medium)

Bread is the UK staple diet, but
Potatoes, rice and cereals could become more
popular if wheat prices keep rising
Growth of bake at home market to save money

Rivalry of Industry Competitors (High)

Fragmented market with many large

and small players

Intense competition between brands

Short product life cycles

Reasonably easy to launch new

product lines

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Acceptability!
Acceptable in the medium term, so long as it does not mean
taking their eye off the ball in the core retail bakery market!
Medium risk, returns may be tight in a wholesale environment
" International option is high risk and may be a 10-20 year
play!
Feasibility!
Sensible level of financial investment required!

Threat of New Entrants (Medium/High)

Entry costs are quite low
It is expensive to build a brand, but brands
are not essential in baking, nor are
economies of scale
Companies who can compete on very
healthy eating or niche dieting positions
could do well

Customer Power (High)

Very easy to switch brands
Market is price sensitive
Customers can determine
market trends