AQA A Level Business 3.9 - Strategic Methods – How to Pursue Strategies

3.9 – Strategic Methods – How to Pursue Strategies


Organic / Internal Growth

Reasons for business growth:
 Survival
 Growth is essential to avoid takeovers
 Staying small may mean costs are too high

 Gain market share
 Firms may be able to develop a monopoly share through growth

 Reduce risks
 Diversifying allows risk to be spread across numerous products

 Economies of scale
 Increase future profitability


Types of growth:
 Internal / organic growth
 External / inorganic growth (mergers and takeovers)


Internal / organic growth – The expansion of the business by using its existing resources to
grow and does not involve any other business.


Example strategies for organic growth:
 Any area of Ansoff’s Matrix
 New distribution channels
 Franchising
 Expanding to new geographical markets (domestic or overseas)
 Invest in increasing capacity, production or technology to increase output


Benefits: Drawbacks:

 Less risk than external growth  Business growth may depend on
market growth
 Can be financed through internal  Hard for market leaders to increase
funds market share organically
 Builds on a business’s strengths  Slow growth may be unattractive to
shareholders
 Avoid overtrading

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,3.9 – Strategic Methods – How to Pursue Strategies


Inorganic / External Growth

External / inorganic growth – Expansion from outside the business by bringing businesses
together.


Types of external growth:
 Takeover (Acquisitions)
 Merger


Benefits: Drawbacks:

 Quicker than internal growth  Diseconomies of scale if too big
 Economies of scale  Potential cultural clash / may inherit
problems
 Reduced competition  Potential for investigation by CMA
 Opportunity to secure suppliers /  Brand dilution
outlets
 Increase market share  Duplication of resources
 Create barriers to entry  Increased waste
 Increased costs


Examples:
 Dominos opened over 400 new UK stores over 11 years. (Organic growth)

 Apple iPhone global sales increased from 1 million in 2007 to 75 million in first
quarter of 2016. (Organic growth)

 Costa Coffee opened 1200 new outlets between 2009 and 2015. (Organic growth)




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, 3.9 – Strategic Methods – How to Pursue Strategies


Retrenchment

Retrenchment – The process of deliberately downsizing a business to improve operational
control.


Measures of retrenchment:
 Closure of unprofitable branches
 Relocating production facilities to cut costs
 Product/market withdrawal
 Job losses (delayering)
 Disposal of a business unit (demerging)


Reasons why business retrench:
 High costs
 Low ROCE
 High gearing
 Loss of market share
 Failed takeover
 Economic downturn
 Change of ownership


Problems with retrenchment:
 Slower production
 Lose innovation
 Lack of motivation
 Decreased productivity


Examples:
 In 2020 Pizza Express cut 2400 jobs due to footfall decline as a result of Covid.
(Delayering)

 In 2017 Samsung stopped selling the Galaxy Note 7 because of overheating and
exploding issues. (Product/market withdrawal)

 In 2015 PayPal split from eBay to improve customer service and flexibility.
(Demerging)




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