Business Studies Grade 12 HEAD FOR SUCCESS. Topic 5: Macro environment – Business Strategies TERM 1

Business Studies Grade 12

HEAD FOR SUCCESS

Topic 5: Macro environment – Business Strategies

TERM 1

MACRO ENVIRONMENT – BUSINESS STRATEGIES

Types of Business StrategiesIntegration strategies• Usually applied when a business sees an

opportunity to solve a challenge by shortening the distribution channel of the product by combining two or more links in the channel.

• This strategy can be in the form of an alliance, a merger / amalgamation or a takeover.

• Integration strategy can be vertical or horizontal, and vertical integration can be forward or backwards.

• The type of strategy depends on which part of the production- / distribution process is taken over

MACRO ENVIRONMENT – BUSINESS STRATEGIESTypes of Business StrategiesIntensive strategies • Aimed at raising turnover (sales) and increased market

share by utilizing existing and available resources.• The purpose of this strategy is to promote the growth of

the business.Diversification strategies• Involves the changing of both the product and the

market.• This strategy is designed to increase sales and the growth

of the business by making new products available to a new target market or by improving existing products.

• A strategy with a high risk because the business is moving into unknown territory, namely a new product and a new market.

• The application of this strategy requires new skills, techniques and infrastructure.


Types of Business StrategiesDefensive strategies• Used when the business is under pressure to

downsize in order to survive.• This is usually the last resort to take drastic

measures after all other strategies have failed, to save the business.


Types of Business StrategiesMost businesses consider the following types of strategies when having to resolve a problem:

Types of strategies:

Definition:

Growth strategies

Integration

strategies

Forward integration (vertical)

• A business takes control of distributing and marketing its goods.

Backward integration (vertical)

• A business takes control of its supplier.

Horizontal integration

• A business takes control over a competitor.

Intensive strategies

Market penetration

• A business increases sales by increasing marketing or by lowering prices in existing markets.

Market development

• A business increases sales by exploring new markets.

Product development

• A business increases sales by developing new products.




Definition:

Growth strategies

Diversification

strategies

Concentric diversification

• A business increases sales by selling new products that are similar to existing products, on new markets.

Horizontal diversification

• A business increases sales by appealing to loyal customers to buy products different from the products that are currently being sold.

Conglomerate diversification

• A high risk strategy where a business expands its operations by moving into new markets with new products.




Definition:

Defensive strategies

Retrenchment • Costs are cut by eliminating jobs.

Divestiture • Costs are cut by selling parts of a business.

Liquidation • The assets of a business are sold.

Other strategies

• The strategy depends on the challenge at hand.


Types of Strategies

Integration Strategies• There are two types of integration strategies: vertical and horizontal

integration.• Both strategies focus on taking over other businesses.

Definition:

Vertical integrati

on

Forward integration

• A business is combined with its buyers.• A business takes control of its own marketing

and distribution.• Example: an apple juice manufacturer

acquires its own packaging plant.• Example: A livestock farmer opened his own

butchery or amalgamates with an existing butchery.

Backward integration

• A business is combined with its suppliers.• In doing so, a business ceases to be

dependent on a supplier.• Example: An apple juice manufacturer

acquires its own apple farm.• Example: A clothing store buys a clothes

factory to reduce the risk associated with the acquisition of clothing.


Types of StrategiesIntegration Strategies

Definition:

Horizontal

Integration

• A business is combined with its competition, or with a business that supplies substitute or complementary goods.

• Examples of substitute goods are diary milk and soy.

• Examples of complementary goods are cricket bats and cricket balls.

• Hence, horizontal integration is the combination of two businesses on the same value chain level.

• Example: an apple juice manufacturer takes over a mango juice manufacturer or a dried fruit manufacturer.

• Example: Takeover of competitors or businesses with substitute and / or complementary products that you sell.


Types of StrategiesIntegration Strategies• Advantages and disadvantages of integration strategies

Advantages: Disadvantages:

Vertical integrati

on

• A business has complete control over manufacturing and selling its goods.

• A business is better equipped to deal with shortages of supply.

• Ensure that stock is always available.

• More control over quality and delivery.

• Increased difficulty for a new business to enter the market as sole access to a resource can be acquired.

• A business has to perform functions it has never done before, like marketing and distribution.

• A business may need to acquire new infrastructure to perform new functions

• Monopoly may arise.• Product variety is

limited.• Solve a challenge, but

create other threats / challenges.

• Long process.


Types of StrategiesIntegration Strategies• Advantages and disadvantages of integration strategies

Advantages: Disadvantages:

Horizontal

integration

• Provides consumers with a greater product selection.

• Greater product selection draws in more consumers.

• More consumers results in an increase in sales and profit.

• Reduces risk competition caused by suppliers of similar goods (competition), substitute goods and complementary goods.

• Acquiring a business is expensive.

• Can lead to the formation of monopolies.

• Monopolies may result in consumers having less choice.

• Monopolies are often associated with high prices.

• Employees from the acquired business may lose their jobs.


Types of StrategiesIntensive strategies:• Main objective is to increase sales and market share.• There are three intensive strategies:Intensive strategie

s:

What? How?

Marketpenetrati

on

• A strategy focusing on increasing the sales of existing products.

• New businesses often use this strategy to gain entry into a new market by initially selling their products very cheap.

• Aims to drive out competitors by dominating the market.

• A business is focusing on a market it knows well and does not have to spend time getting to know a new market.

• Example: A new grocery store chain that offers meat at below the average price of other grocery stores.

• Reducing the price of products to increase sales.

• Increasing the number of sales staff.

• Increasing advertising and promotion.


Types of Strategies

Intensive strategies:Intensive strategie

s:

What? How?

Market developm

ent

• A strategy focusing on increasing sales by selling existing goods in new markets.

• A business must research the markets it wants to enter.

• Example: A local business that starts to export its goods.

• Exporting products.

• Finding new distribution channels.

• Improve the packing material.

Product developm

ent

• A strategy focusing on increasing sales by selling new products to existing markets.

• A business may need to acquire new technology to develop new products.

• Example: A computer company that develops a new computer that is faster, smarter and smaller than existing ones.

• Developing new products.

• Concept testing


Types of Strategies

Intensive strategies:VOORDELE: NADELE:

• Increase the market.• Broaden the vision of the

business.• Help to manage the business

in a profitable and sustainable manner.

• A large variety of ways in which intensive strategies can be implemented.

• Some strategies can make a big positive impact with a small capital investment.

• Can easily fit in with long term vision of the business.

• High marketing costs.• Positive impact is not always

big enough.• Expensive to develop new

products.• Labour intensive.• Can also be an extra

pressure on staff.


Types of strategiesDiversification Strategies:• A high risk strategy that involves businesses

moving into markets where they have little or now experience.

• Diversification often requires a business to acquire new skills, facilities and techniques.

• There are three diversification strategies:Diversification

strategies:

What? Example

Concentric diversificati

on

• New products, which are related to existing products, are added to existing product lines to attract more customers.

• Example: a cell phone manufacturer that starts manufacturing tablets.


Types of strategiesDiversification Strategies:Diversificat

ion strategies:

What? Example

Horizontal diversificati

on

• New products, which are unrelated to existing products, are added to attract more customers.

• This strategy can be very successful if existing clients are loyal.

• A business’ reputation may be severely damaged if the new products are inferior.

• A car dealership that starts to offer insurance.


Types of strategiesDiversification Strategies:Diversificat

ion strategies:

What? Example

Conglomerate

diversification

• A business expands its operations by moving into new markets with new products.

• If an industry suffers a downswing, it will have other income streams as well.

• However, extensive research needs to be done, before entering a whole new market.

• The Virgin group is well known, for example:

Virgin Atlantic (airways)

Virgin Money (insurance)

Virgin Active Virgin Mobile


Types of strategiesDiversification Strategies:

ADVANTAGES: DISADVANTAGES:

• Can serve as motivation for staff.

• Include opportunities to open a new mission and vision for business.

• Distribution of risks.

• High risk for the business entering uncharted territory.

• Can shift focus from main operation of the business.

• Can require high expenses for marketing, research, etc.

• Requires skilled resources.


Types of strategiesDefensive Strategies:• Defensive strategies aim to prevent businesses

from closing down.• Usually considered during times of economic

downswing.• There are three defensive strategies:Defensive strategies

What? How?

Retrenchment

• A strategy that cuts costs by cutting jobs.

• This strategy is usually used by businesses under pressure to raise profits.

• Retrenchment will result in loss of skills for the business.

• Cutting jobs.• Eliminating product

lines.


Types of strategiesDefensive Strategies:Defensive strategies

What? How?

Divestiture

(disposal / suspension)

• Branches of a business, that are not performing well, are closed down or sold.

• Selling some of the assets of the business.

• Selling ownership by selling shares.

• Closing subsidiaries.

Liquidation

• A business’ assets are sold to be converted to cash.

• Liquidation is only considered when all other options are exhausted.

• During liquidation, assets are usually sold for much less than book value.

• Converting a business’ assets into cash to pay creditors.

• Paying off the staff.• Closing the business

down.


Types of strategiesDefensive Strategies:

ADVANTAGES: DISADVANTAGES:

• Can save costs.• Serve as income for the

business.• Get rid of divisions that are

not profitable.

• Can demotivate staff.• Long process.• Must adhere to a lot of

legal requirements.• Can lose money.


Types of StrategiesOther strategies:• Growth strategies and defensive strategies are

well-known strategies for responding to challenges or eliminating threats in the business environment:

a) Replacing individuals• Businesses must employ people who will contribute to the

business achieving its goals.

• Sometimes, a business may be forced to replace individuals:• who are dismissed

• who resign or retire

• who are promoted

• Due to the high cost or recruitment, replacing individuals is often an expensive process.


Types of StrategiesOther strategies:b) Revising a business’ mission

• A clearly defined mission is the first step towards developing a sound strategic plan.

• A mission describes the main reason for a business’ existence.• As a business grows over time, the mission statement

may need to be revised to adapt to the changing business environment.

• Even though revising a mission statement may give employees a new goal to work towards, it may not be enough to salvage a suffering business.


Types of StrategiesOther strategies:c) Establishing or revising objectives• Setting objectives converts the vision into specific

performance targets.• Objectives will give direction to a business and provide

managers with an action plan, stating how to cope with the challenges from the business environment.

• Objectives must include a deadline for achievement.• Managers are responsible for achieving assigned tasks

within a specified time frame.


Types of StrategiesOther strategies:d) Devising new policies• Policies provide managers with rules explaining how a

business wishes to manage its operations.• Although policies sometimes impose constraints which

can limit the decision making process, it gives direction for achieving a business’ goals.


Types of StrategiesOther strategies:e) Issuing stock to raise capital• Public companies raise capital by issuing stock.• Investors are attracted to stock in two ways:

• Some companies pay large dividends.

• Other companies attract investors by improving profitability and in doing so, increasing the value of its shares

• Although companies are owned by the shareholders, the shareholders do not have any influence on the policies that influence business activities.

• A company usually issues stock to raise capital in order to expand its operations.

Advantages of issuing stock: Disadvantages of issuing stock:

• Money is available for expansion.• A company can be managed

more efficiently if money is available.

• Making shares available can make the company a potential take-over target.


Types of StrategiesOther strategies:f) Adding additional sales staff• A business can hire additional sales staff in an effort to

increase sales.• However, this will increase a business’ salary

expenditure.• If this strategy fails, the business will have to pay the

additional sales staff, without obtaining any monetary benefit in return.


Types of StrategiesOther strategies:g) Allocating resources differently• Resource allocation involves using available resources

(financial resources, human resources, entrepreneurial resources and natural resources) in the most efficient way to achieve the business’ goals.

• A business can re-allocate its resources to respond to challenges in the business environment.

• This means that a business can concentrate its resources on its most important and most profitable operations.

• This may result in other business operations being neglected.


Types of StrategiesOther strategies:h) Developing new performance incentives• Performance incentives are rewards offered to

employees for reaching particular targets.• Developing new performance incentives can provide

employees with a new goal to work towards.

Advantages of performance incentives:

Disadvantages of performance incentives:

• Attracts and retains good employees.

• Increases productivity.• Employees do not have to rely on

the performance of others (individual incentives).

• Team incentives encourages co-operation between employees.

• Focus is on results and not on the process.

• Emphasis is on short term results, rather than long term planning.

• Individual incentives discourage teamwork.

• Can create conflict between employees.


Types of StrategiesCommon problems experienced by businesses and strategic solutions:

Extent of control

Problems/challenges

Strategy

Micro

• The elements of the micro environment are fully controlled by a business.

Finding skilled employees

• Skills development• Enter into learnership

agreements• Implement a mentorship

programme

High employee turnover

• Assess working conditions.• Determine reason why

employees resign frequently

• Assess salaries and wages

Lack of motivation among employees

• Team building• Incentive bonuses

Lack of management and leadership

• Do succession planning• Implement a mentorship

coaching programme.• Headhunt good leaders

from other businesses

Meeting employees’ demands

• Engage in collective bargaining


Extent of control

Problems/challenges

Strategy

Market

• The control factors from the market environment give rise to opportunities and threats.

• The business enterprise has no control over these factors.

• The business enterprise is however able to influence some of the control factors from the market environment.

Competitors • Launch a new marketing campaign

• Offer specials to draw attention away from competitors

Finding suitable suppliers

• Give preference to black owned suppliers as this will benefit a business in terms of BEE rating

Strikes • Engage in collective bargaining processes

• Devise a plan to make up for lost production time

Change in consumers’ taste

• Product development to keep up with consumers’ tastes

• Diversification – offer other types of goods to keep consumers interested

Change in consumers’ buying power

• Diversification – offer similar goods, which can be sold cheaper.


Extent of control

Problems/challenges

Strategy

Macro

• Management has no control over the elements of the macro environment.

• Management must still react to these challenges before they develop into dangerous threats.

• Businesses can deal with the challenging macro environment by getting involved in the macro environment.

Legislative requirements

• Make contact with Government department responsible for enforcing a particular law.

• Organise workshops where management is addressed by experts.

Technological inventions

• Appoint employees to keep up with technological trends in the market.

• Embrace technology and use it to the business’ advantage.

Increase in the interest rate

• Do not apply for further credit.

• Proper budgeting to ensure efficient use of money.

Increase in the fuel costs

• Monitor use of company vehicles.

• Efficient route planning.

Documents

Business Studies Grade 12 HEAD FOR SUCCESS. Topic 5: Macro environment – Business Strategies TERM 1