by Sophia Abramchuk

Making Business Decisions

Unit 4a Business Studies
4.3.1 What is a Mission Statement
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)

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, specic 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

Corporate aims are broad long term ideas on how the
business should develop. Can be very vague e.g. to be
protable/successful in the future

An effective Mission Statement
Identies 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

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,
prot, market standing, social responsibility
They are specic, measurable,r elastic and measurable
(SMART) goals which an organisation plans to achieve within
a given time period. These goals will inuence its internal
decisions

Strategy
A plan of actions that has been designed to full an objectives.
A strategy cannot be formed until an objective has been
dened

Are Mission Statements useful

Stakeholders and objectives


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
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
Stakeholder Objectives Conict
Consumers Good value vs. price products
Buying experience (service and
support)
Safe Product
Shareholders
Managers
Employees
Shareholders Maximisation of prots 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- prot 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
Prot 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
1
Mission
statement
Corporate
aims
Corporate objectives
Corporate strategy
Functional objectives
Functional strategy
by Sophia Abramchuk
Supermarket wants to open a new superstore on a
greeneld site- Local community can have the conict 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 benet 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 benets. 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.

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

Conicts between ethical objectives and prot-
based objectives
Argument- being ethical/socially responsible increases costs
BUT
Some ethical companies- highly protable
Can avoid need for outsider regulation (which can be costly)
Can improve motivation/leadership











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 conict

Ethical Decisions making conict
Following codes of practice that embody moral values:
What to manufacture eg arms & cigarettes make prot 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#

Ethical Behaviour and Protability#
Trade off between ethical behaviour and protability?#
However companies with ethical behaviour still make prot eg
Kraft foods, PepsiCo, Dell, IBM

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 protable




2
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 ofce
Multinational culture

Sources of organisational structure

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
difcult 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 reected 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 specic task- reected 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 qualications- e.g. accountants

Sources of
organisational culture
Quote School Examples
Symbol In my job management
have their own parking
spaces and their own
ofces
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
Ofce 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
3
by Sophia Abramchuk
Corporate Strategy

Once the corporate objectives have been decided, a busies
must begin to plan how they will be achieved

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

Developing Corporate Strategy Portfolio Analysis

The Boston Matrix#
An attempt by the Boston Consulting Group to analyse the
product portfolio of a rm
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 prot - so that they
continue to generate the strong cash ows 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
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

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 nancial resources.

4
by Sophia Abramchuk
Porters 5 Forces Analysis
(Michael Porter, a key business management author)
A way to look at the competitive environment
5 forces (factors) which determine the protability 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 uctuating returns

The Bargaining Power of Suppliers
Suppliers want to maximise prot
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
Threat of New Entrants
If businesses can easily come into an industry and leave it
again if prots are low, it becomes difcult for existing
businesses in the industry to charge high prices and make
high prots
Existing businesses are constantly under threat that is their
prots 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 difcult to recoup if the business leaves the industry, can
deter new entrants

Substitutes
The more substitutes there are for a particular product the
ercer 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 prots
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 rms in an industry will
also determine prices and prots for any single rm
If rivalry is erce, 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 protability
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 prots

5
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 exibility: Could have very low prices and
increase market share OR could keep prices at industry
average and have large prots.
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 prot margins

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.

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 difcult as level of competition and
speed of change increase
Strategic decisions need to be exible 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 benet
Managerial time and effort can be put towards pushing the co-
operative venture rather than ghting 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 Inuences 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
Ination costs rise or demand increase


6
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 nding 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

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

7
by Sophia Abramchuk
Investment Appraisal
The importance of investment
Investment in capital (e.g. medium to long term assets)
features;
Substantial nancial resources required
Opportunity and nancial costs: therefore risk
Should aim to achieve nancial as well as corporate
objectives

Investment appraisal
The process of analysing the nancial 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-ow, highlighting projects that quickly
recover their initial investment
Regard payback as one of the rst 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 nd the month when payback occurs:
Remaining cash needed to payback/net inow 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 protability 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 inows and outows over the life of the
investment
Identify in which year investment cost is recouped
Narrow down the month using the formula:
Remaining cash needed to payback x 1 2
months
Net inow expected in that year
Express result as Payback of x achieved in x years and x
months

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 prot / return
ARR doesn't take account of the project duration or the timing
of cash ows over the course of the project
A subjective tool there is no denitive signal given by the
ARR to help managers decide whether or not to invest

Steps to calculate ARR
Create a table of cash inows and outows over the life of the
investment
Calculate the total prot from the investment
Divide the prot over the life of the investment to give an
annual prot rate
Calculate the average rate of return using the following
formula:
Average annual prot x100%
Initial investment
Express result as % return

Net Present Value (NPV)
This method calculates the present value of all future cash
ows from each investment project.
To do this, rstly the future cash ows are set down in a table,
year by year
Future cash ows 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 inows and outows for the duration
of the investment
Choosing the discount rate is difcult especially for long-
term projects
A complex method to calculate and easily misunderstood
Choosing the discount rate is difcult especially for
long-term projects

Cash outow

Cash inow Net cash
ow
Balance
Year 0 310,000 0 (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
8
by Sophia Abramchuk
Steps to calculate NPV
Create a table of cash inows and outows over the life of the
investment
Multiply the inows by the given discount factor (e.g. 5%,
10%)
Calculate the total value of the investment (discounted
inows discounted outows)
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, nancial considerations are only part of the story
when it comes to making investment decisions.

Bear in mind these facts when answering questions
Politics Permeate Decisions are ultimately made and
inuenced by humans, who think well beyond the gures
(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: Compani es may undertake
investments for reasons other than prot maximisation. For
example, they may be trying to protect their long term security,
or deny competitors an opportunity
Mistakes and Errors: Its actually really difcult to accurately
estimate future cash-ows for most projects, and indeed the
actual cost / time required to complete an investment. This
undermines the accuracy of all quantitative methods.






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






9
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 nd the
most efcient 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 rst
To identify the times when resources can be reallocated

The oat
With the network complete you can now identify any idle time.
This spare time is known as the oat.
Resources can be allocated to other duties during the oat
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
Efciency: 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 take-
analysis of the tasks involved should lead to deadlines being
met more effectively as the implications of delays can be
assessed, identied and prevented.
Time based management: ensure project is done as quick as
possible
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 efciency in the use of time
Improve efciency and generate costs saving in the use of
recourse
Benecial to monitoring cash ow
Identify potential problems in implementing operation
Identies 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

10
by Sophia Abramchuk
Special order/ unexpected
contribution
Total contribution- the difference between a products sales
revenue and its variable costs

Non-nancial 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 nd out that
products have been sold to other at a lower price this may
cause resentment
Future orders- sometimes up-protable orders are accepted
in anticipation of future, more protable orders from the new
customers
Current utilisation- an unprotable order might be accepted
to keep employees occupied
Retaining customer loyalty- A business might accept an
unprotable 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:
Prot- 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 prot 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
Contingency planning

Contingency planning- preparing for unwanted and non-
routine 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 rm 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 rm 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

11
by Sophia Abramchuk
Liquidity, protability ratios,
balance sheets
Concept/Stages of Ratio Analysis
Ratio Analysis: a method of assessing a rm's nancial
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 efciency.
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
signicance 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-rm 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-rm Comparisons - Within a company. the efciency 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
efcient, 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
efciency and to allow for exceptional events.

Users of ratios
Managers - Identify efciency of the rm and its different
areas, to plan ahead and see effectiveness of policies
Employees - Whether the rm can afford wage rise and to
see if prots are being fairly distributed
Government - To review success of its economic policies and
nd ways to improve efciency overall.
Competitors - To compare their performance against rival
rms 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 nancial benets with other
investments.

Types of Ratio
Protability Ratio - These compare prots with the size of
the rm, as prot is often primary aim of a company (ROCE)
Liquidity Ratios - These show whether a rm is likely to be
able to meet its short-term liabilities. although prot shows
long-term success its vital to hold sufcient liquidity to avoid
difculties in paying debts. (Current Ratio & Acid Test Ratio)
Gearing - Focuses on long-term liquidity and shows whether
a rm's capital structure is likely to be able to continue to meet
interest payments on, to repay long term debts. (Gearing
Ratio)
Financial Efciency Ratio - Focuses on management of
working capital, used to asses the efciency of rm in
managing assets and short- term liabilities. (Asset turnover,
Inventory turnover, Payables days & Receivables days)
Shareholders Ratios - Focus on drawing conclusions about
nancial shareholder benets from their company shares.
(Divided per Share & Divided Yield)

Measuring protability
Gross Prot Margin
The amount of prot a business makes on its cost of sales.
The mark up prot on each item sold.
The higher the margin the better
A high gross prot 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 Prot Margin
The amount of prot a business/product generates after
paying expenses, as a percentage of turnover
The higher the prot margin the better
A failing net prot margin may suggest that the business is
wasting money through unnecessary expenditure

Protability 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. Prot targets are often expressed as a ROCE which
uses the formula below:
ROCE = Operating Prot /Capital Employed x 100
Measures the efciency with which the rm generates prot
from the funds invested in the business.
Compares net prot to the amount of money in the business
A higher percentage gure is better
Can be compared with: previous gures; 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 short-
term Liabilities.

Current Ratio: In order to meet liabilities a rm can draw on
its current assets,bank balance,debtors and stock that is sold.
Generally, higher numbers are better, implying that the rm
has a higher amount of current assets when compared to
current liabilities and should easily be able to pay off its short-
term 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.
12
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 rm and its likely
impact on the rm's ability to stay solvent.
Gearing (%) = Non-current Liabilities/ (Total equity + Non-
current 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
rm has raised most of its capital from shareholder, in the
form of share capital and retained prot.
Gearing Benets
Benets of High Gearing
There are relatively few shareholders, so it is easier for
existing shareholders to keep control of the company.
The company can benet from a very cheap source of nance
when interested.
In times of high prot, interest payments are lower than
shareholders' dividend requirements, allowing greater retained
prot.
Benets 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 Efciency 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 efciently to
achieve sales.
Low AT shows the business is not using assets efciently to
achieve sales.
Capital intensive rms will have lower asset turnover than
labour intensive rms, 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 gure represents the number of times in a
year that a rm 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.
Factors inuencing 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

13
by Sophia Abramchuk
Human Recourses
Competitiveness

Efciency can be measured by calculating the productivity of a
rm
Productivity- the amount that can be produced with the
resources that are available
Factors that affect efciency
Labour intensive- relatively few machines are needed-
common 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 rms may be unable to afford to buy machinery
Even if they can afford it, they will have to calculate whether
the cost can be justied
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
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 rm can employ staff who have the specic skills required
for different jobs
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; nding 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 inuences 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 inuences
The are of rise in workforce productivity- automation can
improve productivity, as well as motivating employees through
job enrichment, agreeing nancial 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 benet from greater
understanding among the staff of the lives of people from
other cultures.

External inuences
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 rms making use of the inow of
skilled workers and some putting extra training and time into
British workers to get the required skills that can be in short
supply

14
by Sophia Abramchuk
4.3.4. Company growth
Business size can be measured in many ways- e.g.
assets, sales revenue, operating prot, 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 prots
Higher market share
Greater inuence 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 prot
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 uctuations in the economy
For survival
As a defensive strategy
To increase status
To obtain the benets 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 nance (reinvestment of past prots but
at the expense of dividends)

Prots are essential for growth
The ploughing back of past prots is a major source of funds
for growth
Only protable rms generate the funds for reinvestment
Debt nance for expansion is usually dependent upon a track
record of successful and protable 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 rm to
grow
Lack of personal ambition in the owner
Internal resistance to change- e.g. from middle
management and workforce
Organisational inexibility- 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
Problems of growth
Cash ow problems
Danger of overtrading- expanding with insufcient 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 prots back into the business to
increase capacity; using the existing, internal resources of the
business

The mechanism for organic growth
Prots 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 rms performing better than others and therefore
gains market share
When new rms 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 nanced from own resources without need to raise
external nance
Same style of management and organisational culture can be
maintained
Economies of scale available from more efcient use of
central head ofce 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 nanced from retained prots
Involves less risk
Long term, working relationships maintained
Capitalises on existing expertise
Disadvantages
Takes place slowly as the rm 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

15
by Sophia Abramchuk
External growth
Growth by acquisition/take-over or merger
Instead of build up resources internally the rm 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 benets 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 benets
Incompatibility of management styles, structure and cultures
Negative synergy (2+2=3!)
Often driven more by personal ambition
Forms rarely take non-nancial factors in to account
High failure rate
Diseconomies of scale

Mergers
Dened as a voluntary and permanent combination of
businesses whereby one go more rms 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 rm (the acquirer) purchasing and absorbing the
operations of another (the acquired)
The purchase of a controlling interest in another rm
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 protably 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 benets 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 rm is more efcient and effective than the
aggregate of the previous rms

Acquisitions usually fall
The results of external growth are often disappointing- in fact
external growth is notoriously difcult to achieve successfully
At least 50% of all mergers and acquisitions fail to add value
to the existing rms
The benets 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 gure 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

16
by Sophia Abramchuk
Impact of competition legislation in the UK
Monopolies are considered to be against the interests of
consumers
Competition legislation seeks to ensure that rms with a large
markets share do not abuse their position
A dominant rm is one with a 25% (or greater) market share
The commission can rule agains a merger or, alternatively,
impose conditions

Ansoffs Growth Matrix
Ansoff identied 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
Diversication- selling new products to new customers

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

Alternatives to organic and external growth
Consortia- formal agreement between companies to
collaborate
Joint venture with another rm
Licensing- allowing other rms to produce goods
Franchising- allows the franchisee to undertake part of the
business
Sub-contracting/outsourcing non-core activities


17
by Sophia Abramchuk
Greggs and Growth
Suitability of the growth options

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.
nance, 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 t 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 nance this option using internal nance
(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 signicant 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 ourish
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
Internal Growth External
Growth
Improving supply chains by consolidating already existing 79
in-store bakeries into regional retail network
Efciency 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
Existing product New product
Existi
ng
mark
et
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

A Market Penetration Strategy: Growth by
Acquisition
This option is about generating immediate and
signicant 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 signicant 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
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 nd 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
New
mark
et
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
specic 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
A Diversication 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 sufciently to want to
buy frozen products in a
supermarket retail
environment
Greggs would need to
Do its nancial 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
18
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 t 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 nance because
the Balance Sheet is strong
Requires signicant up front work building joint ventures and
local partnerships /franchises with companies such as Moto

Strategic Option: Diversication 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
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 nancial investment required

-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 diversication plans in Iceland and
franchise with Motto


19
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
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
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
Supplier Power (Low)
Numerous, diluted suppliers
Suppliers sell commodities
(wheat, dough)
Relatively easy for Retailers
to switch suppliers if they
want to