Notes · BusinessUK · A-Levels

Strategic methods: how to pursue strategies

This chapter examines the methods a business uses to carry out its chosen strategy. It contrasts organic and inorganic growth and retrenchment, sets out the types of integration, analyses the economics of growth through economies and diseconomies of scale, synergy and Greiner's model, and explores globalisation, expanding overseas and the use of digital technology to pursue strategy.

5 sections~23 min reading time4 competenciesLevel Standard 4 · Advanced 1

T·0999 / 10

Exam profile

AO1 · Define organic and inorganic growth, integration types, economies of scale, globalisation and digital technologyAO2 · Apply growth, integration and internationalisation choices to a given business and calculate cost effects of scaleAO3 · Analyse the consequences of a growth, integration or globalisation strategyAO4 · Evaluate the best method for pursuing a strategy

Operators:explaincalculateanalyseevaluateassessto what extentrecommendjustify

basic level

This is A2 (full A-Level) content: growth methods, integration, globalisation and digital strategy are examined in the second year.

higher level

The full A-Level expects evaluation of growth and internationalisation methods and analysis of economies and diseconomies of scale applied to an unfamiliar business.

Depth

Text

Contents · 5 sections

Strategic methods: how to pursue strategies

Growth and retrenchment: organic versus inorganic#

StandardAQA 7132 3.9.1DfE GCE Business - methods of growth

Organic versus inorganic growth

Fig. 1Organic growth is slower but lower-risk and controllable; inorganic growth is fast but expensive and prone to integration failure.

Once a firm has chosen a strategic direction, it must decide how to pursue it, and a first choice is the method of growth. Organic (internal) growth is expansion generated from within the business - selling more, opening new outlets, developing new products, entering new markets under its own steam. Its advantages are that it is lower-risk and more controllable, it can be financed gradually from retained profit, it preserves the existing culture and management, and it avoids the integration problems of takeovers. Its limitation is that it is usually slow, so it may not keep pace with a fast-growing market or an ambitious objective, and it may be impossible in a saturated market.

Inorganic (external) growth is expansion by combining with another business, through a merger (two firms agreeing to join as one) or a takeover / acquisition (one firm buying control of another). Its great advantage is speed - a firm can gain scale, market share, new products, new markets, brands, technology or capabilities almost overnight - and it can remove a competitor and achieve economies of scale quickly. Its disadvantages are that it is expensive and risky: acquisitions often cost a premium, they can be financed by heavy borrowing (raising gearing), and, above all, they frequently fail to deliver the expected benefits because of the difficulty of integrating two different organisations.

The integration of two businesses after a merger or takeover is where inorganic growth so often disappoints. The evidence is that a large proportion of mergers and takeovers destroy rather than create value, for reasons including a clash of cultures, the difficulty of combining systems and structures, the loss of key staff and customers, overpaying for the target, and management attention diverted from the core business. Recognising this high failure rate is essential for evaluation: the speed of inorganic growth is real, but so is its risk, and the promised synergies frequently fail to materialise.

Growth is not always the aim; sometimes the right method is retrenchment - deliberately reducing the scale of the business by cutting products, markets, capacity or staff. Retrenchment can be a response to poor performance, a downturn, or a realisation that the firm has overextended, and it can restore focus and profitability by concentrating on the firm's strongest activities (its core competences) and cutting loss-making ones. Though often seen negatively and painful in its effect on staff, retrenchment can be a sensible, even essential, strategic method - the firm 'shrinks to grow'. Evaluating the choice between organic growth, inorganic growth and retrenchment depends on the firm's objectives, its finance, the speed it needs, the state of its market and its capacity to integrate or to cut - there is no universally right method.

Worked example

Choosing a growth method

A profitable technology firm wants to enter a new fast-growing market quickly. It could build the capability itself (organic) or acquire an established rival in that market (inorganic). Recommend a method.

Weigh speed
The market is fast-growing, so speed matters - organic growth may be too slow to establish a position before the market matures and rivals entrench.
Weigh risk and cost
Acquisition is fast and buys ready-made capability and market share, but it is expensive, may need heavy borrowing, and carries a high risk of integration failure and culture clash.
Recommend and evaluate
Given the need for speed in a fast-growing market, recommend acquisition - but only if the firm can afford it, has done thorough due diligence, and has a credible integration plan. If those conditions are not met, phased organic growth or a joint venture may be safer. The choice depends on the value of speed against the integration risk.

Result: Because speed matters in a fast-growing market, acquisition is the better method - provided the firm can fund it and integrate the target; otherwise the integration risk could outweigh the speed advantage, and organic growth or a joint venture would be safer.

Typical mistakes

Presenting takeovers as an easy route to growth, ignoring the high failure rate from integration problems.
Treating retrenchment as always a sign of failure rather than a deliberate, sometimes wise, strategic choice.

Active revision

A firm wants to double in size within two years. Evaluate whether it should grow organically or by acquisition.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Integration: horizontal, vertical and conglomerate#

StandardAQA 7132 3.9.1DfE GCE Business - types of integration

Types of integration

Fig. 2Integration is classified by where the other firm sits: same stage (horizontal), up or down the supply chain (vertical), or an unrelated industry (conglomerate).

When a business grows inorganically by combining with another, the type of integration depends on where the other firm sits relative to it in the industry and supply chain. Horizontal integration is a merger with or takeover of another firm at the same stage of the same industry - a competitor. Its benefits are increased market share and market power, economies of scale, the removal of a rival, and access to the target's customers, brands and capabilities. Its risks are the integration difficulties common to all takeovers and the possibility of attracting the attention of competition regulators, who may block a deal that would reduce competition too far.

Vertical integration is a merger with or takeover of a firm at a different stage of the same supply chain, and it comes in two directions. Backward vertical integration is a move towards the source of supply - acquiring a supplier - which can secure and control the supply of inputs, reduce costs by capturing the supplier's margin, and improve quality and reliability. Forward vertical integration is a move towards the customer - acquiring a distributor or retailer - which can secure access to the market, capture the retail margin, and give the firm control over how its product is sold and presented. Both can strengthen the firm's position in its supply chain, but they take the firm into activities it may not understand and can reduce its flexibility.

Conglomerate integration is a merger with or takeover of a firm in a completely unrelated industry - the inorganic route to diversification. Its main benefit is spreading risk across unrelated markets, so that a downturn in one industry does not sink the whole group, and it can deploy surplus cash and management skill into new areas. Its dangers are that the acquiring firm has no expertise or competitive advantage in the new industry, that management attention is stretched across very different businesses, and that the lack of any operational link means the promised benefits are hard to realise - which is why unrelated diversification has a particularly high failure rate.

Evaluating a type of integration means matching it to the firm's strategic aim and weighing the specific benefits against the risks. Horizontal integration suits a firm seeking scale and share in its own industry; vertical integration suits one seeking control over its supply or route to market; conglomerate integration suits one seeking to spread risk. But all forms carry the integration risks of any takeover, and each has its own specific dangers - regulatory scrutiny for horizontal, loss of flexibility and unfamiliar activities for vertical, and lack of advantage for conglomerate. As ever, the right method 'depends' on the firm's objectives, its competences and its finance, and the strongest answers judge the fit for the specific business rather than describing the types in the abstract.

Worked example

Choosing a type of integration

A supermarket wants greater control over the quality and cost of its fresh produce, which has been unreliable. Evaluate whether backward vertical integration into a farming business would achieve this.

Identify the integration type
Buying a supplier of its inputs (a farm) is backward vertical integration - a move up the supply chain towards the source of supply.
Analyse the benefits
It would secure supply, give control over quality and freshness, and capture the farm's margin, potentially lowering cost and improving the reliability the supermarket lacks.
Evaluate the risks
Farming is a very different activity the supermarket may not understand, it ties up capital and reduces flexibility to switch suppliers, and it exposes the firm to the risks of agriculture (weather, disease). Whether to integrate depends on how critical reliable supply is versus the cost and unfamiliarity - a long-term supplier partnership might achieve much of the benefit at lower risk.

Result: Backward vertical integration would secure supply and control quality, but at the cost of capital, flexibility and entering an unfamiliar activity; whether it is worthwhile depends on how critical reliable supply is, with a close supplier partnership as a lower-risk alternative.

Typical mistakes

Confusing the direction of vertical integration (backward = towards suppliers; forward = towards customers).
Ignoring the regulatory risk of horizontal integration or the lack of advantage in conglomerate integration.

Active revision

A coffee-shop chain is considering buying a coffee-bean plantation (backward) or a rival chain (horizontal). Evaluate the two types of integration and recommend one.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

The economics of growth: scale, synergy and Greiner#

AdvancedAQA 7132 3.9.1DfE GCE Business - economies of scale

Economies and diseconomies of scale

Fig. 3The long-run average cost curve: economies of scale pull unit cost down to the minimum efficient scale; beyond it, diseconomies push it back up.

A central economic reason to grow is to reap economies of scale - the reductions in average (unit) cost that come as a firm increases its scale of output, because fixed costs are spread over more units and larger-scale operation is more efficient. Internal economies of scale, arising within the firm as it grows, are conventionally grouped as: technical (larger, more efficient equipment and the specialisation of labour), purchasing (bulk-buying discounts), managerial (employing specialists), financial (borrowing more cheaply), and marketing (spreading advertising over more units). External economies of scale arise from the growth of the whole industry (a skilled local labour pool, specialist suppliers). Economies of scale are a powerful competitive weapon, because a larger firm with lower unit costs can undercut smaller rivals or enjoy a fatter margin.

Growth does not lower unit costs indefinitely, however. Beyond a point, diseconomies of scale set in and average cost begins to rise, usually for managerial and behavioural reasons: coordination and communication become harder in a very large organisation, control weakens, decision-making slows, and workers can feel remote and demotivated, lowering productivity. This gives the long-run average cost curve its characteristic shape - falling as economies are reaped, reaching a minimum at the minimum efficient scale, and then, if the firm grows too large, rising as diseconomies dominate. Recognising that bigger is not always cheaper is important: the pursuit of scale has a limit, and overexpansion can raise costs.

A related concept invoked to justify mergers and takeovers is synergy - the idea that the combined firm is worth more than the sum of its parts (often summarised as '2 + 2 = 5'), because the two businesses can share resources, cut duplicated costs, cross-sell to each other's customers, or combine complementary strengths. Synergy is the promise on which many acquisitions are sold. But it is also frequently overestimated: the expected cost savings and revenue gains often fail to materialise once the integration difficulties, culture clashes and hidden costs are counted, which is a major reason acquisitions so often disappoint. Synergy should therefore be treated with scepticism in evaluation - a plausible promise that must be tested against the evidence of frequent failure.

Growth also brings organisational challenges captured by Greiner's model of growth, which describes how a firm passes through phases of relatively calm growth, each ending in a management 'crisis' that must be resolved before the next phase can begin (for example, an entrepreneurial start-up outgrows its informal leadership and hits a 'crisis of leadership' requiring professional management; later phases bring crises of autonomy, control and red tape). The insight is that growth is not smooth - it forces successive changes in structure, systems and management style, and a firm that fails to adapt its organisation to its new size will stall. Evaluating the economics of growth therefore means weighing the real cost advantages of scale and the possible synergies against the diseconomies, the frequent failure of promised synergies, and the organisational crises that growth provokes - a rounded judgement, not an assumption that growth is always beneficial.

\text{Average cost} = \frac{\text{Total cost}}{\text{Units of output}}

Average (unit) cost

Economies of scale are a fall in this average cost as scale rises; diseconomies are a rise. Comparing average cost before and after growth shows whether scale economies are being reaped.

Worked example

Do economies of scale materialise?

A manufacturer expands, roughly doubling its inputs. Output rises from 10,000 to 25,000 units and total cost rises from £80,000 to £150,000. Calculate the average cost before and after and state whether the firm is enjoying economies of scale.

Average cost before
Average cost = total cost / output = 80,000 / 10,000 = £8.00 per unit.
Average cost after
Average cost = 150,000 / 25,000 = £6.00 per unit.
Interpret
Output more than doubled (10,000 to 25,000) while total cost less than doubled (80,000 to 150,000), so average cost fell from £8.00 to £6.00 - the firm is reaping economies of scale over this range.
Evaluate
The £2 unit-cost saving is a real economy of scale, but it will not continue forever - if the firm keeps expanding, diseconomies (coordination, communication, control) may eventually push average cost back up, and any merger 'synergies' should be treated cautiously given their high failure rate.

Result: Average cost fell from £8.00 to £6.00 as the firm grew, confirming economies of scale over this range - but the benefit has a limit (diseconomies of scale) and claimed synergies must be tested, so growth is not guaranteed to keep lowering costs.

Typical mistakes

Assuming growth always lowers unit costs, ignoring diseconomies of scale beyond the minimum efficient scale.
Accepting claimed merger synergies at face value, ignoring the evidence that they frequently fail to materialise.

Active revision

A firm doubling its output claims it will cut unit costs and gain synergies. Using economies and diseconomies of scale, evaluate whether growth will really lower its average costs.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Globalisation and expanding overseas#

StandardAQA 7132 3.9.2DfE GCE Business - globalisation

Methods of expanding overseas

Fig. 4The methods of expanding overseas form a ladder of rising commitment, control and risk - from exporting to full foreign direct investment.

Globalisation is the growing integration and interdependence of the world's economies, through increasing international trade, investment, movement of people and the spread of technology, so that businesses increasingly operate across borders in a single world market. Its drivers include falling trade barriers, cheaper transport and communications (especially the internet), the growth of emerging economies, and the spread of multinational corporations. Globalisation creates both opportunities (access to vast new markets, cheaper inputs and labour, and economies of scale) and threats (intensified competition from foreign firms in the home market) for a business, and understanding it is essential to modern strategy.

Firms expand overseas for several reasons: to access new and often faster-growing markets (especially as home markets mature), to reduce costs by sourcing or producing where labour or inputs are cheaper, to spread risk across countries, to secure raw materials, and to exploit economies of scale in a larger global market. Emerging and developing markets are particularly attractive for their rapid growth and rising middle-class demand, though they also carry risks of political and economic instability, weaker legal protection and unfamiliar conditions. The decision to internationalise is a major strategic commitment that must be weighed against these risks.

There are several methods of expanding overseas, forming a ladder of rising commitment and risk. Exporting - selling home-produced goods abroad - is the simplest and least risky but offers least control and can be uncompetitive on cost or tariffs. Licensing and franchising let a local partner produce or sell under the firm's brand, spreading fast with low investment but ceding control over quality. A joint venture - a shared enterprise with a local partner - brings local knowledge and shares risk and cost, but can create conflict between partners. Foreign direct investment (FDI) - setting up or acquiring operations abroad - gives most control and commitment but is the most costly and risky. Offshoring (relocating operations abroad) and outsourcing (contracting activities to other firms, at home or abroad) are related tools for reducing cost. The right method depends on the firm's resources, its appetite for risk and control, and the target market.

Expanding internationally is shaped by, and must respond to, trade policy and the wider environment. International trade can be encouraged by free-trade agreements and trading blocs or restricted by protectionism - tariffs (taxes on imports), quotas (limits on quantities) and other barriers that governments use to protect domestic industries, which raise the cost and complexity of exporting. Multinational corporations (firms operating in several countries) are the main agents of globalisation, bringing investment, jobs and technology to host countries but also raising concerns about their power, tax practices, labour standards and effect on local firms. Evaluating an overseas-expansion strategy means weighing the market and cost opportunities against the political, economic, cultural and competitive risks, the method's cost and control, and the ethical and reputational dimensions - a judgement that, like all strategic methods, depends on the specific firm and market.

Worked example

Choosing a method of overseas entry

A mid-sized UK confectionery firm wants to enter a large, fast-growing but unfamiliar overseas market with complex regulation and distribution. Recommend an entry method.

Assess the situation
The market is attractive (large, fast-growing) but unfamiliar and complex - the firm lacks local knowledge of regulation, distribution and consumer tastes, and is only mid-sized, so it cannot easily absorb a large loss.
Compare methods
Exporting is low-risk but may be uncompetitive on cost and give no local presence. Direct investment gives control but is costly and risky given the firm's unfamiliarity and size. A joint venture with a local partner supplies the missing local knowledge, distribution and shared risk.
Recommend and evaluate
Recommend a joint venture to gain local expertise and share the risk, perhaps starting with some exporting to test demand first. The main risk is partner conflict, so the agreement must be clear; the choice depends on finding a reliable partner and the firm's appetite for ceding some control.

Result: A joint venture best matches a mid-sized firm entering a large but unfamiliar market - supplying local knowledge and sharing risk - with exporting as an initial test; the decision depends on finding a reliable partner and accepting shared control.

Typical mistakes

Treating overseas expansion as pure opportunity, ignoring political, cultural, legal and exchange-rate risks.
Confusing offshoring (relocating your own operations abroad) with outsourcing (contracting activities to another firm).

Active revision

A UK food brand wants to enter a fast-growing Asian market. Evaluate whether it should export, form a joint venture, or invest directly, and recommend a method.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Digital technology and innovation#

StandardAQA 7132 3.9.3DfE GCE Business - digital technology

Growth of online sales (illustrative)

Fig. 5Illustrative growth in a firm's online (e-commerce) sales. Digital channels widen reach and cut premises costs but intensify price competition and require investment.

Digital technology has become one of the most powerful methods of pursuing strategy, transforming how firms reach customers, run operations and make decisions. E-commerce - selling online - lets firms reach national and global markets without physical outlets, trade around the clock, cut premises costs, and gather rich data on customers; it has lowered barriers to entry for small firms while intensifying competition and price transparency. Alongside e-commerce, digital marketing (search, social media, targeted advertising) allows precise, measurable targeting of customers at lower cost than traditional media, reshaping the promotion element of the marketing mix.

Data is at the heart of the digital shift. Big data - the vast quantities of information generated by transactions, websites, social media and connected devices - and the data mining and analytics used to interpret it let firms understand customer behaviour in detail, personalise offers, forecast demand, set dynamic prices, and improve every function from marketing to operations. The strategic prize is better, faster, evidence-based decisions and a closer relationship with customers; the concerns are the cost and skills required, data security and privacy risks, and the ethical and legal responsibilities of holding personal data. Used well, data is a genuine source of competitive advantage; used carelessly, it is a reputational and legal liability.

Digital technology also drives operational and process innovation - automation, artificial intelligence, cloud computing and connected systems that raise productivity, cut costs, improve quality and coordinate global operations and supply chains in real time. More broadly, an enterprising and innovative culture - one that encourages new ideas, tolerates sensible risk and continually improves products and processes - is itself a strategic asset, because it lets a firm renew its products (extending life cycles), differentiate itself, and adapt to change rather than being overtaken by it. Innovation links back to product development (Ansoff) and differentiation (Porter) as engines of competitive advantage.

Deciding how far and how fast to invest in digital technology is a strategic judgement with the familiar trade-offs. The benefits - wider reach, lower costs, richer data, faster and better decisions, and the ability to innovate and differentiate - can be transformative, and firms that fail to adopt digital technology risk being disrupted by those that do (a driver of strategic drift). But the costs are real: heavy investment, the disruption and retraining of implementation, cyber-security and privacy risks, dependence on technology that may fail or be superseded, and the workforce implications of automation. The right level of digital investment depends on the firm's market, its customers, its resources and its strategy - and the strongest answers weigh the transformative potential against these costs and risks rather than assuming that more technology is automatically better, echoing the theme that runs through every strategic method: the best choice depends on the specific firm and its circumstances.

Worked example

Using digital technology to pursue a strategy

A regional chain of homeware shops, facing online competition, is considering investing heavily in an e-commerce platform and customer-data analytics. Evaluate the decision.

Identify the benefits
E-commerce would extend the chain's reach beyond its region, trade around the clock and cut reliance on costly stores; data analytics would let it personalise offers, forecast demand and price dynamically - helping it compete with online rivals.
Identify the costs and risks
The platform and analytics require heavy investment and new skills, carry cyber-security and data-privacy responsibilities, and could cannibalise the firm's own store sales; success is not guaranteed against established online giants.
Evaluate
Given that failing to go digital risks being disrupted entirely, the investment is likely necessary for survival, but it should be phased and funded prudently, with attention to data security and to integrating online and store channels (omnichannel). The judgement depends on the firm's finance and how fast its market is shifting online.

Result: Investing in e-commerce and data analytics is likely essential for the retailer to compete and avoid disruption, but the heavy cost, cyber-risk and channel conflict mean it should be phased and well managed - a decision that depends on the firm's finance and the pace of the shift online.

Typical mistakes

Assuming digital technology only benefits a firm, ignoring its cost, cyber-security and privacy risks and workforce impact.
Discussing 'technology' vaguely instead of specific tools (e-commerce, data analytics, automation) and their strategic use.

Active revision

A traditional high-street retailer is losing sales to online rivals. Evaluate how investing in e-commerce and data analytics could help it pursue a recovery strategy.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

References & sources

Sources

Department for Education

GCE AS and A level subject content for business

AQA

AQA A-level Business 7132 specification

Strategic methods: how to pursue strategies

5 sections~23 min reading time4 competenciesLevel Standard 4 · Advanced 1

Strategic methods: how to pursue strategies

Key points

Choosing a growth method

Key points

Choosing a type of integration

Key points

Do economies of scale materialise?

Key points

Choosing a method of overseas entry

Key points

Using digital technology to pursue a strategy

Sources

Strategic methods: how to pursue strategies

Key points

Choosing a growth method

Key points

Choosing a type of integration

Key points

Do economies of scale materialise?

Key points

Choosing a method of overseas entry

Key points

Using digital technology to pursue a strategy

Sources