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Businesses operate in dynamic environments that require diversification and defensive strategies to remain operational in the market - NSC Business Studies - Question 5 - 2024 - Paper 1
Question 5
Businesses operate in dynamic environments that require diversification and defensive strategies to remain operational in the market. Some businesses apply the PESTL... show full transcript
Worked Solution & Example Answer:Businesses operate in dynamic environments that require diversification and defensive strategies to remain operational in the market - NSC Business Studies - Question 5 - 2024 - Paper 1
Step 1
Outline the advantages of diversification strategies.
Answer
Diversification strategies offer several advantages including:
- Increased Revenue: Diversification can lead to a broader market reach, thereby increasing sales and income.
- Brand Awareness: Companies benefit from enhanced brand recognition as they introduce new products or services, improving their overall business image.
- Risk Reduction: By spreading investments and market focus across various sectors, businesses can minimize risks associated with economic fluctuations.
- Technological Benefits: Engaging in different markets allows companies to benefit from technological advancements and innovations from various industries.
- Adaptability: Diversification helps businesses remain functional and operational in changing environments, allowing them to quickly adapt to market demands.
Step 2
Discuss THREE types of defensive strategies.
Answer
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Divestiture: This involves selling off non-core assets or segments that are underperforming. By doing so, businesses can streamline operations and focus on more profitable areas.
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Retrenchment: This strategy includes reducing operational costs through methods like downsizing workforce, closing unprofitable divisions, or cutting back on product lines to maintain profitability.
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Liquidation: In severe circumstances, businesses may sell all assets to pay creditors. This strategy is often adopted when a company is in financial distress and aims to clear debts by liquidating its assets.
Step 3
Explain how the following PESTLE factors pose challenges to businesses: Social
Answer
The social factor can pose significant challenges to businesses by influencing consumer behavior and market dynamics. For instance,:
- Income Disparity: If customers are unable to afford products due to low income or high unemployment rates, sales can decline significantly.
- Changing Consumer Preferences: If businesses are not in tune with the local demographics, they may lose relevance, leading to reduced sales.
- Health Concerns: Social factors such as health awareness can impact sales of certain products, particularly if they are linked to illnesses or are perceived negatively by consumers.
Step 4
Explain how the following PESTLE factors pose challenges to businesses: Environmental
Answer
Environmental challenges are increasingly relevant in business strategy due to:
- Regulatory Compliance: Companies may face legal repercussions if their products or practices harm the environment.
- Waste Management: The costs associated with disposing of waste correctly can be significant, especially for industries with large outputs of byproducts.
- Sustainability Practices: Companies are pressured to adopt environmentally friendly practices, failing which may lead to public backlash and loss of customer trust.
Step 5
Advise businesses on the steps in strategy evaluation.
Answer
To effectively evaluate a strategy, businesses should follow several key steps:
- Establish Evaluation Criteria: Determine what metrics will define the success of the strategy, focusing on profitability, market share, and customer satisfaction.
- Performance Comparison: Review current performance against both initial goals and industry benchmarks to assess effectiveness.
- Identify Deviations: Analyze any deviations from expected outcomes to understand their causes.
- Feedback Loop: Collect feedback from all stakeholders involved to ensure a comprehensive evaluation.
- Make Adjustments: Based on the findings, take corrective actions to refine or pivot the strategy as needed.