1.5 - Growth and Evolution Flashcards
Acquisition
A method of external growth that involves one company buying a controlling interest (majority stake) in another company, with the agreement and approval of the target company’s board of directors
Average cost
The cost per unit of output.
Calculated by the equation AC = TC / Q (total costs divided by the quantity of output)
Backward vertical integration
Occurs when a business amalgamates with a firm operating in an earlier stage of production, such as a car manufacturer taking over a supplier of tyres or other components
Conglomerates
Businesses that provide a diversified range of products and operate in a range of different industries
Demerger
Occurs when a company sells off a part of its business thereby separating into two or more businesses. It usually happens due to conflicts, inefficiencies and incompatibilities following an earlier merger of two or more companies.
Diseconomies of scale
Are the cost disadvantages of growth. Average costs are likely to eventually rise as a firm grows due to a lack of control, coordination and communication
Economies of scale
Refer to a lower average of costs of production as a firm operates on a larger scale due to gains in productive efficiency, such as easier and cheaper access to source of finance.
External diseconomies of scale
Occur due to factors beyond its control which cause average costs of production to increase as an industry grows
External economies of scale
Occur when an organisation’s average cost falls as the industry grows. Hence, all firms in the industry benefit
External growth (or inorganic growth)
Occurs when a business grows and evolves by collaborating with, buying up or merging with other organisations.
Financial economies of scale
Are cost savings made by large firms as banks and other lenders charge lower interest (for overdrafts, loans and mortgages) because larger businesses represent lower risk.
Forward vertical integration
Is a growth strategy that occurs with the amalgamation of a firm operating at a later stage in the production process, such as a book publisher acquiring book retailers
Franchising
Refers to an agreement between a franchisor selling its rights to other businesses (franchisees) to allow them to sell products under its corporate name in return for a fee and regular royalty payments
Horizontal integration
Is an external growth strategy that occurs when a business amalgamates with a firm operating in the same stage of production
Internal diseconomies of scale
occur due to internal problems of mismanagement, causing average costs of production to increase as a firm grows.
Internal economies of scale
occur within a particular organisation (rather than the industry as a whole) as it grows in size
Internal growth (also known as organic growth)
occurs when a business grows using its own capabilities and resources to increase the scale of its operations and sales revenue.
Joint venture (JV)
is a growth strategy that combines the contributions and responsibilities of two or more different organisations in a shared project by creating a separate legal enterprise
Lateral integration
Refers to external growth of firms that have similar operations but do not directly compete with each other, such as PepsiCo acquiring Quakers Oats company.
Managing economies of scale
Occur when larger businesses can afford to hire specialist managers, thereby improving the organisation’s overall efficiency and productivity.
Merger
A form of external growth whereby two (or more) firms agree to form a new organisation, thereby losing their original identities as a new legal entity
Optimal level of output
The most efficient scale of operation for a business. This occurs at the level of output where the average cost of production is minimised
The purchaser
Refers to the acquiring company in acquisition or the buyer of another company in a takeover
Purchasing economies of scale
occur when larger organisations can gain huge cost savings per unit by purchasing vast quantities of stocks/ bulk buying (raw materials, components, semi-finished goods and/or finished goods)
Risk bearing economies of scale
Occur when large firms can bear greater risks than smaller ones due to having a greater product portfolio
Specialisation economies of scale
occur when larger firms can afford to hire and train specialist workers, thus helping to boost their level of output, productivity and efficiency
strategic alliances
Are formed when two or more organisations join together to benefit from external growth, without having to set up a new separate legal entity.
Synergy
A benefit of growth, which occurs when the whole is greater than the sum of individual parts when two or more business operations are combined. Synergy creates greater output and improved efficiency.
A takeover (often referred to as hostile)
occurs when a company buys a controlling interest in another firm without the prior agreement or approval of the target company’s Board of Directors
Target company
Refers to the organisation that is purchased by another in an acquisition or takeover deal
Technical economies of scale
Are cost savings by greater use of large-scale mechanical processes and specialist machinery such as mass production techniques which help to cut average costs of production.
Vertical integration
Takes place between businesses that are at different stages of production
