1.5 Growth and Evolution Flashcards
growth
expansion
what does growth do
creates new opportunities to increase market share and make more profit
advantages of growth
- can achieve economies of scale to reduce costs
- new customers and markets reached, increasing market share/ sales/ revenue
- allows company to influence prices of products and services
- face competitors and external changes
- reduces risks and increases stability
- attract talented employees
external economies of scale
cost-savings that occur in a region or industry that aren’t under the control of the business
innovation (ext. economies of scale)
industry becomes significant for society
infrastructure (ext. economies of scale)
good transportation network, increases productivity
specialisation (ext. economies of scale)
workers start to focus on a particular industry due to its size.
easier to find better workers, reducing costs related to recruiting and training.
external economies of scale list
innovation
infrastructure
specialisation
internal diseconomies of scale
increase in unit costs as output increases, due to becoming too big and less efficient
managerial (int. diseconomies of scale)
hard to efficiently run enterprise as it is too big
- lack of coordination and cooperation may create inefficiencies and increase costs
increase in size of workforce (int. diseconomies of scale)
complicated organisational structure
- large number of managers increases costs
- overcrowding
- employees alienated
communication (int. diseconomies of scale)
too many layers of management
- makes efficient communication difficult
internal diseconomies of scale list
managerial issues
increase in workforce size
communication
external diseconomies of scale
increased unit cost of production for a business due to the expansion of the industry in which the business operates
limited natural resources (external diseconomies of scale)
as output of a business grows, they need more inputs of natural resources.
demand for raw materials may increase in industry.
–> higher costs of production
limited infrastructure (ext. diseconomies of scale)
as industry expands, businesses use infrastructure more often. thus, increased use of infrastructure can slow down deliveries and raise costs of production.
increased regulation (ext. diseconomies of scale)
industry expands, so government pays more attention to it. laws and regulations related to that industry may increase, raising production costs.
external diseconomies of scale list
limited natural resources
limited infrastructure
increased regulation
pollution
benefits of internal growth
- less expensive (uses internal sources of finance, avoid interest)
- less risky (no other parties, so no dilution of control)
- maintains more control
- respects company’s values (culture maintained)
pollution (ext. diseconomies of scale)
emissions cause climate change. natural disasters may damage natural resources and infrastructure. the cost of production increases.
disadvantages of growth nationally and globally
- increased pollution and negative environmental consequences
- (economies of scale and) replace workers with machines
- lose control over operations and don’t monitor worker conditions/pay, leading to exploitation of human labour
internal growth
expansion carried out by the organisation itself, without working with a partner
marketing economies of scale
cost of market campaign is spread over a larger quantity of output
disadvantages of growth
- quality: quality may fall
- loss of control of business
- higher labour turnover
advantages of growth nationally and globally
- more tax revenue to build public infrastructure
- reduce unemployment
- increase consumption and improve living standards
economies of scale
unit (average) cost of production decreases as the level of output increases
internal economies of scale
cost reductions inside company when output expands
purchasing economies of scale
buys inputs at lower cost by purchasing larger amounts
(buying in bulk)
managerial economies of scale
cost of hiring a manager spread over a larger output
(specialists are more efficient)
technical economies of scale
invest in equipment which is more efficient and lowers average cost of production
financial economies of scale
larger loan for investment with lower interest rate
joint venture
new enterprise created by 2 or more businesses which hold onto their distinct identities
internal economies of scale list
purchasing
marketing
managerial
technical
financial
limitations of internal growth
- slower (larger competitors might enter in the meantime)
- can cause cashflow problems
- limited: if it is in a small market, it may not be able to reach a size that results in acceptable profits
strategies for growing internally
- increasing production and gaining market share (promotions or better distribution)
- developing new products (or improve existing products)
- finding new markets: sell in new location or to new target audience
merger
two businesses agree to form a new business together
acquisition
one company purchases another with the permission of the board of directors
takeover
one company purchases another company without permission of board of directors or company
external growth
involves another organisation, allowing objectives to be realized more quickly and efficiently
strategic alliance
two or more businesses work together to achieve a common objective but don’t create a new enterprise
disadvantages of external growth
- riskier
- hard to realise cost reductions (if companies are too different)
- culture clash
- proprietary info and technology could be lost
advantages of external growth
- faster
- economies of scale
- increase employee talent pool, widen range of expertise
- competitor may be eliminated
franchising
arrangement between 2 parties: franchisor and franchisee
franchisor: company with successful business model that wants to expand
franchisee: pays royalties and runs outlets
advantages of franchising (for franchisor)
- faster to grow
- cheaper
- franchisees fund growth of franchisor
- franchisees more motivated to succeed than managers
- gain from franchisee’s local knowledge
advantages of franchising (for franchisee)
- very high success rate
- gains from brand recognition and brand loyalty
- franchisees receive ongoing support and expert advice
- gain from purchasing economies of scale
disadvantages of franchising (for franchisor)
- corporate image and brand reputation at risk is franchisee is incompetent
- needs to ensure quality standards are met
- franchisee keeps all profits
- franchising isn’t applicable to all businesses
disadvantages of franchising (for franchisee)
- very expensive (+ royalties)
- constrained by standards and practices (no innovation)
- individual franchisee is at risk of damaged reputation if another franchisee makes a blunder
reasons for staying small
- avoiding risk, maintaining control
- smaller market size
- limited access to sources of finance
- sustainability
- strong social networks
disadvantages of staying small
- higher costs of production
- harder to access finance
- harder to recruit and retain skilled workers
generative/ regenerative business
business that aims to strengthen its social and environmental ecosystems by creating opportunities for other businesses and communities to develop
- share know-how
- nurture network of relationships between stakeholders
- create shared purpose
ansoff matrix layout
mrkt develop ———- diversification
market penetration
selling more of the same product to the same customers
product development
selling new products within organisation’s existing market
market development
selling existing products to new customers
(new geographic market, new demographic)
diversification
selling new products in a new market
- riskiest
