1.5 - Growth and Evolution Flashcards
business growth definition
how quickly a business can grow in size
how can a business’s size be measured
- revenue
- number of employees
- market share
- market capitalisation
(value of business on the stock market - price per share x number of shares)
what are economies of scale/diseconomies of scale
economies of scale
* as the rate of production increases, the cost of producing decreases (the unit cost of producing a product)
diseconomies of scale
* as the rate of production increases, so does the unit cost of producing a product
examples of internal economies of scale
manegerial economies
* more skilled managers
technical economies
* technology - faster production and mass production
purchasing economies
* bulk-buying discounts
financial economises
* larger firms - trusted more by banks for lower interes rates (lower costs of borrowing)
marketing economies
* spreading a marketing campaign over more units of sales
examples of internal diseconomies of scale
as a firm gets bigger it can lead to:
* communication issues
* coordination and control issues
* motivation issues
what is the difference between internal/external economies of scale
internal economies of scale:
- economies of scale results from inside of the business
external economies of scale:
- economies of scale results from outside of the business - (the whole industry growing in size)
examples of external economies of scale
- infrastructure improvements
- more skille labour
- suppliers may become more efficient
what are some reasons to grow a business
- higher sales revenue
(higher profit) - higher market share
(more power in market) - better brand recognition
(favoured by retailers) - economies of scale
- more power over suppliers
- sense of achievement for owner
- enables investment in research and development
what are some reasons why a business should stay small
- easier for owner to manage
- more limited and special - can sell for higher prices (exclusivity)
- more personal service to customers
- quicker decision making
- growing - may require additional investment - may lead to giving up part of the business - loss of control and conflict with the nature of the business
what factors can contribute to finding the perfect size for a business
- level of control that is wanted to be obtained
- size of the market
- objectives of the business
internal growth/external growth definitions
internal growth
* the expansion of a business using its own resources rather than employing other businesses
external growth
* the expansion of a business through th euse of other businesses
list the external growth methods
- mergers and acquisitions
- takeover
- joint venture
- strategic alliance
- franchise
merger definition
when two businesses combine to create one larger business
acquisition definition
when a company buys another company
* buying all stocks
* or owning majority of shares
takeover definition
when a company buys more than 50% of the stocks within another business to take control of another business - without the will of the other business
what are the different forms of mergers and acqiusitions and takeovers
horizontal integration
vertical integration
backward vertical integration
forward vertical integration
conglomerate diversification
horizontal integration definition
the integration or combining of two companies in the same industry or same stage of production
vertical integration definition
the integration or combining of two companies in the same industry but a different stage of production
backward vertical integration definition
the integration or combining of two companies in the same industry but earlier stage of production
eg. retailer buying a supplier
forward vertical integration definition
the integration or combining of two companies in the same industry but later stage of production
eg. supplier buying retailer
conglomerate integration/diversification definition
the integration or combining of two companies in completely different industries
what is a conglomerate business
a business that operates in a variety of different industries through conglomerate integration
pros/cons of horizontal integration
pros
* greater market share and market dominance
* the ability to enter a new market (eg. US market as well as European)
* economies of scale
cons
* possibility of leadership and culture clash
* government will ensure that business does not have too much control over the market
* potential for diseconomies of scale
pros/cons of vertical integration
pros
* control supply chain more directly (backward)
* greater knowledge of market (forward)
* economies of scale
cons
* culture clash
* cost of acquiring other business
* potential for diseconomies of scale
* may lose focus on main business activities
pros/cons of conglomerate integration
pros
* ability to spread risk through diversification
* access to wider range of consumers/markets
* economies of scale
cons
* shift from main business objectives
* cost for acquiring other businesses
* potential for diseconomies of scale
strategic alliance definition
an agreement between two or more firms to work together on specific actvities while remaining fully independent companies
eg:
* Collaborate on a certain project for a period of time
* United sells Starbucks on their flights
joint venture definition
When two business combine their resources to set up a new business
* two businesses remain independent
* The business split the costs and rewards, control and risk
eg. Chery Jaguar Land Rover - to set up production in China
pros/cons of joint ventures
pros
* Share knowledge and expertise
* Remain independent business
* To enter foreign market
cons
* Disagreement about the terms of the deal
* Clash over key decisions
* Culture Clash
what is a franchise
when a business (franchisor) allows another business (franchisee) to use its name, brand image, business model and product in return for a percentage of the profit and revenue
pros/cons of franchisor
pros
* company is able to grow quickly
* do not haveto pay for expansion - instead recieve profit
cons
* one bad franchise may ruin business
* have to make sure quality is upheld in all franchises
pros/cons of franchisee
pros
* benedits from preexisting brand image and consumer base
* free marketing, supply chain, training and more
* more bargaining power as franchise is large group
cons
* can not make personal decisions
* brand image damaged - damages whole franchise
* have to pay part of sales profit to franchisor
* limited influence in running of business
