1.5 Growth & Evolution Flashcards
what is Business growth
growth is one of the metrics used to determine the size of the business
examples of metrics to measure business growth
sales revenue
profit
market share
market capitalisation
employees
reasons why a business might want to grow
- higher sales revenue and potentially higher profit
- higher market share, meaning more power in the market e.g. better placement in shops
- better brand recognition by customers
- economies of scale - increased production should lower costs of production
- more power over suppliers
- sense of achievement for owners
- can invest in research & development - ways in which we can make the business’ product better
Reasons why a business might want to stay small
- easier for the owner to manage
- quicker decision making - less stakeholders involved - less employees
- more personal service to customers - less customers in theory
- growing may require additional investment, which may mean giving up some ownership - could lead to loss of control - might be a family business
the ideal size for a business depends on
objectives of the business
size of the market
level of control wanted
Internal growth
expansion of a business by using it’s resources and not involving other businesses
might be financed through loan capital, share capital, retained profits
- e.g. opening new shops/factories
- e.g. expanding overseas
External Growth
Expansion involving other organisations
e.g.
- mergers and acquisitions
- takeover
- joint venture
- strategic alliance
- franchise
Economies of scale
when a firm’s average cost decreases as it increases its scale of production
as the firm produces more, it becomes more cost efficient
Diseconomies of scale
when a firm’s average cost increases as it increases its scale of production
average cost = total cost/output
Internal economies of scale
economies of scale resulting from the firm producing more output
Examples of economies of scale
purchasing economies
financial economies
managerial economies
marketing economies
technical economies
Purchasing economies
bulk-buying discounts - can negotiate better deals for larger orders
e.g. buying 10kg apples versus buying 10 tonnes of apples
financial economies
larger firms are likely to be trusted more by banks
lower costs of borrowing (lower interest rate)
Managerial economies
can hire specialists in each area - e.g. marketing, finance
rather than having a general manager do everything
marketing economies
can spread the same marketing campaign over more units of sales
technical economies
large firms are more likely to be able to afford to use better machines/technology
can mass produce
External economies of scale
Economies of scale resulting from the whole industry growing in size
examples of external economies of scale
infrastructure improvements
more skilled labour
supplier become more efficient
diseconomies of scale
when average costs go up as output increases
usually from the problems managing too large a business
examples of diseconomies of scale
communication improvements
poor coordination and control
staff morale
infrastructure improvements
e.g. better roads, trains, internet
governments will often improve infrastructure to help a certain industry
more skilled labour
leads to more productive workers
e.g. silicon valley
communication improvements
slow communication and decision making
paperwork, filing, meetings etc
suppliers become more efficient
suppliers grow and gain internal economies of scale
poor coordination and control
harder to manage departments when they are spread out
time zones, different cultures
staff morale
more difficult to make everyone feel part of a large company
overspecialisation of labour
differences between internal and external growth
internal growth:
- business grows using its own resources
- no use of another business
- retained profit, loan capital, share capital
- a lot slower
External growth:
- using another company to help our growth
- happens a lot quicker
Mergers
when two firms agree to combine to form one larger business
the shareholder of X and Y become shareholders of Z
Acquisition
when one company buys another company
or a controlling interest, meaning >51% of shares
takeover
when one company buys another company who doesn’t want to be bought
horizontal integration
integration with firm in the same industry and at same stage of production
pros and cons of horizontal integration
P:
- greater market share and dominance
- can enter new market
- economies of scale
C:
- leadership and culture clash
- regulatory attention
- potential for diseconomies of scale
Vertical Integration
integration with firm in same industry and at different stage of production
backwards vertical
integration with a supplier less advanced in the supply chain
Forwards vertical
integration with a customer further along the supply chain
Pros of vertical integration
can control own supply chain (BVI)
Greater knowledge of the market (FVI)
Economies of Scale
Cons of Vertical integration
costs of acquiring other businesses
lose focus on core business activities
potential for diseconomies of scale
Conglomerate Integration
Integration with firm in a different industry
A conglomerate business
a business with operates in a number of different industries
Pros of conglomerate integration
spread risk through diversification
access to new customers and markets
economies of scale
Cons of conglomerate integration
costs of acquiring other businesses
lose focus on core business activities
potential for diseconomies of scale
strategic alliance
agreement between two firms to work together but still remain independent companies
joint ventures
when two businesses combine their resources to set up a new business
the two businesses remain independent
the new business created has its own legal identity
the business split the costs and rewards, control and risk
Pros of strategic alliance and joint ventures
share knowledge and expertise
remain independent business
to enter foreign market
cons of strategic alliance and joint ventures
disagreement about the terms of the deal
clash over key decisions
culture clash
Franchise
when a business allows another business to use their brand names, product and business model
franchisee may be able to use
- brand name, logo, supply chain, marketing, training manual
Franchisee will likely have to pay
- a license fee for the franchise, a % sales/profits
Pros of franchise
can grow quickly
do not need to pay for the expansion
cons of franchise
need to ensure quality is maintained in each franchise
one bad franchise can ruin the whole brand
pros of other external growth methods
benefits from the brand image of the franchise
also benefit from their marketing, supply chain, training etc
cons of other external growth methods
have to pay part of the sales/profit to the franchisor
no say in the running of the business
