1.6 Growth and Evolution Flashcards
Ways of measuring the size of the business
- Total sales/sales turnover
- Number of employees
- Market capitalisation: Value of the company in the stock exchange
5 main reasons for growth
Economies of scale: Larger firms can produce at a lower cost per unit
Diversification: larger firms can afford to sell more products into different markets
Financial support: larger firms are less likely to fail (bankrupt) they can borrow more to avoid cash flow, investors are more likely to invest
Personal vanity: power & status
Dominate the market (reduces opposition)
Two types of growth
Internal (organic) growth
External growth
Internal (organic) growth
An increase in the resources - capital and labour
+ inexpensive
- takes a long time for the business to grow
3 main methods of Internal Growth
Sell more existing products in existing markets
Selling current products in new markets
Producing new products (diversification/line extension)
External Growth
M&A: Mergers (without controlling interest) + acquisition (with controlling interest)
4 types of integration
Horizontal integration: two competitors join together (same stage in the production process)
Forward vertical integration: when a firm takes over a customer eg farmer buying a restaurant
Backward vertical integration: backwards in the production process
Conglomerate: when firms that have nothing in common join together (reduces the risk of expansion because it leads to diversification)
Problems mergers and acquisitions
Less than half of mergers and acquisitions are successful because of corporate culture and management styles - bad feelings
Merge
When the owners of each business becomes the owner of the new business
Acquisition
When a company buys over 50% of the shares of another company
Difference merger and acquisition
You don’t need to have the controlling interest of the company when you have a merger + takeover is more hostile
Scale of operations
Maximum output that can be achieved using all the available resources. To change the scale of operations all resources must be changed.
2 possibilities to change scale of operations
change all inputs - (can only be done in the long-term) or change output (change one input - the variable input)
Changes in the scale of operations are changes in output but not all changes in operations are changes in output.
Inputs scale of operations
Variable or fixed -> in the short-term all inputs are fixed and in the long-term all inputs are variable
Economies of Scale
Reductions in cost per unit as the business gets bigger
Internal: Achieved by the increase in the business’s scale of operations
External: Achieved as the industry grows
6 types of internal economies of scale
Financial Marketing Technical Managerial Risk-bearing Purchasing
External Economies of Scale
Happen when a number of large firm are close to each other (location)
Supplier located in the area
Local workforce specialised in tasks needed by firms, reduces training costs
Receive support from the local/national government
Good reputation of the area
Diseconomies of scale
Increase in cost of production per unit when the business gets too big
Why?:
Communication problems
Decision making process may be too long
Alienation (workers feel useless/insignificant)
Optimum scale of operations
where cost per unit are minimised
Advantages in being small
Can be managed and controlled by the owners -
can react quickly to change in customer needs -
can offer personal services to the customers -
lots of workers prefer to work in a more human business -
communication with customers and workers
Other methods of expansion
Franchising
Off-shoring (MNC)
Joint ventures
Strategic Alliances
Financial
Banks are more willing to lend to larger firms as the risk of default is lower and so they charge lower interest rates
‘Going public’ is very expensive, therefore larger firms pay proportionally less than smaller firms (cost per unit goes down)
Marketing
Arise because the cost of advertising is pretty much a fixed cost, so larger firms tend to spend less per unit of output
Technical
This occurs because larger firms can use production methods such as (eg. line production) that are more efficient and productive
Managerial
When large firms can afford to hire specialist managers (instead of general managers) who have expert knowledge such as accountants or lawyers, they are more productive (managerial division of labour)
Risk-bearing
Where the firm can afford to sell a range of products into many different markets. A decline in sales of one product will not significantly harm the firms cash flow.
Purchasing (bulk-buying)
Large firms can buy in bulk, obtaining big discounts
Small Firms
Small firms
Medium -> 51-250 workers -> 10-50M€ Sales-> 10-34M€ Capital employed
Small -> 11-50 workers -> 2-50 M€ Sales -> 2-10 M€ Capital employed
Micro -> -10 workers -> up to 2 M€ Sales -> less than 2 M€ Capital employed
