3.2 Flashcards
Ways to measure growth
-Assets
-Sales value
-operating profit
-market share
-value added
-employee numbers
-branch numbers
Economies of scale
As a business gets bigger a business can lower costs through economies of scaled through:
-can gain comp advantage
-having more funds means you can buy more stock therefore buy in bulk
-having more power
-having more funds for specialised staff (marketing)
-Better reputation for banks to be willing to lend
Type of economy of scale- Purchasing
Discounts and lower prices for the raw materials as they need to purchase more
Type of economy of scale- technical
businesses with large scale production can use more advanced machinery. They can also invest in new tech
Type of economy of scale- specialisation/managerial
Also called managerial, businesses can afford specialist managers
Type of economy of scale- financial
larger firms find it easier to find potential lenders and to raise money at lower interest rates
Type of economy of scale- marketing
As a business gets larger it is able to spread the cost of marketing over a wider range of products. and sales
Type of economy of scale- risk bearing
bigger companies can spread their risk by investing in more products and more markets (diversification)
Diseconomies of scale
As the business grows they may expand the scale pf production beyond the minimum efficient scale. At this point average costs per unit start to rise as production rises, causing diseconomies of scale
Capacity utilisation
How much of the total capacity is being used
Objectives of growth
-Increased market share
-brand recognition
-increased profitability
problems with growth
-lack of motivations
-Lack of coordinations
-Internal communication impact
-Risk of overtrading
Lack of motivation
Large company workers with little say are demotivated which leads to increased absenteeism/ lateness
-reduction in productivity
-lower output per worker
-means increased cost per unit
Lack of coordination
-with new staff and products all resources need to be coordinated
-workers may need to be monitored which increases cost
-move managers with increases costs
Internal communication impact
-workforce increases there tends to be less face to face communication
-many layers of management makes messages take longer to get through everyone
-less efficient communication
therefore..
mistakes
more wastage
increased unit cots
risk of overtrading
overtrading is when a business accepts more orders than it can cope with
-cashflow problem
Ways a business can grow
-organic
-inorganic
Organic growth
Internal growth where a business reinvests its profits into itself
-Business has grown from within
(without merger or takeover)
Could be through:
-increasing the product range
-opening more branches
-taking on more staff
-access foeign markets
Methods of organic growth
-new product launch
-opening new stores
-expanding to foreign markets
-expansion of the workforce
Benefits of organic growth
-Avoids all risk of merger/takeover
-cheaper than merger
-retains company culture
-can be planned
-higher production of economies of scale and lower average costs
-more influence from the market share so can start price setting for the industry.
Drawbacks of organic growth
-higher risk strategy, opening lots of stores and taking on thousands of new staff and capital intensive
-long period between investment and return
-growth may be limited and dependent on reliability of sales forecast
-new market and new countries may be different (e.g. regulations, cultures)
inorganic growth
A business has grown by buying its way into being larger
-a merger
-a takeover
-a joint venture
advantages of inorganic growth
-Much faster growth than organic growth.
-Expanded assets from purchasing another business or adding a location.
-Increased market presence in existing or new markets.
-Competitive edge because of additions from a merger or acquisition.
dis of inorganic growth
-This can lead to conflicts, inefficiencies, and delays
-loss of culture
-Investing in another business or location can be risky
-Upfront costs can be large or require additional funding
-Any new business or location added can add management challenges
-The overall company will be larger, which can make some businesses less flexible
Tactical reasons to takeover/merge
-ensure an increase in market share
-access to tech
-access to staff
-accessto new customers
Strategic reasons to takeover/merge
-access to new markets
-improved distribution
-networks
improve brands
Advantages of merging
-Synergy- combined company is worth more than the parts
-economies of scale- better deals as increased orders
-increased revenue and market share- increased size of the combined company increases market power and ability to set higher prices
-cross selling- 2 companies involve in the deal sell each others products/services, increasing sales
-diversification
-acquiring unique capabilities and resources
-international expansion
risks of mergers and takeovers
-Original purchase cost
-cost of change into a new business
-redundancies of duplicate staff
-cost if it all goes wrong
rewards of mergers and takeovers
-increased revenue
-economies of scale
What are small businesses
Any business with fewer than 250 employees
What are the benefits of staying small
-Product differentiation
-USP
-flexibility
-customer service
-eCommerce
