3.2 Flashcards
Reasons why businesses grow?
-Desire to run a large business & grow it
-Desires for high level of marketshare & profit
-To benefit from economies of scale
-Easier access to finance
Define Internal economies of scale?
Arise from the increased output of the business itself
Define external economies of scale?
Increase in size of the industry that a firm operates in
What is purchasing economies of scale?
Larger businesses are able to obtain lower prices from suppliers compared to smaller businesses.
What is technical economies of scale?
Larger firms can invest heavily in automation in order to further improve efficiency and productivity.
What is managerial economies of scale?
Larger firms can employ specialist managers which should enable the business to be more efficiently run.
Problems arising from growth?
-Diseconomies of scale
-Internal communication barriers
-Overtrading
Define diseconomies of scale
When a business expands beyond an optimum size and becomes less efficient.
Define Over trading
When a business expands to quickly without having finical resources to support such a quick expansion
How to manage risk of overtrading
-Leasing rather than buying equipment
-Obtaining better payment terms from suppliers
-Enforcing better payment terms with customers
Define takeover
Involves one business acquiring control of another business
Reasons for mergers & takeovers?
-Strategic fit
-Economies of scale
-Synergies eg increased revenue, cost savings and increased market share
-Elimination of competition
Drawbacks of Takeovers
-High costs
-Upset customers/suppliers
-Problems of integration
-Resistance from employees
Define horizontal integration
Buying a business at the same stage of production process
Define vertical integration
Acquring a business at a different stage of production
Benefits of vertical integration
-Reduces cost of production
-Makes firm more competitive
-Reduces risk
-Increased profits & brand visibility
Benefits of horizontal integration
-Increased market share
-Economies of scale
-Reduced competition
-Gain knowledge & expertise
Define merger
When two or more businesses combine to form a new company
Problems caused by rapid growth?
-Strain on cash flow
-Increased management complexities
-Quality control issues
-Customer service issues
-Culture clash
-Diseconomies of scale
Define organic growth
Expansion from within a business
Define inorganic growth
Growth from outside the business e.g takeovers, mergers, joint ventures
Advantages of organic growth
-Less risk
-Builds on a businesses strengths
-Allows growth at a sensible rate
-Avoids diseconomies of scale
Disadvantages of organic growth
-Pace of growth may be slow & frustrating
-Access to finance limited
-Don’t benefit from economies of scale
What are some reasons small firms exist?
-Offer more personalised products
-Unable to access finance for expansion
-Provide a product for a niche market
-Avoid diseconomies of scale
-Goal not profit maximisation but profit satisficing
Reasons for staying small: Product differentiation & USP
-Can help differentiate against larger competitors
-More scope for adding value through specialist expertise
Reasons for staying small: Flexibility in meeting customer needs
-Regular communication
-Gives customers the impression they care about wants and needs
-Easier to get customer feedback
Reasons for staying small: High standards of customer service
-Key source of competitive advantage
-Customers treated as a priority in smaller businesses
Reasons for staying small: Exploit opportunities for E-commerce
-Reach a broader customer base
-Target niche segments and over seas
