3.2 Flashcards
what are diseconomies of scale?
when a business increases output so much its average costs will begin to increase
cons of rapid business growth
Diseconomies of scale
Occurs when a company grows too large, making it difficult to manage and control its operations
The cost per unit ends up increasing as a result of these inefficiencies
cons of rapid business growth
overtrading
Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity).
This may cause cash flow problems or decreased customer satisfaction.
cons of rapid business growth
Internal communication
Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination.
result in delays, errors, missed opportunities and impact on employee morale
what is a merger?
occurs when two or more companies combine to form a new company
what is a takeover?
one company purchases another company, often against its will
The acquiring company buys a controlling stake in the target company’s shares (>50%)
reasons why companies may choose to pursue mergers and takeovers
Strategic fit
expand into new markets
diversify its product offerings
gain access to new technology
reasons why companies may choose to pursue mergers and takeovers
Economies of scale
creates economies of scale by allowing companies to reduce costs and increase efficiency
reasons why companies may choose to pursue mergers and takeovers
Elimination of competition
Takeovers are often used to eliminate competition and the acquiring company increases its market share.
reasons why companies may choose to pursue mergers and takeovers
Shareholder value
By combining companies, shareholders can benefit from increased profits, dividends and stock prices
advantages of vertical integration
- Reduces the cost of production as middleman profits eliminated
- Lower costs make the firm more competitive
- control over the supply chain reduces risk as access to raw materials is more certain
- The quality of raw materials can be controlled
- Forward integration adds additional profit as the profits from the next stage of production are assimilated
Forward integration can increase brand visibility
pros of vertical integration
Reduces the cost of production as middleman profits are eliminated
Lower costs make the firm more competitive
Greater control over the supply chain reduces risk as access to raw materials is more certain
The quality of raw materials can be controlled
Forward integration adds additional profit as the profits
from the next stage of production are assimilated
Forward integration can increase brand visibility
cons of vertical integration
Diseconomies of scale occur as costs increase
There can be a culture clash between the two firms that have merged
Possibly little expertise in running the new firm results in inefficiencies
The price paid for the new firm may take a long time to recoup
pros of horizontal integration
The rapid increase of market share
Reductions in the cost per unit due to economies of scale
Reduces competition
Existing knowledge of the industry means the merger is more likely to be successful
The firm may gain new knowledge or expertise
cons of horizontal integration
Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles
There can be a culture clash between the two firms that have merged
issues with rapid growth
Rapid business growth can put a strain on cash flow
The merger/takeover may require investment in new equipment or staff to support the growth which may cause financial strain if the revenue growth does not keep up with the expenses
Diseconomies of scale may increase the cost per unit and are commonly caused by cultural and communication diseconomies when two firms merge
advantages of organic growth
The pace of growth is manageable
Avoids diseconomies of scale
The management knows & understands every part of the business
disadvantages of organic growth
The pace of growth can be slow and frustrating
Not necessarily able to benefit from economies of scale
Access to finance may be limited
what is ansoffs matrix?
a strategic planning tool that helps businesses identify potential organic growth opportunities by analysing their product and market strategies
what are some pros of staying small for a business?
Lower Costs: Small businesses often have lower operating costs due to less overhead, fewer employees, and smaller facilities.
Flexibility: Smaller businesses can adapt more quickly to market changes or customer needs, making it easier to pivot strategies or introduce new products.
Close Customer Relationships: Small businesses often build stronger, more personal relationships with their customers, leading to higher customer loyalty and satisfaction.
what are the cons of staying small for a business?
Employee Retention: Offering career growth and advancement opportunities can be more difficult in a small business, potentially leading to higher employee turnover.
Higher Risk: Small businesses may face higher risks due to limited diversification and dependency on a smaller customer base or fewer revenue streams.
