3.2 Flashcards
6 Reasons to Grow
-Easier access to finance
-Opportunities for product diversification
-Desire for economies of scale
-Desire for stronger market power
-Desire for higher market share + profit
-Desiree to run a large business
What is Economies of Scale
As a business grows, scale of output grows, lowering average unit cost
If a scale of output grows too far, average costs begin to rise, leading to diseconomies of scale
What is Internal Economies of Scale
Lower average costs occur because of factors from inside the business
What is External Economies of Scale
Lower average costs because of factors from outside the business
6 Types of Internal Economies of Scale
-Financial
-Managerial
-Marketing
-Purchasing
-Technical
-Risk bearing
4 Sources of External Economies of Scale
-Geographic cluster
-Transport links
-Skilled labour
-Favourable legislation`
3 Problems with Growth
-Diseconomies of Scale
-Internal Communication
-Overtrading
What is a Merger
When two companies come together to form a new company
What is a Takeover
When one company purchases another company
5 Reasons for a Merger or Takeover
-Strategic fit
-Economies of scale
-Synergies
-Elimination of competition
-Shareholder value
4 Advantages of Vertical Intergration
-Reduce cost of production
-Quality of raw materials can be controlled
-Increase brand visibility
-Allows to be more competitive
4 Disadvantages of Vertical Intergration
-Diseconomies of scale
-Culture clash
-Little expertise
-Cost of purchase
Definition of Vertical Intergration
Involves a merger or takeover either forward or backwards in the supply chain
Definition of Horizontal Intergration
Involves a merger or takeover at the same stage of production process
4 Advantages of Horizontal Integration
-Increase market share
-Reduces competition
-Gain knowledge
-Reduces cost per unit
2 Disadvantages of Horizontal Integration
-Diseconomies of scale
-Culture clash
5 Financial Risks of Mergers/Takeovers
-Overpayment
-Integration challenges
-Cultural differences
-Debt
-Regulatory Hurdles
5 Financial Rewards of Mergers/Takeovers
-Increased market share
-Synergy
-Diversification
-Access to new markets
-Increased value
6 Problems caused by Rapid Growth
-Strain on cash flow
-Increased management complexities
-Quality control issues
-Customer service issues
-Culture clash
-Diseconomies of scale
5 Ways to grow Organically
-Gaining market share
-Product diversification
-Opening new store
-International expansion
-Investing in new technology
4 Advantages of Organic Growth
-Pace is manageable
-Less risky
-Avoids diseconomies of scale
-Management understands business
3 Disadvantages of Organic Growth
-Pace can be too slow
-May not gain economies of scale
-Access to finance may be limited
6 Reasons to stay small
-Offer more personalised experience
-Unable to access finance for expansion
-May be in niche market but is profitable
-High ability to respond quickly
-Avoids diseconomies of scale
-Goal isn’t profit maximisation
