3.2 Flashcards
key reasons for growth
- Increasing profits
- Achieve economies of scale
- Increase market power
- Increase market share and brand recognition
- Grow business and shareholder value
Increase market power
Larger firms may be able to exert greater bargaining power over suppliers and/or customers to gain a competitive advantage
what is Economies of scale
Economies of scale arise when unit costs fall as output increases
average cost per unit is calculated by
total production costs in period (£) / total output in period (units)
internal economies of scale
when a company’s cost increases due to its growth, despite the company’s increasing its output
external economies of scale
Occur within an industry
i.e. all competitors benefit
internal economies of scale
- purchasing economies
- technical
- managerial
- marketing
- netowork
- financial
what is a takeover/acquisition
involves one business acquiring control of another business
possible reasons for takeovers
- Acquire new skills
- Access economies of scale
- Spread risks by diversifying
- Enter new segments of an existing market
- To eliminate competition
- Business lacks knowledge or resources to develop organically
- Speed of growth is a high priority
drawbacks of takeovers
- High cost involved
- Problems of integration (change management)
- Non-existent cost savings
- Incompatibility of management styles, structures and culture
- High failure rate
Common Reasons Why Takeovers Fail
- Lack of decisive change management in the early stages
- The takeover was mishandled
- Cultural incompatibility between the two businesses and poor communication
- Competitors take the opportunity to gain market share whilst the takeover target is being integrated
directions of integration
Forward + vertical
Backward + vertical
Horizontal
Conglomerate
directions of integration
Forward + vertical
Acquiring a business further up in the supply chain – e.g. manufacturer buys a distributor
directions of integration
Backward + vertical
Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler
directions of integration
Horizontal
Acquiring a business at the same stage of the supply chain – e.g. a manufacturer buys a competitor
directions of integration
Conglomerate
Where the acquisition has no clear connection to the business buying it
benefits of horizontal intergration
- Achieve economies of scale
- Potential to secure revenue savings
- Wider range of products
- Reduces competition by removing key rivals
- Buying a existing brand can be cheaper than organically growing a brand – this makes the entry barriers higher for potential rivals
benefits of vertical intergration
- business captures a greater share of the profit on each sale
- Create a barrier to entry to potential new competitors
- Gain greater insights into customer needs and wants at each stage of the supply chain
what is a merger
a combination of two previously separate firms which is achieved by forming a completely new firm into which the two original businesses are integrated
