3.2 Flashcards
Objectives of growth
- to achieve economies of scale (internal and external)
- increased market power over customers and suppliers
- increased market share and brand recognition
-increased profitability
ALSO
-Economies of scope- operating with a wide variety of products in number of markets= decreased costs as shared across product lines= decreases risk of product failing
>EVAL-loss of focus on particular product= poor performance
-SYnergies -bring businesses that complement eachothers strengths
>EVAL-can be lack of synergies eg culture clash
-Experience curve= bigger firms have more experience as have made more mistakes in past and gained knowledge from
>EVAL, lack of comp= complacencies
Problems arised from growth
-Overtrading happens when a business grows too quickly without having the necessary resources (e.g., cash flow, staff, or equipment) to support its growth.
-Diseconomies of scale, control,communication,coordination,motivation
- Internal communication problems eg role confusions= poor performance
Reasons for Mergers and Takeovers
- EOS
- Increased market share
- Diversification
- Access to new technologies
- Synergy
Define integration ,merger ,takeover and acquisition
Integration- growth through merger or takeover
Merger - 2 or more businesses join under common ownership
Takeover- taking majority of stake in a company eg 25%
Acquisition- buying another firm completely eg 100%
Define vertical integration, horizontal integration and conglomerate
Vertical integration- integration of firms in same industry but different stages in production process
> Forward- taking over customer eg retailer
> Backward- taking over supplier
Horizontal integration- merger of 2 firms in the same industry and same stage in production process
Conglomerate- firm in different industry with no obvious connection integrate
Financial risk of inorganic growth
- High cost
- Debt burden, If the acquisition is funded by debt, the company may face increased financial pressure from interest payments, affecting profitability and financial stability.
- Cultural differences= culture clash = decreases productivity = loss of employees
- regulatory hurdles
Financial rewards
Of inorganic growth
- Increased market share= increased sales and profits
- Synergy= cost saving through elimination of duplicate functions and increased efficiency= increased profitability
- diversification= wider range of products= decrease risk
- access to new markets= higher customer base = increased sales revenue
Problems of rapid growth
-diseconomies of scale
-culture clash
-quality contorl issues
-strain on cash flow
Define organic growth
Organic growth-using abnormal profits to grow naturally by increasing output
Adv and dis of organic growth
ADV OF ORGANIC
- less risk
- cheaper
-controlled growth
- decreased disecnomies of scale
DIS of organic
-slow= decrease shareholder confidence as they may want rapid ROI
-No external expertise
-Competition
-Limited resources
Define inorganic grwoth
Inorganic growth- growing by increasing output or business outstream through merger or takeover
Adv and dis of inorganic growth
ADV of inorganic
- Quicker than organic
- rewards for previous owner
- increased profits if successful
-increased market share
- EOS
DIS
-regulation= CMA may intervene
-Financial stretch
-Resistance, low productivity and morale eg culture clash
Methods of Growing Organically
- Expanding Product or Service Offerings
- market penetration
- geographic expansion
-increasing sales
-R&D
Reasons for staying small
-Product differentiation and USP, to compete with large businesses= product has to be unique form larger firms= creates USP= increases prices ,revneue and market share
-Customer service- smaller businesses find it easier to provide personal service eg owners building relationships with customers
-Flexibility in customer needs, small businesses= flexible= quick decision making and easy adaptation while large firms takes months to change and implement
-Competing through e-commerce- small businesses can compete online without the need of physical stores.
> Online sales can help small businesses reduce costs associated with traditional brick-and-mortar stores, such as rent, utilities, and staffing. This allows small businesses to remain cost-competitive even in a crowded market.
