3.2 Flashcards
Why do businesses want to grow?
Increase profits
Achieve EOS
Increase market power
Increase market share and brand recognition
What are EOS?
When unit costs fall as output increases
How to calculate average cost per unit?
Total production costs in period/ total output in period
How EOS can provide a competitive advantage?
EOS is a key aim for businesses that wish to position themselves as low cost operators
What are internal EOS?
Arise from the increased output of the business itself
What are external EOS?
Occur within an industry i.e all competitors benefit
Types of internal EOS
Purchasing
Technical
Managerial
Purchasing EOS
Buying in greater quantities usually results in a lower price (bulk buying)
Technical EOS
Use of specialist equipment or processes to boost productivity
Managerial EOS
Specialist managers can be employed to help reduce unit costs and boost efficiency
Examples of external EOS
- having many specialist suppliers close by
- pool of skilled labour to choose from
- access for research and development facilities
Diseconomies of scale
No guarantee that unit costs will fall as the scale of a business’ operation rises
Examples of DEOS
- control- problems in monitoring productivity and work quality, increasing wastage
- co operation- workers in large firms may develop a sense of alienation and loss of morale
- negative effects of internal politica
What is overtrading?
When a business expands too quickly without having the financial resources to support such a quick expansion
How overtrading links to business failure?
If suitable sources of finance are not obtained, overtrading can lead to business failure
Overtrading can occur even if a business is profitable- issues of working capital and cash flow
Symptoms that a business might be overtrading
- high revenue growth but very low gross and operating profit margins
- increase in current ratio
- very low inventory turnover ratio
- low levels of capacity utilisation
How can businesses manage the risk of overtrading?
- reducing inventory levels
- scaling back the pace of revenue growth until profit margins and cash reserves have improved
- leasing rather than buying capital equipment
Objectives of small businesses
- survival
- revenue maximisation
- profit maximisation
- cost efficiency and scale
- customer service
Why stay small?
- product differentiation and USPS
- flexibility in meeting customer needs
- deliver high standard of customer service
- exploit opportunities from e-commerce
Staying small: product differentiation USPs
- help differentiate against larger competitors
- customer perception may be an expectation of a better product from a business Yh at fares
- more scope for adding value through the provision of specialist expertise
Staying small: flexibility in meeting customer needs
- talk to their customers regularly
- communicate in the customers language which give the impression to the customer that they are more in tune with their needs
What is organic growth?
Involves expansion from within a business
E.g:
Expanding product range
What is external growth?
Mergers and takeovers
What is a takeover?
Involves one business acquiring control of another business
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
Difference between merger and takeover
M: involves a new firm being created into which two businesses are merged
T: involves an existing firm acquiring more than 50% of another firm, taking control
Reasons for growing through takeovers
- increase market share
- acquire new skills
- access EOS
- acquire intangible assets (brands, parents, trade marks)
Drawbacks of takeovers
High cost involved
Problems of intervention
Incompatibility of management styles, structures and culture
Why do some takeovers fail?
Price paid for takeover was too high
Cultural incompatibility between two businesses
Poor communication
What is forward + vertical direction?
Acquiring a business further up in the supply chain e.g manufacturer buys a distributor
What is the backward + vertical direction?
Acquiring a business operating earlier in the supply chain e.g retailer buys a wholesaler
What is the horizontal direction?
Acquiring a business at the same stage of the supply chain e.g manufacturer buys a competitor
What is a conglomerate?
When the acquisition has no clear connection to the business buying it
What is organic growth?
Involves expansion from within a business
E.g expanding product range
Advantages of organic growth?
Less risk than external growth
Can be financed through internal funds
Builds on business’ strengths
Allows the business to grow at a more sensible rate
Disadvantages of organic growth
Growth achieved may be dependent on the growth of the overall market
Hard to build market share if business is already a leader
Slow growth- shareholders may prefer more rapid
Organic growth: franchising
When a franchisor grants a license (franchise) to another business (franchisee) to allow it to trade using the brand/ business format
Why franchising is a good growth strategy?
- a classic growth strategy for a proven business format
- enables much quicker geographical growth for a relatively low investment
- still have the option to open locations that are operated by the franchisor
- capital investment by franchises is an important source of growth finance
Benefits of franchising for the franchisee
- tried and tested brand
- advice, support and training
- easier to raise finance
- lower risk method of market entry + lower failure rate
Drawbacks of franchising for the franchisee
- not cheap: initial fees + royalties and commission
- restrictions on actions, including selling
- franchisor owns the brand
