(3.2) Business Growth Flashcards
What is economy of scale?
It’s benefits businesses gain as they grow
What are the objectives of growth?
Economies of scale
increased market power - business can charge higher price/ demand lower costs from suppliers
Increased market share/ brand recognition & power -
Increased profitability - greater returns
Give examples of internal economies of scale
- Purchasing and marketing economies, marketing becomes cheaper
- Technical economies,
- Specialisation and managerial economies, can afford higher skilled workers
- Financial economies, Can raise finances easier
- Risk bearing economies, reduced risk as they can carry out more intensive research
Give examples of external economies of scale
- Labour, if schools offer training courses that are aimed at the industry
- Lower transport costs
- Ancillary and commercial services,
- Co-operation
- Disintegration
What are the problems with Growth?
Overtrading - Running out of cash
Diseconomies of scale - Average costs rise as output rises
Internal Communications - hard to communicate between departments
What are the two types of growth?
Internal/ organic growth and external/ inorganic growth.
What are the types of external growth and what do they mean?
Mergers and takeovers.
Merger-when two businesses have agreed to unite as one new company
Takeover(friendly/hostile)-when one firm gains control over another by buying 51% of shares
What is horizontal integration?
When two firms in the same market and stage of production merges together
What is vertical integration and the two different types?
When two firms in different stages of development joins together.
Backwards ie apple taking over a manufacturer
Forward ie apple taking over a retailer
What are the problems with rapid growth?
Outgrows premises, potential shortage of cash, potential increase in staff turnover and decrease in motivation
What is conglomerate?
When a firm merges/ takes over an unrelated business
Ie Apple and Cadbury
What are the methods of growing organically?
New products, open new stores, expand into foreign markets, develop an online presence
What are the advantages of growing organically?
Cheaper than merging, reduced risk, EoS, can be planned unlike a takeover, retails an company culture
Less risk
controlled pace - the business can grow steadily and when its ready
Cheaper than external growth
Diseconomies of scale minimalised - as growth is gradual
What are the disadvantages of growing organically?
Long ROI, growth can be limited, no new resources from others, new markets can be dangerous without buying an already built business, slower growth, shareholders may want quick profits
What are the top reasons for staying small?
Owners preference, flexibility, lower costs, can deliver personal customers service, have more control, Product differentiation
What is the difference between internal and external economies of scale?
Internal-cost advantages enjoyed by a single business as it grows
External-cost advantages available for all business as the industry grows
What is the reasons for mergers and takeovers?
- To grow
- EoS
- Profitability
What are the disadvantages of growing inorganically?
Resistance - productivity can be low when a business has been taken over
Financial strain - both mergers and takeovers can stretch a firms finances, especially if a war begins
What are the advantages of growing inorganically?
Speedy growth
Rewards for previous owners - large playouts
Greater profitability if merger/takeover is successful
What is a merger?
When a business have agreed to unite into one new company
PLC Only
What is a takeover and the two types?
When one firm gains control over another by buying 51% of shares
Hostile - Both businesses are happy
Volatile - Resistance
What is the financial risk of external growth?
Original cost
Costs of changing into a new business
Redundancies of duplicate staff
Opportunity cost - what if it all goes wrong
What is the financial reward of external growth?
increased revenue
Economies of scale
