3.2 Business Growth Flashcards
Name 4 reasons why businesses grow
-to increase profitability; growth means ^ custokmers -> ^ revenue -> ^ profit
-to achieve economies of scale;
-increased market power over customers & suppliers
-increased market share and brand recognition
Name 5 problemes that sometimes arise from growth
-diseconomies of scale
-poor internal communication
-poor employee motivation
-poor managerial co-ordination
-overtrading
What is diseconomies of scale
inefficiencies related to growth -> upward pressure on unit costs
What is inorganic growth
growth that occurs due to taking over/ merging with another business
What is organic growth
growth which takes place internally within the business
Name 3 methods of organic growth
business can finance the griwth through retained profits
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Name 3 advantages of organic growth
-leaders influence stays strong; greater chance of preserving original organisational culture -> likely to be successful -> has put company in position to grow
-reduction of financial risk;
-secure career paths;
Name 3 disadvantages of organic growth
-limited speed leading to limited size
-failing to fully exploit a short-lived opportunity
-predictability
What are synergies
benefits of 2 things coming together that could not exist when they are seperate
-e.g. economies of scale reuslting from a merger
Name 4 common reasons for mergers & takeovers
-growth-
-cost synergies
-diversification
-market power
What is a merger
when 2 businesses agree to come together to create brand new single business
What is a takeover
when 1 business buys over 50% of another businesses shares
Name the 3 types of integration
-vertical integration- merger/ takeover involving 2 companies at diff stages of same supply chain:
forward vertical integration; when company buys customer
backward vertical integration; when company buys supplier
-horizontal integration- when business buys/ merges with rival
-conglomerate integration- where merger/ takeover involve coming together of 2 unrelated businesses
Name 2 benefits & disadvantages of backward vertical
+secures supplies
+should lower the cost of supplies
-can tie the business into a supplier that may not always offer the best option
Name 2 benefits & disadvantages of forward vertical
+guaranteed outlet for the businesses products
-can lead to diseconomies
-could be confusion over which firms culture should be adopted in some areas
Name benefits & disadvantages of horizontal integration
+likely to provide clear economies of scale
-xan lead to diseconomies
-could be confusion over which firms culture should be adopted in some areas
Name benefits & disadvantages of conglomerate
+diversifies the business - spreading risk into diff markets
-potential faiure to understand target company as it will be in an unfamiliar market
-may distract management from original business due to unfasmiliarity and slowness to integrate
How can Ansoff’s Matrix be used for decisions concerning takeovers
-matrix allows for analysis of the market & products being sold by firm being taken over
Financial rewards of mergers and takeovers?
A
- Speedy Growth –> large market share, lower costs resulting from economies of scale, more market power and higher profitability
- Increased profitability
Name 3 issues of rapid growth inorganically
-with new management structures in place staff may find themsleves working for a new boss
-staff may need to adjust to operate in new business culture; may feel uncomfortable
-customers & suppliers -> may feel discomforted by dealing with new suppliers and customers
How do businesses survive in competitive markets
-lowests costs due to price competition evident
-strong point of differentiation due to product innovation being common
Name 4 reasons for a business to stay small
product differntiastion & USPS ->when business finds point of differentiation, selling to niche market -> can spend all time deepening point of differentiation -> don’t need to grow
flexibility in responding to customer needs -> fewer layers between bosses & managment, communications quicker -> descision-makers liekly to know about changes sooner
greater customer service -> staff part of a small close-knit workforce -> understand how performance affects success of business -> more motivated -> better service
e-commerce -> ability to reach a global amrket -> allows for specialist niche market -> which wouldn’t be large enough to support business on national scale
business objectives and size
Why do firms grow by increasing profitability
- growth means more customers
- more customers more revenue
- more profit
Types of economies of scale
- purchasing (negotiate cheaper unit costs from supplier)
- managerial (specialist managers)
- technical (firm can afford to buy specialised equipment)
Explain overtrading
- occurs when a business experiances cash flow problems as a result of expanding too quickly without sufficient cash in bank
Give some methods of growing organically
- staff devlopment
- using retained profits
Three advanatages of organic growth
- leaders influence stays strong (preserve organisational structure)
- reduction of financial risk
- secure career paths ( better management positions, internal promotions)
Disadvantages of organic growth
- limited speed leading to limited size
- failing to fully exploit a short lived opportunity
- predictability
How can growth lead to poor internal communication
-larger organisations rely on more written forms of communication -> harms effectiveness of communication
-messages need to pass through more layers of the organisational structure
-> could lead to resources wasted due to ineffective comm
How can growth lead to poor employee motivation
->employees may feel like their work goes unnoticed
->may struggle to see how their achievements impact the success of the business
-> can lead to falling motivation
How can growth lead to poor managerial co-ordination
-as business grows -> boss may struggle to maintain regular contact with everyone
-this is bcs meetings take up valuable time
-failure to co-ordinate effectively -> mistakes -> ^ costs
How can growth lead to overtrading
-if business grows rapidly -> levels of cash outflows rises consistently as it expands
-after those assets generate a return -> is when cash inflows start to rise -> this could take months
-creates a situ where business is trying to fund large-scale operation with very little cash
What is overtrading
when a business experiences cash flow problems due to expanding too quickly with little cash in bank
What is diversification
-new product, new market
-does this to reduce its reliance on on market/ product in case of issues
What is market power
When 2 firms in same market come together -> ^ power over customers -> ^ prices charged -> boost margins
What are cost synergies
When business grows through merger/ takeover -> ^ size -> economies of scale -> reduced unit costs
What is growth
stage where the business reaches point for expansion and seeks additional options to generate more profit
What is economies of scale
reductions in unit cost caused by growth of a business
How does a business gaining market power affect their customers?
-charge higher prices
-less competitive forces -> less need to spend money on new products -> reduces need to spend money on innovation & development
How does a business gaining market power affect their suppliers?
-dominant businesses can force cost reductions
-positive impact -> ^ growth -> ^ sales
How does a business increasing market share affect its brand image?
growth -> ^ market share -> ^ power over customers -> ^ brand recognition
What are 3 benefits of brand recognition
-customers buy brands they recognise -> ^ recognition -> ^ in sales
-can charge ^ prices
-create customer loyalty
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What are the benfits of increased profitablity
-allows for further innovation and invetsment
What are the Financial Risks of Mergers and Takeovers?
- Resistance from employees –> can result in job loss also there might be disrupting such as strikes
- Integration costs –> technical changes, system changes, severance pay for dismissed workers, training etc.
