3.2- Business Growth Flashcards
What is business growth defined?
Business growth is the point at which a business needs to expand and seeks options to generate more profits.
What are the 4 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.
What is economies of scale and that are its benefits?
The idea that as a business grows in size it will be able to gain competitive advantage in a number of ways;
• By having more funds to buy stock, so being able to get better deals by buying in bulk
• By having more power
• By having more funds to pay for specialist staff
• By having a better reputation so banks are more willing to lend
• We call this economies of scale (EOS)
When do economies do scale occur?
Economies of scale (can we say EOS for short) occur when unit costs or average costs fall as a result as an increase in the level of output of the business.
What is risk bearing?
Bigger companies can spread their risk by investing in more products and more markets (diversification).
What are the 3 problems that can rise from business growth?
- Diseconomies of scale.
- Internal communication
- Overtrading
What is diseconomies of scale, and outline internal and external DEOS.
As the business grows they may expand the scale of production beyond the minimum efficient scale (see next slide)
• At this point the average costs per unit starts to RISE as production RISES
• Internal DEOS; communication, co-ordination, motivation
• External DEOS; overcrowding in industrial areas, traffic congestion, price of land and labour rises
What is a Merger?
A merger is a legal deal to bring two businesses together under one board of directors.
The businesses are usually the same size and the name is normally changed (although not always).
What is a take-over?
- Also known as an acquisition.
- This is a legal, deal where one larger business purchases a smaller one.
- If the deal is unwanted by the management or board of directors then this is a ‘hostile take-over’.
What are the tactical reasons for a merger or takeover?
- Attempt to ensure increased market share.
- Access to technology, staff or intellectual property.
What are the strategic reasons for a merger or takeover?
- Access to new markets.
- Improved distribution networks.
- Improved brand awareness.
What are the reason for a friendly take-over?
A business may be struggling with cash flow problems and invite a takeover from a stronger business, known as a ‘White knight’ as they come in to rescue the struggling business.
How does the process of a hostile take-over happen?
The board of directors will try an resist the takeover, but if another business gets 51% shares they can takeover management and control.
What is the primary sector of a business?
Primary Sector businesses that are involved in digging, fishing, mining to remove products from the planet at source E.g. a Farm or quarry.
What is the secondary sector of a business?
Secondary sector business that are involved in manufacturing raw materials into other products e.g. Clothes factory, cheese maker.
What is the Tertiary sector of a business?
Tertiary sector are businesses that sell goods to the customers e.g. Shops, Banks, insurance companies.
What is horizontal integration?
Businesses operating in the same sector (e.g. tertiary) merge or takeover another business in the same sector.
What is vertical integration?
Vertical integration is when one business in one sector takes over or mergers with a business in another sector or part of the supply chain.
What are financial, risks of mergers and takeovers?
- Original purchase cost.
- Cost of change into a new business.
- Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.
- Cost if it all goes wrong.
What are the financial rewards of mergers and takeovers?
- Increased revenue
- Economies of scale
What are the problems with mergers and take-overs?
- Clash of cultures
- Possible communication problems
- Possible move away from core competencies of original business may cause issues of control
- Unreliable merger partners
- Diseconomies of scale
- Lack of understanding of local markets leading to wrong promotional message
- 75% of all mergers fail
What is organic growth defined?
Organic growth is the proc of business growth which comes from within the business, as opposed to mergers and takeovers.
What is inorganic growth?
This means that a business has grown by buying its way into being larger, this may be through;
• A merger
• A takeover (also known as an
acquisition)
• A joint venture
What are the 4 methods of organic growth?
- New product launches
- Opening new stores or branches
- Expanding into foreign markets
- Expansion of the workforce
