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
What are the advantages of organic growth?
- This avoids all the risks and pitfalls of merging with another business
- Cheaper than merging
- Retains the company culture
- Can be planned for unlike a takeover
- Higher production means EOS and lower average costs
- More influence comes with more market share, can start setting prices for the industry
What are the disadvantages of organic growth?
- This is a very high risk strategy, opening lots of stores and taking on thousands of new staff is very risky and capital intensive
- Long period between investment and return on investment
- Growth may be limited and is dependent on reliability of sales forecasts
- New markets and countries can be dangerous to enter into without buying a business already operating in that country
What is the definitions of small businesses?
The usual definition of small and medium sized enterprises (SMEs) is any business with fewer than 250 employees.
• There were 5.2 million SMEs in the UK in 2014, which was over 99% of all business.
• Micro-businesses are business with 0-9 employees.
• There were 5million micro-businesses in the UK in 2014, accounting
for 96% of all businesses
What is a unique selling point?
USP stands for unique selling point or proposition, it means what makes this product different from others on the market?
It is a way of promoting the features of the product or service of the business; quality, customer service, delivery, price, technical features or function.
How can a business respond to customer needs quickly to gain an advantage over large businesses?
- Carrying out research into opinions,
looking at customers websites - Gaining feedback; forums, polls, users groups, online communities
- Track social media discussions about the products
- Collect data on customer transactions
- Collaborate with customers to produce new products or services
How can a small business survive through customer service?
How else can a business differentiate themselves from their competitors? By giving excellent customer service.
- Consumers appreciate businesses that give them more for their money, especially when times are tough.
- Efficient service, fast delivery and flexible payment terms will help to persuade customers to spend with them rather than a competitor.
How can small businesses survive through E-commerce?
- Small businesses can sell successfully through third party websites such as Ebay and Amazon
- 85% of UK consumers aged 18 or over already shop on the Internet
- E-commerce will grow from 14% to 34% of all retail sales by 2020
