3.2 - Business Growth Flashcards
1
Q
What are the main objectives of growth?
A
- Achieve economies of scale
- Increased market power over customers and suppliers
*Increased market share and brand recognition - Increased profitability
2
Q
What are internal economies of scale?
A
These occur as a result of the growth in the scale of production within the firm
3
Q
What are the different types of internal economies of scale?
A
- Financial
- Managerial
- Marketing
- Purchasing
- Technical
- Risk bearing
4
Q
What are external economies of scale?
A
These occur when there is an increase in the size of the industry in which the firm operates
5
Q
What are the different types of external economies of scale?
A
- Geographic cluster
- Transport links
- Skilled labour
- Favourable legislation
6
Q
What are financial economies of scale?
A
- Large firms often receive lower interest rates on loans than smaller firms, as they are perceived as less risky
- A cheaper loan lowers the cost per unit (average cost)
7
Q
What are managerial economies of scale?
A
- Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost (AC)
- Managers in small firms often have to fulfill multiple roles and are less specialised
8
Q
What are marketing economies of scale?
A
- Large firms spread the cost of advertising over a large number of sales and this reduces the AC
- They can also reuse marketing materials in different geographic regions, which further lowers the AC
9
Q
What are purchasing economies of scale?
A
- Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the AC
10
Q
What are technical economies of scale?
A
- Occur as a firm can use its machinery at a higher level of capacity due to the increased output, thereby spreading the cost of the machinery over more units and lowering the AC
11
Q
What are risk bearing economies of scale?
A
- Occur when a firm can spread the risk of failure by increasing its number of products, i.e. greater product diversification - less failure lowers AC
12
Q
What are geographical cluster economies of scale?
A
*As an industry grows, ancillary firms (such as suppliers) move closer to major manufacturers to cut costs and generate more business
* This lowers the AC e.g. car manufacturers in Sunderland rely on the service of over 2,500 ancillary firms
13
Q
What are transport links economies of scale?
A
- Improved transport links develop around growing industries to hep get people to work and to improve the transport logistics
- This lowers the AC e.g. Bangalore is known as India’s Silicon Vallet & transportation projects have been successful in transforming the movement of people and goods
14
Q
What are skilled labour economies of scale?
A
- An increase in skilled labour can lower the cost of skilled labour, thereby lowering the AC
- The larger the geographic cluster, the larger the pool of skilled labour
15
Q
What are favourable legislation economies of scale?
A
- This often generates significant reductions in AC as governments support certain industries to achieve their wider objectives
16
Q
What are the main problems that can arise from growth?
A
- Diseconomies of scale
- Internal communication
- Overtrading
17
Q
What are diseconomies of scale as a problem that arises from growth?
A
- Occurs when a company grows too large, making it difficult to manage and control its operations
- It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control
- The cost per unit ends up increasing as a result of these inefficiencies
18
Q
What is internal communication as a problem that arises from growth?
A
- Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination
- This may result in delays, errors, missed opportunities, and impact on employee morale
19
Q
What is overtrading as a problem that arises from growth?
A
- Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity)
- This may cause cash flow problems or decreased customer satisfaction e.g. a company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers
20
Q
What is a merger?
A
- A merger occurs when two or more companies combine to form a new company
- The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
21
Q
What is a takeover?
A
- A takeover occurs when one company purchases another company, often against its will but not always
- The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations
22
Q
Why might a business want to integrate with another (merge or takeover)?
A
- Tactical Reasons
- Ensure an increase in market share
- Access to technology
- Access to staff
- Access to intellectual property such as patents
- Strategic reasons
- Access to new markets
- Improved distribution networks
- Improved brands
23
Q
What are the advantages of mergers/takeovers?
A
- Synergy - the combined company is worth more than the sum of its parts
*Economies of scale - Increased revenues and market share
*Cross-selling - sell each other the products and services - Diversification
*Acquiring unique capabilities and resources - International expansion
24
Q
What are the disadvantages of mergers/takeovers?
A
*Original puchase cost
* Cost of change into a new business
*Redundancies of duplicate staff e.g. only 1 marketing dept. needed
* Cost incurred if the merger fails
25
What is horizontal integration?
The merger or takeover of a business producing the same or similar goods and services (operates in the same sector and industry)
26
What is vertical integration?
* Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain - e.g. a dairy farmer merges with an ice cream manufacturer
* Backward vertical integration involves a merger or takeover with a firm further backward in the supply chain - e.g. an ice cream retailer takes over an ice cream manufacturer
27
What are the advantages of horizontal integration?
* The rapid increase in market share
* Reductions in the cost per unit due to economies of scale
* Reduces competition
* Existing knowledge of the industry means the merger is more likely to be successful
* The firm may gain new knowledge or expertise
28
What are the disadvantages of horizontal integration?
* Diseconomies of scale may occur as costs increase - e.g. unnecessary duplication of management roles
* There can be a culture clash between the two firms that have merged
* The price paid for the new firm may take a long time to recoup
29
What are the advantages of vertical integration?
* Reduces the cost of production as middleman profits are eliminated
* Lower costs make the firm more competitive
* Greater control over the supply chain reduces risk as access to raw materials is more certain
* The quality of raw materials can be controlled
* Forward integration adds additional profit as the profits from the next stage of production are embodied
* Forward integration can increase brand visibility
30
What are the disadvantages of vertical integration?
* Diseconomies of scale occur as costs increase - e.g. unnecessary duplication of management roles
* There can be a culture clash between the two firms that have merged
* Possibly little expertise in running the new firm, due to it being in a different sector, which results in inefficiencies
* The price paid for the new firm may take a long time to recoup
31
What are the financial rewards of mergers/takeovers?
* Increased market share
* Synergy - the value of the two firms combined is greater than the value of each separate part
* Diversification
* Access to new markets
* Increased value
32
What are the financial risks of mergers/takeovers?
* Overpayment - not being able to recoup the investment through increased revenue or cost savings
* Integration challenges - integrating two companies can be complex and costly
* Cultural differences - clashes
* Regulatory hurdles - opposition from regulators or other stakeholders
* Debt - may take on debt to acquire which can increase financial risk and reduce flexibility
33
What are the problems caused by rapid growth?
* Strain on cash flow (if revenue does not keep up with the expenses)
* Increased management complexities
* Quality control issues
* Customer service issues
* Culture clash
* Diseconomies of scale
34
What is the difference between organic and inorganic growth?
Organic growth is growth that is achieved by increasing output and enhancing sales, as opposed to inorganic growth from mergers or takeovers
35
What are the methods of organic growth?
* Gaining greater market share
* Product diversification
* Opening a new store
* International expansion
* Investing in new technology/production machinery
36
What are the advantages of organic growth?
* The pace of growth is more manageable
* Less risky, as growth is financed by profits and there is industry expertise
* Avoids diseconomies of scale
* The management knows and understands every part of the business
37
What are the disadvantages of organic growth?
* The pace of growth can be slow and frustrating
* Not necessarily able to benefit from economies of scale
* Access to finance may be limited
38
Why may firms choose to remain small?
* Can offer a more personalised service and focus on building relationships with customers
* They are unable to access finance for expansion
* The provide a product that is in a niche market - smaller market size, little room for growth
* By remaining small, there is a high ability to respond quickly to changing customer needs/preferences
* Rapid growth can cause diseconomies of scale which can be difficult to deal with
* Owners goal may not be profit maximisation but rather a goal such as having an acceptable quality of life (satisficing)
