3.2 - Business Growth Flashcards
Economies of scale
Occurs when an increase in the scale of output results in a lower cost per unit, e.g. purchasing economies.
Diseconomies of scale
Occurs when an increase in the scale of output leads to higher costs.
Internal and external economies of scale
Internal - occur as a result of the growth in the scale of production within the business.
External - occur when there is an increase in the size of the industry which the firm operates.
Organic growth
Growth that is driven by internal expansion, using reinvested profits or loans.
Merger
Occurs when two or more companies combine to form a new company.
The original company doesn’t exist anymore and their assets and liabilities are transferred to the new company.
Takeover
Occurs when one company purchases another company, often against its will.
The acquiring company buys a controlling stake in the target companies shares (>50%) and gains control of its operations.
Growth creates
Economies of scale by allowing companies to reduce costs and increase efficiency through consolidation of operations.
Synergies
The benefits that result from the combination of two or more companies, such as increased revenue, cost savings, or improved product offerings. (2+2 = 5)
Elimination of competition
Takeover often used to eliminate competition and to increase market share.
Integration chain
Supplier - manufacturer - Distributor - retailer - End consumer.
Horizontal integration
A merger/takeover of a firm at the same stage of the production process. e.g. ice cream manufacturer buys another ice cream manufacturer.
Foreword vertical integration
Involves a merger/takeover with a firm further foreword in the supply chain, towards consumer.
E.g. Dairy farmer (supplier) merger with an ice cream manufacturer (manufacturer).
Backward vertical integration
Involves a merger/takeover with a firm further backwards in the supply chain, away from end consumer.
E.g. An ice cream retailer takes over an ice cream manufacturer.
Financial risks of inorganic growth
Overpayment, integration challenge, cultural differences, debt
Financial rewards of inorganic growth
Increased market share, synergy, diversification, access to new markets and increased value.
Problems caused by rapid growth
Strain on cash flow, increased management complexities, quality control issues, customer service issues, culture clash, diseconomies of scale.
Organic growth is usually generated by
Gaining greater market share, product diversification, opening a new store, international expansion (market development), investing in new technology/production machinery.
Advantages of organic growth
Manageable pace of growth, less risky as growth is financed by their profits and industry expertise, avoids diseconomies of scale, management knows and understands every part of the business.
Disadvantages of organic growth
Pace of growth can be slow and frustrating, not necessarily able to benefit from economies of scale, access to finance may be limited.
Ansoff’s matrix
Reasons to stay small
More personalised service, respond quickly to changing consumer needs, owners goal is not profit maximisation - rather high quality, provide a product in the nice market.
