3.2 Business growth Flashcards
Name 2 problems with growth
- diseconomies of scale
- internal communication
- overtrading
Define diseconomies of scale
Diseconomies of scale occur when a business grows too large and its cost per unit starts to increase instead of decrease
How can diseconomies of scale happen?
Coordination Problems: Managing a large business can become more difficult, leading to communication issues and slower decision-making processes.
Employee Motivation: As the company grows, employees may feel less engaged or have less individual responsibility, reducing overall productivity and motivation.
Increased Bureaucracy: Larger organizations tend to have more layers of management, which can create delays in decision-making and make the business less flexible.
Supply Chain Issues: A larger business may struggle to manage its supply chain effectively, resulting in higher transportation costs, delays, or inventory problems.
Higher Input Costs: Larger companies might need to pay higher wages to skilled workers or invest in more advanced technology, leading to increased operating costs.
What is overtrading
Overtrading occurs when a business expands its operations too quickly without having enough resources (like cash or credit) to support the increased activity
what are some signs of overtrading?
Cash Flow Problems: The business struggles to pay suppliers or meet other financial obligations because its cash is tied up in unsold stock or unpaid customer invoices.
Increased Debt: The business may take on more debt to finance its expansion, leading to higher interest costs and financial pressure.
Stock Shortages: The business might run out of inventory or experience delays in production due to insufficient resources to keep up with demand.
Stretched Resources: Staff may become overworked, and operational efficiency can suffer as the business tries to do more with limited resources.
Name 3 causes of overtrading
Rapid growth in sales or market share without proper financial planning.
Lack of sufficient working capital to cover the increased production costs or demand.
Poor management of cash flow and financial resources.
What are some groth objectives?
- to achieve economies of scale
- increase market share and brand recognision
- increase profitability
- increase market power over customers and suippliers
Define economies of scale
When a business produces more or the same amount of goods for a lower price, reducing their unit costs.
name 3 types of internal economies of scale
Purchasing, Technical, Managerial
Name 3 types of external economies of scale
Skilled workforce, Co-operation between firms, Support services
What type of roth are mergers and takeovers?
External growth
Define internal growth
Internal growth (also known as organic growth) refers to a business expanding its operations from within. This growth occurs through increasing sales, developing new products, entering new markets, or improving efficiency
Define a takeover
A takeover occurs when one company acquires control of another by purchasing a majority of its shares, effectively gaining control of its operations
Name 10 benefits of a takeover
- increased market share
- acquired new skills
- access economies of scale
- secure better distribution networks
- acquire trade marks, brand image,
- overcome barrier to entry to target markets
- defend against takeover threats
- eliminate competition
- spread risk by diversifying
- enter new segments of existing markets
Give 5 drawbacks of takeovers
- inloves high costs
- risks upsetting customers and suppliers
- problems of integration
- resistance from employees
- incompatibility of managment styles
Define mergers
A merger is the combination of two or more companies to form a new, single organization. Typically, both companies agree to merge, sharing resources, operations, and management to improve efficiency, market position, or profitability
What is Horizontal integration?
it is when a business mergers with another business , or takeover of , a business in the smae supply chain , for example bakery merging with another bakery
Define vertical integration
Integration with a business at different tages in the supply chain.
Name 4 consequences to horizontal integration
- economies of scale
- cost saving from cutting back duplicate functions
- wider product portfolio
- reduced competition
Name some advatnges of Vertical Integration
- Allows gretaer control over supply chain
- Improved acces to key raw materials
- gives better control over retail distribution channels
- creates barrier to entry to potentil new competitors
what are distribution channels?
Distribution channels refer to the paths or routes through which goods and services travel from the producer to the final consumer.
Name 5 ways in which a business can grow organically
Franchasing
Launching new product
Expandin into new markets
Increase number of employees
Developing channels of distribution to the market
Advatnages of organic growth
- Less risky than inorganic growth as it is more likely to be financed using retained profit
- less risky of losing control as share capital is less likely to be needed
- builds on business core strengths and abilities
- allowa business to grow at a more sensible rate potentially avoiding diseconomies of scale
Name disadvatages of oranic growth
-More likely to be slower than a taker over or a merger creating possible conflict with shareholders as well as perhaps missing out on maket opportunities
-scope for rowth may be more limited that an inorganic growth
- if may mnake it harder for business to compete if rivarls are using inorganic growth
- franchises is used can be hard to manage effectively
Names a few problames with rapid (inorganic) growth
- Culture clashes
- Gearing
- overtrading
- diseconomies of scale
- loss of control
Survival metods for small business in competitive market
- product differentiation and USP
- flexibility in responding to customer needs
- customer service
- E-commerce
Why might a business want to stay small?
Profit satisfycing
Owners may want full control of the business
Smaller business may have better relations with customers
define profit satisficing
Profit satisficing refers to a situation where a business aims to achieve enough profit to satisfy its owners or shareholders, rather than striving for maximum profit
define profit maximasation
Profit maximization is a business objective focused on achieving the highest possible profit by increasing revenue and reducing costs.
