3.2 - Business Growth Flashcards
Explain what the reasons are for a business staying small in size (5)
Personal service - many people prefer to do business with the company directly and are prepared to pay higher prices to do so
Owners preference - An owner may be happy with the businesses performance and may not want the added responsibility of growth
Flexibility and efficiency - small firms are often more flexible and innovative, able to react quicker to changes in market conditions
Low barriers to entry - Low set up costs make it easier for smaller businesses to compete
Small firms can be monopolists- can supply a service to the local community that no other firm does
Explain how product differentiation and USP’s allow small businesses to compete
What does a USP include
Make their product/service different to competitors, attracting customers and developing brand loyalty.
Includes: Quality, Customer service, Features and functions, Delivery and Price
Explain how flexibility in responding to customer needs allows small businesses to compete
Smaller businesses can identify new opportunities and meet the changing needs of customers faster than larger competitors. Can respond quicker to external factors and make a product more specific for the customer
Explain how customer service allows a small business to compete
Can differentiate a smaller business to their competitors. Easier for a smaller firm to have better communications with customers and offer a more personal service
Explain how E-commerce allows a small business to compete
Give examples of types of E-commerce
Can sell their product/service online to access the same customers as large competitors
Online shop- selling products online independents or through third party sites like Amazon and Ebay
Social media consultants- offer a service to improve a firms social media networking, to improve communications with customers
Information sites- provide information to customers and make revenue through advertisements
Tutoring or training- offering a service to customers who are willing to pay to learn something
Define Merger
Is a legal deal between two businesses of similar size bringing both firms together under one board of directors, with a name change usually taking place. E.g. T-mobile and Orange formed EE
Define Takeover
Is a legal deal where one business acquires another business , buying enough shares to have control over the business
What are reasons for mergers and takeovers (5)
Attempt to increase market share (increased control of market)
Access to technology, employees or property (acquiring a foreign firm to gain cheaper tax rates)
Access to new markets
Improved distribution networks
Improved brand awareness
Define a Friendly Takeover
Occurs because the business may have cash flow problems and invite a takeover from a stronger business, known as a white knight.
Define a hostile takeover
Occurs when the board of directors will try to resist takeover, but if 51% of shares are bought management and control changes
Define Integration
When businesses join together to form one
Define Horizontal integration
Occurs when two firms in the same sector and the same stage of production join together. Both have knowledge of the market and less risk of failure
Define Vertical Integration
Occurs when two firms in different sectors and stages of production join together. Can be forward, join with a firm in next stage of production, or backwards, join with firm in previous stage of production. Can lead to cheaper costs and a guaranteed supply output
What are the Financial Risks of mergers and takeovers (4)
Regulatory intervention - CMA has power to block a deal if they feel it goes against the interests of consumer
Resistance from employees - likely to be job losses , employees likely t9 disrupt proceedings, decreased productivity
Integration costs - complex, expensive and time consuming process to physically integrate two firms
Bidding wars - if more than one business wants to acquire a business the price starts to rise
What are the financial rewards of mergers and takeovers (4)
Speedy growth- grow quicker than internal methods leading to a larger market share,lower costs and economies of scale
Higher remuneration for senior employees - salaries of senior staff will rise as they are in control of a larger firm
Rewards for previous owners - owners of acquired business gain significant financial reward
Increased profitability - future revenues will increase and costs will decrease due to economies of scale, increasing profits
What are the problems of rapid growth (5)
Drain on resources - mergers and takeovers are expensive, can stretch financial resources
Coping with change- difficulty in merging two cultures, can cause conflict
Alienation of customers- can lose close relationship with customers, damaging brand image and a loss of customers
Loss of control- increased chain of command effects communication
Shortages of resources - increased demand for resources due to growth increases price
Define growth
Growth is a stage where a business reaches the point for expansion and seeks additional options to generate more profit
State the objectives of growth
Economies of scale
Increased market power
Increased market share and brand recognition
Increased profitability
Explain Economies of scale as a benefit of growth
List the types
Economies of scale are reductions in average costs arising from growth of the firm
Internal Economies of scale:
Financial EOS - Large firms have easier access to loans as they have large assets to offer as security
Purchasing EOS- Large firms buy large quantities of stock, lower average costs
Technical EOS - Large firms can invest in large scale technology which decreases average costs and increases productivity
Marketing EOS - Large firms have larger marketing budgets, spread put over a large output
Managerial EOS - Can employ specialist managers (marketing, finance ect), increasing efficiency and decreasing average costs
External economies of scale are reductions in Average costs arising from the growth of the industry. E.g. better transport infrastructure and suppliers relocating closer
Explain increased market power as a benefit of growth
Allows a large firm to dominate customers and suppliers in transactions
Suppliers- can force suppliers to decrease prices of materials
Customers - can charge higher prices and lack innovation due to lack of competition
Explain increased market share and brand recognition as a benefit of growth
Allows a firm to charge higher prices, create customer loyalty, enhance product recognition and launch new products easier as a result of increased power over the market.
Explain increased profitability as a benefit of growth
Increased profitability is more common in larger firms, allows investment and innovation to develop and launch new products, to grow even further
State the problems arising from growth
Diseconomies of scale
Internal communication
Overtrading
Explain diseconomies of scale as a problem of growth
List the types
Occurs where a large business expands production beyond the Minimum Efficient Scale (output that minimises average costs) and therefore average costs increase
Reasons for diseconomies of scale :
Control- less control leads to less productivity
Communication- harder to communicate
Coordination- hard to ensure all departments work similarly
Motivation- employees feel less valued, decreased productivity
Explain internal communication as a problem of growth
Is the exchange of messages inside a business. If a business grows too big there could be a problem and distortion with communication, leading to a waste of time, resources and productivity
Explain overtrading as a problem of growth
Why does it mostly occur
Occurs when a business tries to fund large volumes of business without sufficient resources, can run out of cash and collapse
Mostly occurs due to :
Do not have enough capital to produce large volumes
Offer too much trade credit to customers
Operating with slim profit margins , not enough profit to fuel growth
Define organic growth
Is a business growth strategy that involves a business growing gradually using its own resources
Define Inorganic growth
Is a business growth strategy that involves two or more businesses forming together to form one much larger one
State the methods of growing organically (5)
New customers New products New markets New business model Franchising
Explain new customers as a method of growing organically
A firm may gradually increase production to supply more customers , continuing to grow and expand when full capacity is reached
Explain new products as a method of growing organically
A firm may be very innovative and committed to research and development to be able to develop new products to stand out from competitors and grow
Explain new markets as a method of growing organically
A firm may replicate their operations and practices in a different area to increase their customer base
Explain new business models as a method of growing organically
Developments in technology or social change may change the way a business operates or grows. A firm may use e-commerce to grow
Explain franchising as a method of growing organically
Where the firm sells the naming rights and products to other entrepreneurs to sell, involves the franchisee opening a new store to trade in
Explain the advantages of organic growth (5)
Less risk than other growth strategies- errors are prevented as the culture and operations are already established.
Cheaper than other growth strategies- financed from retained profit with no finance costs, inorganic methods use external methods of finance, adding to the cost of growth
Maintain control- have complete control of the growth process and how they operate.
Better protected financial position- gradual growth so less strain on financial resources, allowing stronger cash flow
Less likely to have diseconomies of scale- sharp increases in unit costs are less likely to occur
Explain the disadvantages of organic growth (5)
Pace of organic growth may be too slow for shareholders -may sell their shares
May prevent the business from accessing the resources, knowledge and profitable developments owned by other businesses
Slow growth may mean the firm is left behind in the market - may lose ability to compete effectively
Longer time to achieve economies of scale- would have to operate at higher costs and lower profit margins for longer time
Not appropriate in a rapidly growing market
