3.2 business growth Flashcards
Define business growth
The point at which a business needs to expand and seeks options to generate more profits
Why might a business want to grow
To become more recognised
To start selling in new markets
Gain a larger audience
Be more attractive to shareholders
Generate more profit
Meet increases in demand
Spread risk
What are the objectives of growth
To achieve economies of scale
Increases market power over customers and suppliers -> porters five forces
Increased market share and brand recognition
Increased profitability
When does economies of scale occur
When unit costs or average costs fall as a result of an increase in output of the business
The more they make the cheaper it gets per item
If production is less expensive as average costs have fallen then this can increase the profit margins of the business or they can choose to reduce prices to gain more market share
What are the internal economies of scale (7)
- technical economies of scale
- purchasing economies
- managerial economies of scale
- financial economies of scale
- risk bearing economies from diversification
- network economies
- the marketing economies
Explain about technical economies of scale
I.e benefits of containerisation
A way in which a business can achieve economies of scale through large scale production so we can use more or more advanced technology -> increases productivity and output -> lower unit costs
Another way is the bigger a business gets, they usually have more funds for research and development -> new advanced technology -> further reduce unit costs
If businesses are mass producing they can use containerisation-> reduces unit costs
Explain about purchasing economies
Eg bulk buy
The bigger the business, the more bargaining power -> likely to get discounts for bulk buying
Links to porters 5 forces
Explain about managerial economies of scale
Using specialised staff
The bigger the business, the more able to take on specialist staff e.g accountant
As they’re specialists, they tend to be more efficient -> less wastage, lower unit costs
Explain about financial economies of scale
The bigger the business, the more able they are to negotiate terms on better finance -> longer pay back, lower interest rates
The bigger businesses are perceived to be less risky
Explain risk bearing economies from diversification
Diversifying spreads risk + fixed costs over more products -> reduces unit costs
Explain about network economies
Builds networks between supplies and customers
About being able to negotiate better terms
The bigger the business, the better able to negotiate discounts, better trade credit agreements, purchase bigger orders-> reduces unit costs
Explain the marketing economies
The business is able to spread the costs of marketing over more products
Bigger businesses can do this easier
The more products-> lower unit costs
Once businesses get so big they don’t need to advertise individual products, just the corporate name
What’s external economies of scale and what are they
Come about through what happens in the industry. Requires no investment from your business
- development of r+d facilities in local universities that several businesses in an area can benefit from
- spending by a local authority on improving the transport network for a local town/ city
- relocation of components suppliers and other support businesses close to the main centre of manufacturing are also an external cost saving
Explain development of r+d facilities in local universities that several businesses in an area can benefit from
The business may employ these people -> less training -> costs go down
Explain spending by a local authority on improving the transport network for a local town/ city
May reduce transport costs -> employees can get to work easier -> less absenteeism and easier to transport supplies and goods
Explain relocation of component supplies and other support businesses close to the main centre of manufacturing are an external cost saving
Don’t have to spend as much on transportation of supplies
Using local businesses -> may get a better price
Saves costs
Eg Nissan and other car part manufactures in Sunderland
Explain the objective of increased market power over customers and suppliers
Powerful suppliers-> can charge high prices, decreased trade credit terms -> can negatively impact cash flow
Powerful customers-> low prices , high quality -> raises costs and lowers revenue
Powerful customers come about because of limited choice in the market
A short to medium term objective which flows from the longer term
Explain the objective of increased market share and brand recognition
In dynamic and competitive markets, businesses may seek to grow to achieve increased market share
Other businesses may seek to buy other businesses in the same industry in order to acquire recognised brands
Explain the objective of increased profitability
Many businesses seek to grow and expand their profitability
This means as they increase their output, production becomes cheaper per unit (EofS) and the whole business becomes more profitable as costs are reduced
Measuring profitability: gross profit margin, operating profit margin, net profit margin
What’s profitability
How efficiently the business is able to change their revenue into profit
What are the problems of business growth
Diseconomies of scale
Internal communication
Over trading
They can be overcome it’s just how you manage them
Explain about diseconomies of scale
As the business grows they may expand the scale of production beyond the minimum efficient scale
At this point the average costs per unit starts to rise as production rises
Internal and external
What’s internal DEOS
To do with communication, coordination, motivation
What’s external DEOS
To do with overcrowding in industrial areas, traffic congestion, price of land and labour rises
What does the minimum efficient scale look like
Average/ unit costs along the side
Output on the bottom
The line slopes down unit it reaches a curve and starts to rise again
Once it reaches the bottom of the curve the average costs rise per item
What are the causes of internal DEOS
•Lack of motivation
Workers in large companies may feel demotivates with little say in their working life -> powerlessness and alienation -> increased absenteeism and lateness -> reduction in productivity, lower output per worker, increased unit costs
•Lack of coordination
As a company grows and takes on new staff, makes new products, buys new premises, there is more to coordinate.
All resources need to be controlled so that operations can run smoothly. Workers may need monitoring which can add to costs. May need more managers which increases average cost per unit
Explain about internal communication
As the size of the workforce increases, there will be less face to face communication
Takes a long time for messages to get through as there’s many layers of management
Less effective communication:
Means mistakes are made -> Means more wastage -> higher average unit costs
Explain about over trading
Over trading is where a business accepts more orders than it can cope with
This can result in cash flow problems because for example , if the business accepts a large order which isn’t getting paid for until the end of 3 months, they won’t be able to fulfill further large order as they will have no cash to buy stock with
What are the methods of growth
Mergers and takeovers
What’s a merger
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 but not always
Eg curry’s pc world
What’s a takeover
Aka an acquisition
A legal deal where one larger business purchases a smaller one
If the deal is unwanted by the board of directors then it’s a hostile takeover
Eg Michael Kors takes over Jimmy Choo
What are the reasons for mergers and takeovers
Tactical
Strategic
What are tactical reasons for mergers and takeovers
- Attempt to ensure increased market share -> quick way of increasing power in the market place
- Access to tech, staff or intellectual property (copyright patents)
What are strategic reasons for mergers and takeovers
- Access to new markers -> may allow for diversification with less risk
- Improved distribution networks
- Improved brand awareness
What’s horizontal integration
Business operating in the same sector merge or takeover another business in the same sector or on the same level of the supply chain
Eg hungry house -> just eat
What’s vertical integration
When one business in one sector takes over or merges with a business in another sector or part of the supply chain
Eg IKEA buys Romanian Baltic forests to control its raw materials
What’s are the 3 business sectors
Primary -> Involved in digging, fishing, mining eg farm
Secondary -> involved in manufacturing raw materials
Tertiary -> the services sector of the economy
What are the financial risks of mergers and takeovers
- original purchase cost because you may not get a return on investment if you sell for less
- cost of change into a new business eg name, uniform, product, packaging -> may not get a return on investment
- redundancies of duplicate staff
- cost if it all goes wrong
What are the financial rewards of mergers and takeovers
Increased revenue -> repaid increase as mergers and takeovers are inorganic growth
Economies of scale -> the more you produce, the lower the unit costs
Explain the problem of rapid growth : short term
Business that have merged may outgrow their premises in the short term-> may not be enough space for everyone to work efficiently
Morale may drop if staff can’t cope with the extra work so productivity may decrease. Extra work may include learning about new products, quality systems ect
There may be a shortage of cash to meet expansion costs -> impacts liquidity of the business as the less cash, the less able they are to pay for liabilities
The risk is that the business had to make sure the merger or takeover isn’t going to stretch cash flow to a point where they can’t pay running costs
Taking on more and more work to generate income places additional pressure on premises and staff
Explain the problem of rapid growth : management pressure
Management may be under pressure, operating reactively rather than proactively
Reactively-> because they’re unsure of the systems to deal with problems as they arise
Proactively-> try to tackle problems before they arise
The quality of the products and services may drop, causing an increase in customer complaints. Management may experience wider somas of control -> less able to monitor staff and staff being unsure of new products in the line = falling quality and complaints
What are some long term problems with mergers and takeovers
Clash of cultures
Possible communication problems -> taller structure-> more Human Resources -> slower communication or different systems
Possible move away from core competencies of original business may cause issues of control
Diseconomies of scale
Lack of understand of local markets leading to wrong promotional message
What’s organic growth
Give examples
The process of business growth which comes from within the business as opposed to mergers and takeovers
Increasing the product range
Opening more branches
Taking on new staff
What’s inorganic growth and give an example
A business had grown by buying its way into being larger
Could be through
A merger
Takeover
Joint venture
What are the methods of growing organically
New product launches
Opening new stores
Expanding into foreign markets
Expansion of workforce
Explain the method of organic growth : new product launches
If the risk pays off then the business will be able to enjoy increased revenue and increased profits
Links to product development
Explain the method of organic growth: opening new stores
A business can grow organically by opening new stores eg H&M planned to open 400 new stores in China
Explain the method of organic growth: expanding into foreign markets
What are 5 factors the business needs to consider to sell in new markets
Can be through exporting goods and services abroad or through opening new stores in foreign countries
Links to market development
5 factors the business needs to consider to sell into new markets
- Level and growth of disposable income
- Infrastructure
- Political stability
- Exchange rates
- Ease of doing business
Explain the method of organic growth: expansion of workforce
What do they need to consider
Can take on new staff
Things to consider/ risks:
- cost of recruitment
- cost of low productivity if no/low demand
- cost of redundancy if staff no longer needed
- cost of training new/ existing staff
- wage bill increases -> especially if structure is getting taller - more management wages
What are the advantages of organic growth
- avoids all the risks and pitfalls of merging with another business
- cheaper than merging as don’t have the initial purchase cost involved with a merger or takeover, no redundancies or duplicate staff -> cheaper in short term
- retains company culture
- can be planned for unlike a takeover, can plan for speed of growth and what happens when
- higher production means EofS and lower average costs
- more influence comes with more market share, can start setting prices for the industry. Links to porters five forces as they have more power
What are the disadvantages of organic growth
- Very high risk strategy
- long period between investment and return on investment
- growth may be limited and is dependent on relatability of sales forecasts and the market
- new markets and countries can be dangerous to enter into
Explain the disadvantage of organic growth : high risk strategy
- Very high risk strategy -> opening lots of new stores and taking on lots of new staff is very risky and capital intensive -> cost of training may be high, new stores may not do well, high costs of recruitment and selection
Can lead to problems due to having to invest lots of cash into hiring new staff and opening new stores such as:
Cash flow problems
Wage bill increases
Long time between initial investment and return on investment
Explain the disadvantage of organic growth : long period between investment and return on investment
May cause issues with shareholders who want a quick return -> the type of business will influence the significant of this -> ltd’s might be more willing to wait for the return as shareholders are friends and family -> would prefer long term growth but plc’s may want a quick return for shareholders
Explain the disadvantage of organic growth: growth may be limited and dependent on reliability of sales forecasts and the market
Is the market growing? Which businesses already operate in it?
Boston matrix or a marker map would be useful
Explain the disadvantage of organic growth: new markets and countries can be dangerous to enter into
Can be dangerous to enter into without buying a a business already operating in that country.
May be moving away from key competencies
Define a small business
Small to medium sized enterprises (SMEs) are any businesses with fewer than 250 employees
What’s a micro business
0-9 employees
What are the benefits of a small business
Product differentiation or USP
Flexibility in responding to customer needs
Customer service
E-commerce
Explain the benefit of a small business: product differentiation or USP
Differentiation strategy of small businesses creates:
value, highlights quality or durability of product, focuses on non price competition like attracting customers through taste and style, can gain customer loyalty, may give the impression there’s no suitable substitutes
USP of small business:
Is a way of promoting the product or services features, quality, customer service, delivery, price, technical features or functions
Explain the benefit of a small business: flexibility in responding to customer needs
A small business can gain significant competitive advantage over larger companies if it responds quickly to customers needs
It can do this by:
- carrying out research into opinions
- gaining feedback, forums, polls, users, groups, online communities
- track social media discussions about the products
- collect data in customer transactions
- collaborate with customers to produce new products or services
Explain the benefit of a small business: customer service
Consumers appreciate the businesses that give them more for their money, especially when times are tough
Efficient service, fast delivery and flexible payment terms will help persuade customers to spend with them rather than a competitor
Explain the benefit of a small business: e-commerce
Small businesses can sell successfully through third party websites like Amazon -> they don’t have to Grow by opening new stores or even set up their own website
Can gain access to a wide audience as 85% of Uk consumers aged 18+ already shop online
24/7 sales allow a business to benefit from increased revenue without the investment of opening physical stores. Can also be worldwide
Less overheads-> low costs -> important for small businesses to keep costs low as they don’t benefit from EofS
