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Business > 3.2 business growth > Flashcards

3.2 business growth Flashcards

1
Q

Define business growth

A

The point at which a business needs to expand and seeks options to generate more profits

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2
Q

Why might a business want to grow

A

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

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3
Q

What are the objectives of growth

A

To achieve economies of scale

Increases market power over customers and suppliers -> porters five forces

Increased market share and brand recognition

Increased profitability

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4
Q

When does economies of scale occur

A

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

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5
Q

What are the internal economies of scale (7)

A
  • technical economies of scale
  • purchasing economies
  • managerial economies of scale
  • financial economies of scale
  • risk bearing economies from diversification
  • network economies
  • the marketing economies
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6
Q

Explain about technical economies of scale

A

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

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7
Q

Explain about purchasing economies

A

Eg bulk buy

The bigger the business, the more bargaining power -> likely to get discounts for bulk buying

Links to porters 5 forces

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8
Q

Explain about managerial economies of scale

A

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

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9
Q

Explain about financial economies of scale

A

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

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10
Q

Explain risk bearing economies from diversification

A

Diversifying spreads risk + fixed costs over more products -> reduces unit costs

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11
Q

Explain about network economies

A

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

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12
Q

Explain the marketing economies

A

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

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13
Q

What’s external economies of scale and what are they

A

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
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14
Q

Explain development of r+d facilities in local universities that several businesses in an area can benefit from

A

The business may employ these people -> less training -> costs go down

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15
Q

Explain spending by a local authority on improving the transport network for a local town/ city

A

May reduce transport costs -> employees can get to work easier -> less absenteeism and easier to transport supplies and goods

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16
Q

Explain relocation of component supplies and other support businesses close to the main centre of manufacturing are an external cost saving

A

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

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17
Q

Explain the objective of increased market power over customers and suppliers

A

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

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18
Q

Explain the objective of increased market share and brand recognition

A

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

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19
Q

Explain the objective of increased profitability

A

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

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20
Q

What’s profitability

A

How efficiently the business is able to change their revenue into profit

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21
Q

What are the problems of business growth

A

Diseconomies of scale

Internal communication

Over trading

They can be overcome it’s just how you manage them

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22
Q

Explain about diseconomies of scale

A

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

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23
Q

What’s internal DEOS

A

To do with communication, coordination, motivation

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24
Q

What’s external DEOS

A

To do with overcrowding in industrial areas, traffic congestion, price of land and labour rises

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25
Q

What does the minimum efficient scale look like

A

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

26
Q

What are the causes of internal DEOS

A

•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

27
Q

Explain about internal communication

A

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

28
Q

Explain about over trading

A

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

29
Q

What are the methods of growth

A

Mergers and takeovers

30
Q

What’s a merger

A

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

31
Q

What’s a takeover

A

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

32
Q

What are the reasons for mergers and takeovers

A

Tactical

Strategic

33
Q

What are tactical reasons for mergers and takeovers

A
  1. Attempt to ensure increased market share -> quick way of increasing power in the market place
  2. Access to tech, staff or intellectual property (copyright patents)
34
Q

What are strategic reasons for mergers and takeovers

A
  1. Access to new markers -> may allow for diversification with less risk
  2. Improved distribution networks
  3. Improved brand awareness
35
Q

What’s horizontal integration

A

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

36
Q

What’s vertical integration

A

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

37
Q

What’s are the 3 business sectors

A

Primary -> Involved in digging, fishing, mining eg farm

Secondary -> involved in manufacturing raw materials

Tertiary -> the services sector of the economy

38
Q

What are the financial risks of mergers and takeovers

A
  • 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
39
Q

What are the financial rewards of mergers and takeovers

A

Increased revenue -> repaid increase as mergers and takeovers are inorganic growth

Economies of scale -> the more you produce, the lower the unit costs

40
Q

Explain the problem of rapid growth : short term

A

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

41
Q

Explain the problem of rapid growth : management pressure

A

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

42
Q

What are some long term problems with mergers and takeovers

A

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

43
Q

What’s organic growth

Give examples

A

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

44
Q

What’s inorganic growth and give an example

A

A business had grown by buying its way into being larger

Could be through
A merger
Takeover
Joint venture

45
Q

What are the methods of growing organically

A

New product launches
Opening new stores
Expanding into foreign markets
Expansion of workforce

46
Q

Explain the method of organic growth : new product launches

A

If the risk pays off then the business will be able to enjoy increased revenue and increased profits

Links to product development

47
Q

Explain the method of organic growth: opening new stores

A

A business can grow organically by opening new stores eg H&M planned to open 400 new stores in China

48
Q

Explain the method of organic growth: expanding into foreign markets

What are 5 factors the business needs to consider to sell in new markets

A

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

  1. Level and growth of disposable income
  2. Infrastructure
  3. Political stability
  4. Exchange rates
  5. Ease of doing business
49
Q

Explain the method of organic growth: expansion of workforce

What do they need to consider

A

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
50
Q

What are the advantages of organic growth

A
  • 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
51
Q

What are the disadvantages of organic growth

A
  • 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
52
Q

Explain the disadvantage of organic growth : high risk strategy

A
  • 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

53
Q

Explain the disadvantage of organic growth : long period between investment and return on investment

A

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

54
Q

Explain the disadvantage of organic growth: growth may be limited and dependent on reliability of sales forecasts and the market

A

Is the market growing? Which businesses already operate in it?

Boston matrix or a marker map would be useful

55
Q

Explain the disadvantage of organic growth: new markets and countries can be dangerous to enter into

A

Can be dangerous to enter into without buying a a business already operating in that country.

May be moving away from key competencies

56
Q

Define a small business

A

Small to medium sized enterprises (SMEs) are any businesses with fewer than 250 employees

57
Q

What’s a micro business

A

0-9 employees

58
Q

What are the benefits of a small business

A

Product differentiation or USP

Flexibility in responding to customer needs

Customer service

E-commerce

59
Q

Explain the benefit of a small business: product differentiation or USP

A

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

60
Q

Explain the benefit of a small business: flexibility in responding to customer needs

A

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
61
Q

Explain the benefit of a small business: customer service

A

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

62
Q

Explain the benefit of a small business: e-commerce

A

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

Business (18 decks)

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