3.2 - Growth Flashcards
What is growth?
When all aspects of the business expands
How can growth be achieved?
- opening new stores
- retained profit
- employ more staff
- produce more products
How can growth be shown?
- higher revenue
- more market share
- more control over suppliers
What is business growth?
The process of improving some measure of an enterprises success. This may be physical growth by expansion of financial growth.
Why do business want to grow?
- To increase profits
- To achieve economies of scale
- To increase market power
- To increase market share
- To increase profitability
What is the difference between internal economies of scale and external economic of scale?
- internal - economies which arise within the business as its scale operation expands (better management/ technology/ access to finance)
- external - economies which arise as the whole indsutry grows (growth in demand, could be in one region or area too)
What acronym can be used to remember internal economies of scale?
‘Really Fun Mums Try Making Pies’
R - Risk
F - Financial
M - Managerial
T - Technology
M - Marketing
P - Purchasing
What are the problems arising from growth?
- Diseconomies of scale
- Poor internal communication
- Poor employee motivation
- Poor managerial coordination
- Overtrading
What is a merger?
Where two firms of similar size agree to join forces permanently to create a new company that is twice the size of its predecessors.
What is a takeover?
- When one firms buys a majority of the shares in another and therefore achieves full management control.
- Hostile takeover is when shareholders agree for one firm to take over another.
- When a business gets 51% of the shares they can takeover.
What are the advantages and disadvantages of a merger?
- economies of scale
- eliminates competition
- increases market share & power
BUT - may be a clash of cultures
- diseconomies of scale - cost per output starts to increase
- less choice from consumers
What are the advantages and disadvantages of a takeover?
- eliminates competition
- increases market share & power
- venture into new businesses and markets
BUT - culture clashes
- diseconomies of scale
What is meant by synergy?
‘When two businesses come together it will be better than doubling’. Two firms together will have lower costs than each firm individually due to bulk buying.
What is meant by diversification?
Entering different markets to reduce dependence upon current products and customers in order to reduce risk
What is meant by market power?
When two companies merge, the combined businesses will have greater market power used to reduce the degree of competition within the market.
What is horizontal integration?
When one firm acquires another within the same industry at the same stage of the supply chain. E.g. Adidas buying Reebok
What are the advantages and disadvantages of horizontal integration?
- Huge scope for cost cutting by reducing duplication of sales force, distribution and marketing overheads
- opportunities for economies of scale
BUT - if there is competition the CMA may launch an investigation
What is meant by vertical integration?
When a company expands it business operations into different steps o the same production path e.g when a manufacturer owns its supplier.
What is backward vertical integration?
- Involves them purchase of or merger with suppliers up the supply chain. Companies pursue backward integration when it is expected to result in improved efficiency and cost savings.
- might cut transportation costs
What is forward vertical integration?
Control direct distribution or supply of a company’s products. Conducted by a company moving down the supply chain
What are the financial implications of mergers and takeovers?
- costs associated are huge
- merger - large amount of legal expenses due to formation of new company
- takeover - costs may be slightly smaller, particularly if the take over is friendly as the business is likely to be struggling so share prices will be lower.
What are the financial risks of mergers and takeovers?
- original purchase cost
- cost of change into a new business
- redundancies of duplicate staff e.g. two marketing managers
- cost if it all goes wrong
What are some financial rewards of mergers and takeovers?
- increased revenue —> increased profit —> reinvestment —> opportunities to grow
- EOS
What is organic growth?
Growth a company achieves from its existing businesses rather than newly acquired ones
What is inorganic growth?
Growth a company achieves from mergers or takeovers
What are the benefits of organic growth?
- allows the business to maintain control of their company
- higher production = business may benefit from EOS
- less risky
What are the drawbacks of organic growth?
- can take a long time to grow internally
- the rise of the market may restrict growth
- focusing in internal methods and efforts may cause the business to miss other opportunities.
