3.2 - Growth Flashcards
Reasons to grow
- Increase profits
- Achieve economies of scale
- Increase market power
- Increase market share and brand recognition
- Grow shareholder value
Economies of scale
When unit costs decrease as output increases
Formula for unit costs
Total production costs / Total output
Types of internal economies of scale
- Purchasing
- Technical
- Managerial
- Marketing
- Network
- Financial
- Risk bearing
Examples of external economies of scale
- Many specialist suppliers close by
- Access to research and development facilities
- Pool of skilled labour to choose from
Diseconomies of scale
When unit costs increase as output increases
Reasons for diseconomies of scale
- Lack of motivation and co-operation
- Lack of co-ordination and control
- Negative effects of internal politics
Overtrading
When a business expands too quickly without having the financial resources to support such a quick expansion
Ways to manage the risk of overtrading
- Reduce inventory levels
- Leasing rather than buying capital equipment
- Improving payment terms with customers and suppliers
Factors causing overtrading
- Rapid business growth
- Insufficient working capital
- Excessive credit sales
- Overinvestment in fixed assets
Reasons to stay small
- Product differentiation and unique selling point
- Flexibility in meeting customer needs
- Deliver high standards of customer service
- Exploit opportunities from e-commerce
Takeover
When one business acquires control of another business
Reasons for takeovers
- Increase market share
- Acquire new skills
- Spread risks by diversifying
- Secure better distribution
- Acquire intangible assets (brands, patents and trade marks)
Benefits of a takeover
- Fast growth
- Access to new skills and technology
- Economies of scale
Drawbacks of a takeover
- High cost
- Cultural clashes
- Job losses
Forward vertical integration
When a business acquires or merges with another company further along the supply chain, typically closer to the final consumer. This usually means a manufacturer taking control of a distributor or retailer
Advantages of forward vertical integration
- Stronger market presence
- Cost savings
- More stable supply chain
Disadvantages of forward vertical integration
- High initial costs
- Less flexibility
- Management challenges
Backward vertical integration
When a business acquires or merges with another company earlier in the supply chain, typically a supplier. This means a company takes control of the production of its raw materials or components
Advantages of backward vertical integration
- Lower production costs
- Improved product quality
- Better negotiation power
Disadvantages of backward vertical integration
- Risk of inefficiency
- High initial costs
- Less flexibility
Horizontal integration
When a business merges with or acquires another company at the same stage of the supply chain within the same industry
Advantages of horizontal integration
- Stronger competitive position
- Cost savings
- Greater bargaining power
Disadvantages of horizontal integration
- Reduced innovation
- Culture clashes
- High costs
Conglomerate integration
When a business merges with or acquires another company in a completely different industry
Advantages of conglomerate integration
- Reduced industry-specific risk
- Stronger brand presence
- More opportunities for growth
Disadvantages of conglomerate integration
- Lack of industry expertise
- Potential for brand dilution
- Management complexity
Merger
When two companies agree to combine into a single entity
Benefits of a merger
- Stronger financial position
- Operational efficiency
- Boosts innovation
Drawbacks of a merger
- Job losses
- Regulatory issues
- Cultural challenges
Organic growth
Expansion of a business using its own resources, rather than through mergers, acquisitions, or takeovers. This growth is achieved by increasing sales, launching new products, or expanding into new markets
Advantages of organic growth
- Lower risk
- Maintains business control
- Sustainable growth
Disadvantages of organic growth
- Slower expansion
- Limited resources
- Missed opportunities
Inorganic growth
When a business expands through mergers, acquisitions or takeovers, rather than growing internally
Advantages of inorganic growth
- Rapid expansion
- Access to new skills and technology
- Increased market share
Disadvantages of inorganic growth
- Financial risk
- Regulatory hurdles
- Job losses
