3.9 - Business growth Flashcards
explain why Larger businesses are more stable than small businesses.
§ Business size- revenue, profit, market share, number of employees, assets. When a business grows, these increase.
§ An increase in sales volume and revenue – greater profits= re-invested – stimulate more growth
§ Bigger market share- business has more influence . high market share- influence to control prices
§ Larger businesses benefit from E.O.S and economies of scope- lower unit costs
§ Bigger businesses – range of products or service- adapt to market changes. Businesses change- increase dividends
state and explain types of economies of scale
rts
experience curve issues
Old- 1966
§ Complacency- Market leaders
§ Experiences vs resistance to
change
§ Labour efficiency- less wate
§ Labour specialisation
§ Advances in capital
§ Input mix
External economies of scale makes a whole industry or area more efficient
Occurs when industries are more concentrated in small geographical areas
§ Having large number of suppliers to choose from gives E.O.S. locating near lots of suppliers- negotiate with a
range – increase quality and reduce prices
§ A good skilled local labour supply – industry more efficient. Most imp for industries where training is expensive
Experience curve:
As a business grows – increases its
experiency = inc. efficiency = cost per unit to decrease. BTE
§ Cost adv porters generic strategy
§ Lower prices- MS inc
§ Monopoly BTE- inc price. E.O.S
§ Lower costs. MAX MS
The impact of growth or retrenchment on the functional areas of the business
rts
expl. Economies of scope- more variety is cheaper
why it is cheaper
Business produced multiple products instead of specialising in one- cheaper for one business to produce many
products. Extending product range, specialist expertise or competency, current equipment, where similar raw
mat inputs, distribution, logistics
§ Maximise use of resources. Share expertise. ADV- spread risk
§ Business that have people/ infrastructure = more efficient at producing an additional product. Able to expand
the production dept without having to expand other dept- unit costs decrease
§ Existing businesses benefit from brand loyalty- know the brand, more likely to buy other products they make
§ Economies of scope- charge lower prices due to lower unit costs= comp adv – force rivals out the market
expl. Diseconomies of scale
expl. retrenchment
may be necessary to remain profitable. Often due to D.E.O.S, declining markets, economic
recession. improved competitor performance, low ROCE, high gearing, failed takeover to survive
Retrenchment means that business will have to downsize in some areas. Achieved by:
§ Cutting jobs- sales are decreasing, business decrease its wage bill by cutting jobs- reduce labour costs
§ Reducing output- selling fewer units- reduce output and capacity- reduce costs
§ Withdrawing from markets- businesses cost to stop selling in less profitable market
§ Splitting the business up (de merging) easier to manage and control a smaller business, might split up into
several smaller ones and focus on making each one profitable
§ Reduce product portfolio- reduce losses from a particular product being unprofitable
1. Retrenchment affects workers- if a business retrenches too quickly (e.g. a recession), impact on workers is
significant- lead to decreased productivity- problem even worse (may)
2. Leave unprofitable markets due to low ROCE. Leave market due to economic downturn. Reduce D.E.O.S. Focus
on core competencies
Problem with Retrenchment:
Lose gain from E.O.S/ economies of scope if product portfolio Is reduced
§ Lose gains from experience curve If redundancy issues- less corporate
knowledge- increase avg cost p/u
§ Reduce motivation. Wider impact on stakeholders.
Why firms restrict growth or retrench:
Maintain culture of small business.
Conflicts between shareholders
and owners
§ Business will become too
complicated to manage
§ Growth required additional
financial resources
§ May not want to strain cash flow
Impact of retrenchment:
Finance- ease cash flow issues, generate cash to reduce gearing/ debt
§ Less focus on e/r fluctuations – support cost cutting
§ Operations- E.OS- depends on positioning to min efficient scale. Capacity utilisation- high =efficient
§ HR- impact organisational structure. Delayering-flatter structure- motivational gains Redundancy package.
Depends on which staff have been made redundant
§ Marketing- reduce product portfolio, pricing strategies, distributional channels
The scale and scope of retrenchment can have limited or significant changes.
§ Small-scale, incremental retrenchment has only limited impact
§ Significant retrenchment is often associated with a fundamental reappraisal of the business
Common Actions & Possible Implications for Change
rts
Organic growth (internal growth) means increasing production scale:
: investing and employing more resources
§ Growth as a result of a firms increasing capacity through retained profit- increasing output - building a larger
factory, hiring more workers, increasing raw mat, product portfolio, distribution channel or outlets, overseas
expansion. Offshoring, outsourcing, e-commerce
+ve organic growth
a firm has control over exactly how this growth occurs, less risk than inorganic growth (risk – averse)
§ Integration is expensive, time-consuming, evidence suggesting that the long-term share price of the company falls
following integration. Maintain current management style, culture
§ Existing shareholders retain control over firm, reduce conflicts in objectives. No divorce of ownership and con
§ Firms grow by building upon their strengths and using own funds, retained profits, fund the growth. Firm is not
building up debt- growth is more sustainable
§ Less disruptive changes- workers efficiency, productivity, morale is high. Under armour, LEGO (examples)
-ve organic growth
slow,
§ Organic growth - too slow for directors who wish to maximise their salaries, rapid growth of revenues and profits
§ More difficult for firms to get new ideas.
§ Difficult to build market share if one business is already a clear leader
§ Firms might rely on the strength of the market to grow, - limit how much and how fast their can grow.
§ Sometimes another firm has market or asset which company would be unable to gain through organic growth.
§ Businesses might miss out on opportunities for ambitious growth- if rely on internal
Growth as a result of takeovers and mergers:
- A takeover is when one firm buys another firm, becomes part of the first firm (controlling interest). Agreed/
hostile - A merger is when two firms unite to form a new company. Merger – motive= synergy- more rev and cost savings
- External growth can happen through horizontal integration, vertical integration, or conglomerate integration
- Horizontal and vertical integration happen between firms in the same market
§ External growth can rapidly increase the capacity, workforce, technology, skills and assets- increasing MS. Spread
risks
§ Main motive for mergers = synergy- business after the merger is more profitable than the business before the
merger. Merged businesses = more rev/ cost savings than independent businesses. Could be synergy failure, high
risk
Growing large brings problems:
Diseconomies of scale, poor communication, organisation- only solution may be retrenchment
§ Growing companies- difficult to manage cash flow- invest in assets- less cash available for day to day expenses
§ Fast growth- risk of overtrading. Increased demand – firms have to buy more and more materials and employ
more people- they don’t have money available to pay bills. Strain on working capital. Reduce receivables, increase
payable. Growing can change it from an LTD to PLC.
(external growth) Original owners lose control (affects strategy)
Make managers shorter – termism. Shareholders see quick ROI
§ More open to a hostile takeover- controlling interest
§ Businesses need to avoid growing so much they dominate the market and become a monopoly- attracts CMA
Why businesses grow:
Increase shareholder value
§ Shareholder pressure- beyer and Monsanto
§ Increase market share
§ Growth
§ Economies of scale
Forward and backward vertical integration:
integration of firms in the same industry but at different stages in the
production process/ VALUE CHAIN
§ If merger takes the firm back towards the supplier of a good= backwards integration. Forward integration is
when the firm is moving towards the eventual consumer of a good
+ve forward and back ward integration
Firms can increase their efficiency, through gaining economies of scale- reduce their AC= lower prices.
Creates barriers to entry
§ Firms have more control of the market. Removing suppliers, crucial information from competitors- market less
contestable, taking market intelligence away. Vertical- can sell directly to public
§ Backwards integration- firms can control the price they pay for their supplies, and they could raise the price for
other firms= cost advantage over their competitors.
§ Backwards - tighter control of supply chain, can dictate who you supply to
§ Backwards - control the quality of suppliers, ensure delivery is reliable. Not concerned - exploited by suppliers,
costs low, lower prices for consumers- increase comp and sales
§ Firms have more certainty over their production, with factors such as quality, quantity, and price.
§ Less risk -suppliers don’t worry about buyers not buying their goods and buyers don’t worry about suppliers not
supplying their goods
§ Forward integration secures retail outlets - restrict access to these outlets for competitors. Better control over
retail distribution channels, build revenues
-ve vertical integration
: Firms may have no expertise in industry they took over. Diseconomies of scale could be considered.
§ Vertical integration- barriers to entry- might discourage or limit the entrance of new firms- lead to a less
efficient market- firm has little incentive to reduce average costs when their market share is high.
§ Mergers can often create new problems of communication and coordination- DEOS
franchising
why might orgs do this
franchisors grants a license to another
businesses to allow it to trade using the brand/ business
format
Internal growth. Organisations may look to franchise
their brand to grow- useful strategy as:
§ Classical growth strategy for proven business format
§ Enables much quicker geographical growth for
relatively low investment
§ Option to open locations that are operated by
franchisor
§ Capital investment by franchises an imp source of
growth finance
Advantages of franchising
§ Running your own business
§ Pre established business- less risk
§ Easier to raise finance
§ Buying power of franchisor
§ Low risk methods
Disadvantages of franchising for franchisee:
Not cheap – initial fees + commission
§ Restrictions in action.
§ Franchisor owns the brand
§ Could fail
Horizontal integration-
combining firms that are at the same stage of the production process in the same industry–
+ve horizontal int
§ Reduce competition as competitor is removed - increases market share, firms power to influence markets, l/r
pricing power. Potential to secure revenue synergies
§ Firms grow quickly, which can give them a competitive edge over other firms in the market
§ Firms specialise and rationalise, reducing the areas of the businesses which are duplicated.(cost savings)
§ Grow in a market where it already has expertise, which is more likely to make the merger successful.
§ Monopsony power- buy their stock at a lower price, increasing efficiency.
§ Firms can increase output quickly, so they can take advantage of economies of scale. (lower LRAC)
§ The 2 firms have expertise in the same industry, so the merged firm can gain advantages, such as in marketing.
§ Wider range of products – diversification creates opportunities for economies of scope
§ Buying an existing and well-known brand = cheaper than organically growing = BTE higher 4 rivals higher l/r
monop profits
-ve horizontal inte
Increase risk for the business as if that market fails, waste of investment
§ Risk of diseconomies of scale - clashes of management style and culture,
§ Mergers risk destroying shareholder value - synergies never materialize. mergers fail to achieve gains SV
§ Risk of attracting investigation from the competition authorities= lessening of competition in a market
§ Recued flexibility- more personnel -need for transparency, accountability slow down the rate of innovation
Conglomerate integration
combining firms which operate in completely different markets
§ Product extension mergers- firms making related products
§ Geographic extension merger- firms in same industry, different geographic markets
+ve conglomerate
§ It is useful for firms where there may be no room for growth in the present market.
§ The range of products reduces the risk for firms and if a whole industry fails, they will still survive
§ It will make it easier for each individual part of the business to expand than if they were on their own as finance
can be easily obtained and managers can be transferred from company to company within the firm.
-ve conglomerate
. The problem with this is that firms are going into markets in which they have no expertise. It can often be
damaging for the business. D.E.O.S
hostile and agreed takeovers and ventures
rts
Adv & dis of joint venture:
Adv of joint venture:
§ Partners benefit from
expertise and resources
§ Partner may have
option to acquire in
future
§ Reduces risk of growth
Dis:
§ Conflicts in decision
making
§ Split profits
expl. external growth as a risky strategy
rts
Overtrading
firms become too confident and expand rapidly without organising long term funds and put a strain on
working capital w/o org l/t funds. During rapid expansion this means a firm needs to buy more and more materials,
but lacks the money because its customers have not yet bought the goods.
retail chains (overtrading0
Keen to open new outlets
§ Have to pay rent in advance, pay shop fitters, pay for stock
§ Large outlay before sales
§ Businesses rely on l/t contracts also at high risk of overtrading
How to resolve overtrading:
§ Reducing inventory levels
§ Leasing rather than buying capital equipment
§ Obtaining better payment terms from suppliers
§ Enforcing better payment terms with customers
§ Scaling pace of rev growth till profit margins/ reserves improved
Overtrading is most likely to occur if:
Growth is achieved by making
significant capital investment in
production or operations capacity
before revenues are generated
§ Sales are made on credit and customers
take too long to settle amounts owed
§ Significant growth in inventories is
required in order to trade from the
expanding capacity
§ A long-term contract requires a
business to incur substantial costs
before payments are made by
customers under the contract
Synergy
§ Eliminate duplicated functions & services
§ Better deals from suppliers
§ Higher productivity & efficiency from shared
assets
Revenues
§ Cross-selling to customers of both businesses
§ Access to new distribution
§ Brand extensions
§ New geographic markets opened up
Takeovers- negative synergy= reduces efficiency
External growth methods are quicker and used to gain resources:
Much quicker and can rapidly increase capacity, workforce,
tech, assets- inc Sales- INC MS
§ Diversification- combine with existing business
§ Reduce comp- takeovers and mergers in same market
§ Move into another country- combine with comp w
established infra
§ Same industry- E.O.S and scope
Busines owners may choose to restrict growth or retrench:
They may want to maintain the culture of a small business.
§ The business will become more complicated to manage as it
gets bigger.
§ Growth requires the business to secure additional financial
resources, which can be complicated.
§ They may not want to put too much strain on their cash flow
position.
Greiner’s model of growth
describes different phases of growth over time but periodically reach a crisis point
§ Suggests each phase of growth is followed by a crisis where action needs to be taken- a revolution
list and explain all phases
Phase 1: Creativity—leadership crisis
§ When a business is starting up its often very creative and everyone in the business can share ideas easily. Once the
business gets to a certain size, there’s a need for strong leadership to give company direction and structure
Phase 2: Direction—Autonomy crisis
§ Leaders set up a formal organisational structure with defined dept and roles. Employees become more
experienced- more say in decisions and business will be too big for senior managers to manage everything. More
autonomy through delegation is needed (DECENTRALISATION)
Phase 3: Delegation—control crisis
§ More power and responsibility is delegated down to middle-managers and the organisational structure may become
decentralised. Leaders may try to regain some control in order to have a more coordinated business that is
optimising its use of the resources available.
Phase 4: Coordination—Red tape crisis:
§ As control is regained by senior managers, certain decisions become centralised and new procedures to coordinate
diff areas of the business are implemented, however, can be too many procedures, decrease efficiency as people ae
constantly waiting for decisions to be made and approved.
Phase 5: collaboration—Growth crisis:
§ To continue growing- some formal procedures are replaced by collaboration between dept and teams. More focus
in on communication and info management. Company might struggle to grow internally and consider external
growth
Phase 6: Growth through alliances- mergers, takeovers—Growth Crisis (overtrading)
benefits of greiners
It provides a number of
identifiable challenges companies
may face.
* It’s simple to understand and
shows a way forward for growth.
* Different phases for a company
to identify their current position
are highlighted.
Criticisms of griners
simplistic
§ Not every business will suffer crises
as it grows – many adapt easily
§ doesn’t really take account of pace
of growth, particularly in an
increasingly dynamic external
environment
key points of greiners
Greiner’s Growth Model predicts the six phases and five crises that
businesses go through as they grow.
§ Growth is hard. Poses many management and leadership
challenges (crises)
§ Leadership and organisational structure has to evolve to reflect the
growth of a business
§ Businesses that don’t adjust will experience lower growth than
those that do
Innovation
an improvement or a new idea for an existing product, process, service within the marketplace with the
intention for it to be a success
Invention
Invention- the creation of a product of introduction of a process or new type of service for the first time
Product innovation
making new goods/ services or improving existing ones. Developing an invention- brand new
product
Process innovation
changing a process of production that already exists or putting into practise a brand new
production process. E.g. – innovate new customer experience, new functionalities of product, new corp culture
Many businesses do research and development
- drives innovation. Stay ahead of competition- expand markets= increase market share
Patented innovation
recoup R + D costs- sell their licenses
§ Businesses maintain the unique features of their products for as long as the patent last. They do not have to worry
about competitors copying their exact invention
§ Some industries are particularly fast moving and need to constantly develop new products
Benefits of Innovation
Initially charge higher prices for innovative products/services before competitors - similar products to market.
§ Being innovative -good for firm’s reputation –first to launch exciting new products in the past, people will
naturally be interested in their future products.
§ Innovations in processes - add value to existing products and services.
§ PR coverage- added value- word of mouth
§ Increase MS- patented USP- porters barriers to entry
§ Financial rewards and meet shareholder expectations. First mover adv (loyalty)- premium pricing- high market
capitalisation- perceived value increase
§ Businesses with lots of innovative products -take advantage of economies of scope
§ Enhanced reputation – innovative company
Drawbacks of innovation
Innovation can be a very costly and time consuming process – businesses risk running out of money if they invest
too much into R&D and don’t get the products to market quickly enough. High initial costs
§ End up wasting resources by developing something customers don’t want.
§ Might not be able to produce the new product on a large scale at a low enough cost- not guaranteed return on
investment.
§ Other businesses- likely to react with their own
§ Businesses risk ruining their reputation if the innovative product is poor quality.
§ Potential legal implications
§ Uncertain returns. Government
