3.9 - Economies Of Scale & Scope Flashcards
What is growth and for what 4 reasons do businesses grow? What are the 2 types of growh?
What problem can it create and how can it be overcome?
Expansion
1 Increase profitability (eg/spread FC over more units, cost per unit decreases, increasing prift margins)
2 Become more efficient (eg/use more capacity)
3 Market dominance
4 Managerial objectives (eg/to grow)
1 ORGANIC (expand from within eg/expand factories, open new outlets, increase product range, perhaps diversify-slower process but less risky than external) 2 EXTERNAL (takeover/mergers-process not quick but quick growth b once completed have eg/doubled size of business by taking over big store, bigger risk)
Overtrading=cash flow problems so forecast probelms&raise additional working capital before growth occurs to fall back on (eg/extra rent, wages, insurance etc&inflows wont be quick enough as bsuinesses not yet establisbed receiving full potential revenue)
Whats retrenchment? What are 4 reasons why bubsinesses do it?
What problem can it create and how can it be overcome?
Process of slimming down opreations
-reducing capacity (eg/by factory/store closures&redundancy)
1 Survive recession
2 Delayering to improve comprtitiveness
3 Prevent losses at end of prodocts life cycle (eg/cut before decline&dont use extension strategies)
4 Straregic change of direction
Redundancies=use natural wastage (just leave&dont replace-voluntary&mabe paid off eg/retire/want career change) rather than compulsory redundancy but effects workers still employed (job security, motivation&morale lowered) so could redeploy
What are the impacts of growth and retretcnhment on the 4 functional areas of bsiness: Marketing Finance HR Oprerations
Marketing
G=expand, firms n competitive market miht have to emphasise their better value for money in MM
R=opt to scale down operations by reducing product range/exiting specific markets-budget for promtoion&new product developemnt might be reduced
Finance
G=price cuts used to increase market share will reduce profit margins, over rapid expansion can cause cash flow problems
R=redundancy payments could cause additional cash outflows in ST but in LT smaller workforce should reduce BE output level by lowering FC
HR
G=additional staff hired to cope with extra workload
R=redundancy programmes can cause morale decline for those surving job cuts, more talented members might choose to leave before next roun of redunancies for better security (if didnt, not sure wen able to receiev job)
Operations
G=prodction methods might have to adpat to ensure additojnal demand created by marketing department can be supplied
R=investment in new macinery&equip likely to halt, poor staff morale liekly to=fall in prodcutivty makin firm less effiecient
What is the model of growth? What are the different phases?
GREINERS MODEL OF GROWTH
-suggests 6 stages of growth business passes when expanding
-if plan ahead for crises (aka turning point) to reason to panick
-each phase begins with period of stable growth, followed by crisis, firm must then reorganise if to continue growing&progressing to next stage in model
P1=creativity&crisis of leadership
P2=direction&crisis of autonomy
P3=delegation&crisis of control
P4=coordination&monitoring &crisis of red tape
P5=collaboration&crisis of internal growth
P6=alliances&crisis of identity
Give an exmape f a business that has retrenched
JAMIE OLIVER closes 6/42 of his italisn restranuts
WHY
-market was tough&uncetainties caused by Brexit intensified the pressures eg/price of ingrdients bouht in Italy increased bc of cange in exchange rates tuhs value of money since vote to leave EU
DID
- move will affect 120 staff&said would try to move to other parts of chain (redcued FC)
- each needed 3000 diners a week to be profitiable (BE level)
- planned to open more overseas
- buy back one in Autrailia
- he moved after Keystone Group which ran ops, went into receiverhsip&put fanchise up for sale
Whats included in each of the 6 phases of Greiners Growth model?
P1=creativity&crisis of leadership
Entrepreneur busy creating prdoducts&opening up markets, not many staff so iformal communication works&rewards for long hours are probaby through profit share/stock options
But as more staff join, production expands&capital injected so need for more formal communication, crisis=professional managemnt needed=founders may chnage their style&take on this role/someone new brought in
P2=direction&crisis of autonomy
Growth contniues in enviro of mor formal communications, budgets&focus on separate activities, incentive schemes replace stock as financial reward
But comes point when products&processes become so numerous=not enough hours in day for 1 to manage all&cant know as muc about all produts&services as those lower down in hierarchy so crisis=new strcutres based on delegation needed
P3=delegation&crisis of control
With mid-level mamngers freed up to react faster to opp. for new products/markets, organisation continues t grow&top management focuses on monitoring&dealing wiht big issues, many tsuck at this stage bc managers struggl tolet go of control theyve assumed so mid-level managers strat to struggle with their roles, crisis=more sophisticated design required so separet parts can work toegther more effecteviely
P4=coordination&monitoring &crisis of red tape
Growth continues with previously isolated business units reorganised into product groups/seervice practices, investment allocated centrally&managed according to ROI not just profits, incentives shared through company wide profit share schemes alligned to corporate goals
But work becomes submerged under increasing amounts of bureaucracy&growth stifled as result so new culture&sructue must be introduced
P5=collaboration&crisis of internal growth
Formal controls replaced by professional good sense as staff group®roup flexibly in teams to deliver projects in matrix structure supported by sophistocated info&team based financial rewards, crisis=further groeth can only ome by develeoping partnerships with external, complementary organsiations
P6=alliances&crisis of identity
Suggests growth continues through mergers, outsourcig, netwrokig&other solutions inc. external companies, growth rates vary between&within phases, duration of pases depend on rate of growth in market
But longer phase lasts, harder it is to transition to next phase of growth
Not ALL businesses go throug crises in tis order so use as a trating point for thinking about businss groeth&adapt to your cirumstamces
What are 3 advantages and 4 diasdvantes of organic growth?
+ less risk than external growth (slowly&steadily doing more of the same), allowing to grow at more sensible rate
+ can be financed through internal funds (eg/retained profit)
+ Build on business’ strengths
- grpwth can be dependent on growth of overall market (if everyones established, can ony succeed through growth of market-new customers coming in)
- hard to build amrket share if businsss is already leader holding large % of customers
- slower growth (pressure from sharehoders for rapid growth)
- franchises (if used) can be hard to manage effectvely
What is franchising as a method of internal/organic growth?
Arises when franchisor grants a license (franchise) to another business (franchisee) to allow it trade using the brand/business format (proven successful)
- enables quicker geographical growth for relativley low investment
- still have option to open locations operated by franchisor (can choose to manage franchises wihtout franchisee so gain all profits)
- capital investment by franchisees (have to buy in&set business up) is important source of growth finance
Oultine a business example for franchising
Outline the steps to become a frnachise for thid business
McDonalds
- announced plans to double no. stores in China wihtin 5 years&aimed to reivive brand&overtake rivals in world s fastest growing consumer market
- but didnt do it themselves, insteadsold controllling interset
- believed in order to mke moeny, needed to grow McDoalds quicker
Revenues&market iage still trying to recover from 2014 when chinese supplier was found to be suppplying rotting meat to KFC&McDonalds CHina stores, as reusult MCD has sought to cultivate percpetion of cleanliness&safety in China
Questions as to whether new owners know how to run fast food business (run into issues of quality control&standardisation if double in size in such short time)
NEED to make significant upfront investment so need at least £100,000 in funds, need to demonstrate can lead from front&workwithin framework to give greatest chace of success
RECEIVE world class support&trainging to franchisees, before strating undergo comprehenisive restatraunt trainging programme, make suree have supply chain to be proud of though strict welfare&traceability stnadards&benefit from marleting&branding thats among most recognised on planet
LOOK FOR passion, persoanility, love for pprople, franchisees come from diverse range of personal&professional background but theres few qualities they all share
MONITOR goals for year set&grouped uner 5 key pillars covering performance areas of people, operational excellence, sales&marketing, finaincial growth-cascaded throughout all restaraunts to ensure all businesses alligned&working towards common goal
What types of external growth are there? What are the types of external growth, why would you do this?
Vertical back/forward
Horizontal
Conglomerate (diversification-takeover something completely unrelated to what business does)
What are the methods of external growth, why would you do this?
Mergers&takeover
- Growth (primary reason)
- Cost synergies (economies of scale-2may be more cost effective than separately)
- Diversification (diff markets, reduce dependence on current products aka build portfolio=less risk, gain experience from other business)
- Market power (reduce competitiveness bu buying out competitor, increase prices if dominant&margins by size&synergies)
MERGER (2 firms, roughly same size choose to come together)
-research show lower success than takeovers (perhaps no clear winner=confused&weakened leadership&culture clash-both sets of staff expect bosses to fight for them to have best jobs in new organisational structure
TAKEOVER (1 business acquires control of another)
-risky
Takeover is a method of external growth which includes 1 business acquiring control of another. What are the reasons why a business may choose this method?
REASONS:
- increase market share (buy someone in your market out)
- access economies of scale (get bigger)
- secure better distribution (eg/manufacturer buys shop selling goods-allows to make sure our goods are sold=direct control)
- overcome barriers to entry to target markets (takeover someones place to get in market without being small&facing barriers)
- spread risk by diversifying
Most appropriate for business when:
- existing product are in later stages (survive by taking someones products in earlier stage without having to create own)
- business lacks knowledge/resources to develop organically
- speed of growth=high priority
Outline TESCO as a successful business example of a merger
TESCO (UKs biggest supermarket group) to BOOKER GROUP (buy UKs biggest food wholesaler) in £3.7bn deal - would create UKs leading food business
B shareholders end up owning 16% of combined group
T dubbed it “low risk” merger
Bringing together 2 complementary businesses-focus on food&customers, how to serve UK better=not about cutting costs in supply chain but about looking at food market completely differently (better range&value)
By combining with B, T is expanding beyond traditional food retailing business&making strides into restaurant&takeaway food sectors
Before merger T facing rising prices from suppliers “but had nothing to do with deal”
Will create food giant that not only sells in supermarkets but tens of thousands of independent retailers, cafes&restaurants (but also supplying rivals)
T in crisis in recent years, losing market share in tough retail market&selling off closing parts of company inc Giraffe restaurant
Now expanding again&panning to resume dividend payments (brighter financial future)
_can apply ANSOFF
Outline an unsuccessful business merger example
HEINZ & KRAFT (formed 3rd largest&beverage company in North America with unparalleled portfolio of iconic brands)
H=51% stake
K=49% stake
Creates substantial value for K shareholders&opp. to participate in new company’s LT value creation potential
Presents substantial opp. for synergies=increased investments in marketing&innovation
Understand need t preserve both company’s heritage in respective hometowns&support local charities&community relationships in which they operate
Focus on establishing new organisational structure
Strong platform for both US&internationally (rapid expansion while delivering quality customers love)
- so focused on cost cutting lost sight of tasty food=reported a gigantic loss, slashing dividends
- hasn’t adopted to consumer tastes-need for healthier foods
Outline British Airways as a successful business example of a merger
BRITISH AIRWAYS&IBERIA (new company called International Airlines Group but operate as normal)
Said would benefit shareholders, employees&customers
Expected to save £350m a year
Headquarters in London with BA shareholders retaining 55% ownership
Important step in process towards creating 1 of worlds lading global airlines that will be better equipped to compete with other major airlines&participate in future industry consolidation (chance to cut costs following 2 tough years for airline industry)
Seen as good merger&match as have few overlapping routes
Synergies&job losses
+merger now complete creating europes 3rd largest scheduled airline
+booking made easier eg/more choice of flights
What model can be used in takeovers?
ANSOFFS MATRIX
Used to analyse risks&rewards from takeover
Considers extent to which business is keeping close to its core business&whether its moving into new territory
Give 2 business examples of takeovers
DISNEY&PIXAR (originally merger then Disney agreed to buy Pixar for $7.4bn-previously ongoing disagreements)
- overall successful integration&experience helped 2 companies grow greatly
- P created list of what not to change to preserve culture eg/employees didn’t sign new employment contracts as have always done what’s expected&were mixed in new enviro with new responsibilities&tasks to increase Ds efficiency
- ability to motivate&lead employees in way they easily adapt to dynamic enviro=legend&d adapted it
GOOGLE PURCHASED ANDROID
- use skills of A team, G spent time developing operating system for mobile devices
- attracted by mobile OS launched so G thought it could greatly expand its core search&ad businesses well beyond PC platform at time
- G received great return on investment (bought for only $50mill)
Outline Sainsburys take over
BOUGHT ARGOS - Argos owner agreed to £1.4bn takeover (S hasnt overpaid)
- eal would create multi prodict multi chsnnel retailer
- catapults Sainsburys exposure to non-food items forward by £4bn a year&offers synergies
- argos hold 12% shares
- combined business would be very attractive to customers&create vaue for shareholders of both companies
- closure of Argos stores&some relocated in Sainsbury stores
SUCCESS
-cost savings imporved profits&drove increase in trading intensity
-half year underlying rfiuts rose to £302mill but when costs taken into account, profits actually halved (costs from recpntructing store managemnet teams-hundreds of jobs&managemnent levels cut to save £500mill where change=hard butneeded to met current&future customer needs=respond quicke to needs&truly integrate businesses forward, creating joined experience ffrom brands-also £25mill spent on redundnacy)
-diff. market&Brexit problem (30% S’s goods come from EU&stock previously bumpy)
-despite ggood summmer for suermkerts, grocery sales lagged behind rivals (using industry figures)
_Was well crafted tactical decision to draw greater footfall&reduce cost saving measurs
What are the drawbacks of a takeover?
Why do so many fail?
DRAWBACKS (high risk strategy):
- high cost involved&problems of valuation (do end up paying more as diff to decide business’ worth?)
- upset customers&suppliers bc of questionable motives (no longer share same values? Why takeover-profit/share?)
- problems of integration (resistance)
- non-existent cost savings (do synergies actually save money?)
FAIL
- price paid=too high
- lack of decisive change management in early stages&takeover mishandled, poor communication with managers, employees&other stakeholders
- loss of key personnel&customers (worry of security)
- cultural incompatibility between 2 businesses
- competitors take opp. to gain market share whilst takeover target is being integrated (not quick process, focus solely on takeover miss arising opp-taken over in market by competitor)
What is integration?
What are the 4 main types of merger/takeover in relaion to integration?
Include at least 3 potential business benefits of horizontal and conglomerate? Which is most liekly to succed?
Grwth stratges categorised in terms of whether they involve buusness moving forward/backwards in supply chain or whether strategy simply consoloditaes position at same stage of supply chain
1 Forward vertical (acquiring business further up supply chain eg/manufacturer buys distributor)
-buy ahead
2 Backward vertical (acquiring business operating earlier in supply chain eg/retailer buys wholesaler)
-away from customer
3 Horizontal (acquiring business at same stage of supply chain eg/manufacturer buys competitor) \+more likely to achieve economies of scale \+cost synergies from rationsalistion of business (eg/redundancies-don't need 2 finance departments=shrink=reduced wage costs) \+reduces competition by removing key rivals=increases market share&long run pricing power \+buying existing&well known brand can be cheaper than organically growing a brand (makes entry barriers high for potential rivals)
4 Conglomerate (acquisition has no clear connection to business buying it-new product/market)
+rapid growth
+diversification
+asset stripping (buy struggling business without intent to run it-bought cheap, sell assets for more than bought business so profit made)
-LEAST likely to succeed (little knowledge of market place of company being bought)
In relation to integration, forward and backawrd bverticl include acquiring businesses further up/earlier in supply chain. What are 4 potential benfist of growig through verticl integrration?
+enbales business to capture greater share of prfit on esach scale (are now possinly 2 stages in supply chain)
+secures importnant sources of supply/distribution (you are shop=secure supply/distribution)
+create barrier to entry for potential new competitors
+gain greater insights into cusomer needs&wants at each stage of supply chain (now incuded in more than 1 part of chain)
What are joint ventures?
A separate busiess entity (are diff skills/markets etc) created by 2/more parties involving shared ownership, returns&risks
-parties involved usually loooking to benefit from complementary strengths&resources brought to venture
-often method of 1 business enetering international markets (requirement of firms enetring certain industires in some countries=JV with someone established in that market)
EG/Google JV with TV producers to design/producce smart TVs with built in web browsing
Joint ventures include a separate business entity created by 2/more parties involving shared ownership, returns&risks, what are 3 potential benefits and 4 potential drawbacks choosing this method of growth?
+JV partners benefit from each others expertise&resources (eg/customer base, market knowledge etc)
+each partner might have option to require in future the JV business based on agreed terms if proves successful
+reduces risk of growth strategy (particularly if involves entering new market/diversification)
- risk clash of organsational structures (particularly in terms of management style)
- objectives of each partner may change leading to conflict
- in practice, appears to be imbalance in levels of expertise, investment/assets brought into venture by diff partners
- what happens if JV fails? (can it be sold/closed amicably?)
Provide an example of a business which became a JV in order to enter an international market
Provide an example of a business example where the JV failed
Kellogg and Wilmar International Limited.
- Kellogg International entered market in order to expand presence in Chinese market to sell cereals&other snack foods to consumers in China
- JV resulted in profitable synergic relationship for both companies as Wilmar International provided extensive distribution&supply chain network to Kellogg International&Kellogg managed to enter into new geography with this agreement&relationship
Ford Edsel.
- Perhaps biggest JV failure of all time
- ford reportedly invested $400 million into production of Edsel but Americans didnt buy the car bc “big&uneconomical” (Edzel was high-end car, its failure attributed to lack of defining its market niche before production by executives)
- 3 years later, Ford took Edzel out of market, marking it as biggest failure in JV history
How does growth impact each of the funnctional areas: Marketing Finance HR Operations
MARKETING
- more money available to be spent on market research (better target customers)&advertising (attract)
- if demand=high, higher price could be charged
- more spent on promotional activity
FINANCE
- profots may be higher=costs spread thinner-economies of scale
- more retained profit (opp. for new produc=expansion)
- cash flow issues if overtrading
HR
- possibly more workers needed (so more trainng)
- redundancy
- temp staff to cope with changes in demand
OPERATIONS
- use up more capacity&spread costs thinly
- outsource if not enough capacity
Provide a business example of horizontal growth through a merger
What 4 benefits&2 problems might they experience?
DIXONS CARPHONE (new electronics retail giant) after £3.8billion “merger of equals”
- merger saw 3 brands (Currys&PC world owned by Dixons&Carphone Warehouse coming together)=allowed a “new reatiler for the digital age” to be created(focused on combo of product rather than individual brands
- allows new business to prepare further for “internet of things
-as result of merger, have successfully trialed&decided to roll out “3 in 1” new store concept where PC world&Curry stores combine&carphone warehouse inserted into megastore (change in format=130 existing stores closing=both shoppers&employees prefer this understandable&convenient retail format
Will benefit from:
+increased buyer power, market share&skills
+wider product range for customers
+better prepared to respond to changing tastes&enviro
+lower costs (store closures)
- conflict from management styles&culture (merger of equals=not 1 clearly leading)
- redundancies (impact morale&efficiency)
What is controlled and uncontrolled growth?
What does growth norally create?
CONTROLLED=planning ahead, outsourcing, planning to increase capacity
UNCONTROLLED=results in overtrading, lack of capacity, IT systems cant cope, logistical issues (movement pf goods to customers)
Naturally creates economies&diseconomies of scale
- if more economies=created, unit costs will fall
- if more diseconomies=created, unit costs will rise
