3.9.1 Flashcards
What are the reasons businesses grow or retrench?
Businesses may grow to expand and increase sales, showing success in terms of revenue. Retrenchment occurs when businesses reduce costs to stabilize financially, improve profits, and exit unprofitable areas through cost-cutting methods such as redundancies, closing unprofitable sections, or removing management layers.
What are economies of scale and how can they be achieved?
Economies of scale occur when unit costs fall as a business expands. They can be achieved through technical economies (advanced equipment for efficiency), purchasing economies (bulk discounts from suppliers), and managerial economies (specialized employees leading to higher efficiency).
What are diseconomies of scale?
Diseconomies of scale happen when a firm grows beyond its optimal output, leading to increased average costs. They can be caused by issues such as communication problems, duplication of effort, poor management, low staff morale, and control difficulties due to the business’s increased complexity.
What is the experience curve?
The experience curve suggests that as a business gains more experience in producing a product, its unit costs decrease. For instance, the cost of manufacturing semiconductors can fall by 25% for each doubling of production volume.
What is synergy in the context of business growth?
Synergy occurs when two businesses combine, and as a result, they perform better together than they did separately, creating a 2+2=5 effect. For example, a company with strong design capabilities merging with one with strong funding may benefit from both sides working together.
What is overtrading and why is it risky?
Overtrading occurs when a business expands rapidly without securing adequate financing, leading to a cash flow shortage. For example, opening multiple stores quickly without the necessary capital to support the increased spending can result in liquidity problems.
What are the differences between organic and external growth?
Organic growth happens internally, such as by opening new branches or plants, and is low-risk but time-consuming. External growth occurs through mergers, takeovers, or joint ventures and can be faster but riskier, involving integration and possible management issues.
What is a joint venture?
A joint venture is a collaboration between businesses that share information and resources for a specific project, but each retains its identity. This allows businesses to pool expertise and finance without complete integration.
What is a franchise and what are its advantages/disadvantages?
A franchise allows one business (franchisor) to sell the rights to another (franchisee) to operate under its name. Advantages for the franchisor include receiving lump sums and royalty fees, while disadvantages include losing some control. For the franchisee, the advantage is trading under an established name, but the disadvantage is paying a percentage of profits.
How does growth impact functional areas in a business?
Growth impacts finance (requires capital for expansion), HR (requires more recruitment and training), operations (may strain capacity), and marketing (needs increased or targeted marketing efforts).
What are the advantages and disadvantages of horizontal integration?
Advantages of horizontal integration include eliminating a competitor, achieving economies of scale, and gaining more power over suppliers. Disadvantages include redundancies, management conflicts, and potential scrutiny from competition regulators.
What is vertical integration, and what are its types?
Vertical integration is when a business expands its operations into different stages of production. It can be backward (e.g., a car manufacturer acquiring a supplier) or forward (e.g., a car manufacturer acquiring a retailer). It allows greater control over the supply chain but can also involve management challenges.
What is conglomerate integration and its impact?
Conglomerate integration occurs when businesses from different industries merge. This spreads risk and may provide synergy, but the lack of focus and management experience in the new industry may lead to inefficiencies.
What are the benefits of synergy in mergers and takeovers?
Synergy can lead to sharing R&D costs, achieving economies of scale, and saving on marketing and distribution costs by utilizing shared resources and sales channels.
Why may synergy fail in mergers or takeovers?
Synergy may fail due to diseconomies of scale, firms being in different markets, or differences in corporate culture that lead to integration problems.
How does integration impact stake
holders in a business?
Integration can lead to benefits like reduced competition, economies of scale, and more power over suppliers. However, it may also result in redundancies, less consumer choice, and potential conflicts in management or among stakeholders.
What is retrenchment in business?
Retrenchment refers to reducing costs in a business to become more financially stable, increase profits, and exit loss-making areas, achieved by actions like cutting costs, redundancies, or closing unprofitable sections.
What are economies of scale?
Economies of scale occur when unit costs fall as a business expands. They can be achieved through technical, purchasing, and managerial economies, such as investing in advanced equipment, negotiating bulk discounts, or hiring specialists.
What are diseconomies of scale?
Diseconomies of scale refer to the disadvantages experienced by a business when it operates beyond its optimum output, leading to higher average costs due to factors like communication problems, poor management, and loss of control.
How do economies of scope benefit a business?
Economies of scope occur when a business gains cost advantages by sharing costs between different products or divisions, like using the same advertising for multiple products, reducing overall marketing costs.
What is the experience curve in business?
The experience curve suggests that as a business gains more experience in producing a product, its unit costs decrease. The more experience a firm has, the lower its costs, providing a competitive advantage, especially for market leaders.
What is synergy in business integration?
Synergy occurs when two businesses combine and perform better together than they did separately, such as a strong design team merging with a company that has high funds but lacks new investment areas.
What is the difference between organic and external growth?
Organic growth occurs when a business expands by opening new stores or functions, which is a low-risk and slow process. External growth occurs through mergers, acquisitions, or takeovers, allowing faster expansion but often at a higher risk.
What is horizontal integration?
Horizontal integration is when two firms at the same stage of production merge or integrate, such as two car manufacturers, to eliminate competitors and achieve economies of scale.
