9 - Assessing Change In Scale Flashcards
What Is Retrenchment?
Downsizing the scale of a businesses operations, to reduce costs.
What Are Methods To Retrenching A Business?
(4 Points)
~ Reduce output.
~ Reduce staff size.
~ Reduce product portfolio.
~ Reduce amount of trade partners.
Why Might Businesses Choose To Retrench?
(4 Points)
~ Leave a market, due to economic downturns.
~ Reduce DEOS, to become more efficient.
~ Focus on core competences.
~ Sell off unprofitable parts of the business.
What Are The Problems With Retrenchment?
(4 Points)
~ May loose gains from EOS.
~ May loose gains from economies of scope, if product portfolio is reduced.
~ May reduce motivation for existing employees, if it has lead to redundancies.
~ Impacts on stakeholders.
What Is Growth?
Increasing the size of the business operations.
Why Might Businesses Choose To Grow?
(3 Points)
~ Reduce average costs, by benefiting from EOS.
~ Increased market share.
~ Ability to achieve economies of scope.
What Are The Problems With Growth?
(2 Points)
~ DEOS.
~ Overtrading, problems on cash flow.
What Are The Types Of Growth?
(2 Points)
~ Internal (Organic) growth.
~ External (Inorganic) growth.
What Is Organic Growth?
When a business expands in size, by opening new stores or branches.
What Is External Growth?
When a business expands, by either merging with or taking over other business.
What Are The Types Of External Growth?
(4 Points)
~ Forwards vertical integration.
~ Backward vertical integration.
~ Horizontal integration.
~ Conglomerate integration.
What Is Forward Vertical Integration?
Expanding operations, by joining a firm further forward in the supply chain.
What Is Backward Vertical Integration?
Expanding operations, by joining a firm further back in the supply chain.
What Are The Benefits Of Vertical Integration?
(4 Points)
Forward:
~ More control over outlets and retailers.
~ More control over distribution network.
Backward:
~ More control of supply chain, negotiations to reduce costs.
~ Leads to better quality control and an efficient production process.
What Are The Drawbacks Of Vertical Integration?
(4 Points)
~ Cultural clashes, leading to conflicts.
~ DEOS.
~ Expertise loss, due to entrance of a new market.
~ Can require complex management.
What Is Horizontal Integration?
Expanding operations, by joining a firm at the same stage of the production process.
What Are The Benefits Of Horizontal Integration?
(4 Points)
~ Increased market share.
~ EOS, due to producing on a larger scale, reducing the threat of new entrants.
~ Reduce competition, if integrating with a competitor.
~ Greater access to new markets and customers.
What Are The Drawbacks Of Horizontal Integration?
(4 Points)
~ Reduced competition.
~ DEOS, larger business size.
~ Cultural clashes.
~ High costs involved.
What Is Conglomerate Integration?
Expanding into unrelated industries.
What Are The Benefits Of Conglomerate Integration?
(2 Points)
~ Spreads risk over different industries, due to potential diversification.
~ Greater access to new markets and customers.
What Are The Drawbacks Of Conglomerate Integration?
(3 Points)
~ Possible lack of expertise in the new market.
~ DEOS.
~ Cultural clashes.
What Are The Methods Of Growth A Business Can Adopt?
(4 Points)
~ Mergers.
~ Takeovers.
~ Joint ventures.
~ Franchising.
What Is A Merger?
Combination of 2 firms, into a single entity.
What Is A Takeover?
One company gains 51% of shares to acquire control of another organisation.
What Is A Joint Venture?
(2 Points)
~ 2 or more business, agree to act collectively to set up a new business venture.
~ With all parties contributing funds to start up the business.
What Are The Benefits Of A Joint Venture?
(2 Points)
~ Sharing of resources and risks.
~ Combined expertise.
What Are The Drawbacks Of A Joint Venture?
(3 Points)
~ Conflicts in all areas.
~ Cultural differences.
~ Shared revenue.
What Is Franchising?
When franchisor grants the rights to operate under their brand.
What Are The Benefits Of Franchising?
(2 Points)
~ Rapid expansion, with minimal capital invested due to franchisee paying for rights.
~ Local expertise, from franchisees.
What Are The Drawbacks Of A Franchising?
Can lead to less consistency in quality, as they do not operate how the franchisor does.
What Are The Issues With Growth?
(5 Points)
~ EOS.
~ Economies of scope.
~ DEOS.
~ Synergies.
~ Overtrading.
Describe Technical EOS
(2 Points)
~ Bringing in specialist machinery and workers as a firm gets larger.
~ Boosting productivity and lowers AC, as costs are spread over more units of output.
Describe Purchasing EOS
(2 Points)
~ When a firm can buy their raw materials in bulk as they grow, negotiating unit discounts.
~ Lowering AC as a result.
Describe Managerial EOS
(4 Points)
~ As a firm gets larger, they can employ specialist managers.
~ These managers monitor the productivity of the workforce, boosting it.
~ They bring in their specialist skills, which workers then benefit from, increasing productivity.
~ Which then decreases DEOS.
What Are The Types Of Causes Of DEOS?
(4 Points)
~ Control.
~ Communication.
~ Coordination.
~ Motivation.
What Is Economies Of Scope?
(3 Points)
~ Offering a range of different products, distributing costs over a range.
~ Leading to a fall in unit costs, meaning lower prices.
~ E.g. Diversification, entering new markets.
What Is A Synergy?
(2 Points)
~ When 2 businesses join together, they will be able to achieve more than the sum of 2 businesses operating separately.
~ 1+1 = 3.
What Is Overtrading?
(2 Points)
~ When a business has grown too quickly, resulting in it operating at a level beyond its resources.
~ Leading to liquidity problems.
What Are Solutions To Preventing Overtrading?
(3 Points)
~ Ensure there is a cash flow forecast.
~ Reduce receivable days.
~ Expand payable days.
