9.1 assessing a change in scale Flashcards
what is a changing scale
when a business is growing, shows managers that the business is moving forward
how can growth be seen as important
- shows progress
- create financial benefits
- create momentum
- market power, lower costs due to greater bargaining power
2 forms of growth
organic- when a business grows through its own operations for example sells more products or launches a new product
external- this involves growth by joining with another business through a merger or takeover, this leads to a jump in growth, however a lot of clashes such as culture or operations
4 types of economies of scale
purchasing economies- more bargaining power with suppliers, suppliers rely more on the growing business so may be more willing to lower prices
technology economies- when large scale of operations enables particular technology to be used with the most amount of efficiency, eg one tractor for one field not efficient, whereas one tractor for twenty fields is more efficient as cost of the tractor is spread amongst more product
financial economies- as a business gets bigger it gains more assets and this may mean that a bank is more willing to lend to it at a lower interest rate as the risk is lower, this reduces interest costs
managerial economies- as a business expands it may bring in specialists to focus on parts of a business
what is economies of scope
cost savings from operating in several markets or providing a range of products
what is the experience curve
as a business grows and operates on a larger scale its employees gain experience, managers become more familiar with what needs to be done and so this makes decisions faster and better. smaller businesses may lack experience and therefore make more mistakes and be less effective. the experience effect has a very significant influence on unit costs
what is synergy
when two businesses join together and do better as a pair than as individual businesses, 2+2=5
problems of growth
- diseconomies of scale- when cost per unit increase as the business increases size
- communication problems- as a business grows communication may become more complex, leading to slower and poor decision making
- control and coordination problems- more employees, more products, more decisions being made and more communication flows, controlling who does what and monitoring the quality of the work can become more difficult
- motivation issues- as a business grows it may be that employees lose contact with senior managers and the overall vision of the business, and feel like they are less significant to the success of the business and lose motivation as they may believe they aren’t as useful
what is overtrading
excessive buying and selling of stocks
Greiners model of growth
phase 1 growth through creativity - leadership crisis - phase 2 growth through direction - autonomy crisis - phase 3 growth through delegation - control crisis - phase 4 growth through coordination - red tape crisis - phase 5 growth through collaboration - growth crisis - phase 6 growth through alliances
what is a joint venture
involves businesses sharing information and resources on some projects but each retaining their own identity
what is a franchise
a joint venture between a franchisor and a franchisee, the franchisor is the original business that sells the right to use its name and idea to franchisee
what is vertical integration
a business joins with another business at a different stage of the same production process, backwards vertical integration is taking over a business that supplies you, forward vertical integration is taking over a business you supply to
what is horizontal integration
occurs when a business integrates with a business at the same stage of the production line
what is a conglomerate
when one business integrates with another in a different industry
