9.1 Assessing a change in scale Flashcards
Retrenchment
Strategy used by a business to reduce its overall size or diversity of operations
Takeovers
Where one business acquires control of the assets of another business either by a formal offer or by the purchase of a controlling interest of shares. (a.k.a acquisitions)
Mergers
Where two or businesses join together by mutual consent.
Reasons why businesses grow?
- Increased profit
- Survival
- Reduce risk
- Increased market share
Reasons why businesses retrench
- Changes in the market
- Failed takeover
- Economic downturn
Organic growth
When an organisation expands by selling more of its existing products/ services or develops new products/ services.
External growth
Achieved through takeovers or mergers.
Economies of scale
The proportionate saving in costs as a result of an increase in the size of an operating unit.
OR
The reduction in unit costs as a result of increased size.
Types of economies of scale
Financial economies of scale
- Financial institutions see bigger businesses as a safer bet because of their greater assets = more willing to lend and often at lower interest rates
Technical economies of scale
- Larger businesses are more able to invest in technology, they are more likely to have the finance to do so + can use the technology more efficiently and productively
Purchasing economies of scale
- Greatest power that can be exerted by large businesses over suppliers e.g. bulk purchasing
Managerial economies
- When a business grows there is greater scope to employ specialists in all parts of the business
Economies of scope
Economies of scope are the proportionate saving gained by producing two or more distinct products when the cost of doing so is less than that of producing each separately.
OR
The reduction of unit costs because of producing a wider variety of goods and services.
Diseconomies of scale
Refers to a situation where economies of scale no longer occur and unit costs begin to increase rather than decrease.
OR
When a business grows so large that costs per unit increase.
Reasons why diseconomies of scale could occur:
Poor communication:
- Greater complexity involving more layers slows communication + less responsive
Lack of control and coordination:
- Harder to monitor numerous divisions and departments
Alienation of the workforce:
- Larger businesses can become alienated because of job losses/ increase in technology OR may stem from poor communication and a feeling of no longer being valued.
The experience curve
The idea that the more you do something, the better you get at it, enabling quicker and cheaper production. Thus, as a business gets bigger, they should gain a competitive cost advantage.
Overtrading
The situation where a business grows too quickly, undertaking more business than its working capital can cope with.
Synergy
The idea that the value and performance of two businesses combined will be greater than the sum of the two parts.
Greiner’s model of growth
Described the different phases of a business’s growth and provides a framework to help understand different organisational structures and coordination methods.
Phase 1: Growth through creativity
- Companies form because of a creative force
- Do whatever is needed to make things work.
Phase 2: Control through direction
- Informal communication starts to fail
- Business is now too big for leader to get involved in everything
Phase 3: Growth through delegation
- Business now has functional management
- But founder/ leader still struggling to let go
Phase 4: Growth through coordination
- More formal management structures in place
- New layers of hierarchy to keep control
Phase 5: Growth through collaboration
- A dangerous growth in organisational bureaucracy
- Slowing decision making and missing changes in the external environment
Phase 6: Growth through alliances
- Growth slowing as business runs out of ideas
- Alliances are sought
Criticisms of Greiner’s model of growth
- It is simplistic
- Not every business will suffer from crises as it grows
- Many businesses adapt easily without any panics/ crises
- Model does not take into account the pace of growth
Issues with retrenchment
- Involves downsizing which results in inevitable job losses and redundancy
- Possibility of workforce alienation
- Requires careful consideration with early consultation and collaboration
Impact of growth or retrenchment on functional areas of the business
Marketing:
- Decisions regarding changing marketing objectives in a growing or declining market.
Finance:
- Include decisions regarding the finance of growth
- May relate to achieving financial stability in a declining market
Operations:
- Impact is in relation to unit costs, capacity and how to use technology
Human Resources:
- Impact of a change in size is likely to be in relation to organisational structure and responsibilities
- Impact on the need for recruitment, selection and training
Backward vertical integration
Involves acquiring a business operating earlier in the supply chain. Greater control over suppliers and prices.
Forward vertical integration
Involves acquiring a business further up in the supply chain. Guarantees access to markets.
Horizontal integration
Businesses in the same industry and which operate at the same stage of the production process are combined.
Conglomerate integration
Involves the combination of firms that are involved in unrelated business activities.
Reasons for failure of takeover/ mergers
- Over-optimistic assessment of the business
- A lack of detailed research
- Resistance from employees
- Clashes of culture
- A lack of experience and expertise in the case of conglomerate mergers/ takeovers
- Financial pressures including paying too high a price
Joint ventures
A business arrangement where two or more businesses agree to pool their resources for the accomplishment of a specific task.
Franchising
Method of growth where an existing business [the franchisor] grants another party [the franchisee] the right to use its trade name and sell its products or services.
Benefits of franchising
- Relatively quick
- Finance is provided by the franchisee
- Franchisee is likely to be highly motivated
- Organisational structure is less complex
