9.1 Assessing a change in scale

Question 1

Retrenchment

Answer 1

Strategy used by a business to reduce its overall size or diversity of operations

Question 2

Takeovers

Answer 2

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)

Question 3

Mergers

Answer 3

Where two or businesses join together by mutual consent.

Question 4

Reasons why businesses grow?

Answer 4

• Increased profit
• Survival
• Reduce risk
• Increased market share

Question 5

Reasons why businesses retrench

Answer 5

• Changes in the market
• Failed takeover
• Economic downturn

Question 6

Organic growth

Answer 6

When an organisation expands by selling more of its existing products/ services or develops new products/ services.

Question 7

External growth

Answer 7

Achieved through takeovers or mergers.

Question 8

Economies of scale

Answer 8

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.

Question 9

Types of economies of scale

Answer 9

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

Question 10

Economies of scope

Answer 10

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.

Question 11

Diseconomies of scale

Answer 11

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.

Question 12

Reasons why diseconomies of scale could occur:

Answer 12

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.

Question 13

The experience curve

Answer 13

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.

Question 14

Overtrading

Answer 14

The situation where a business grows too quickly, undertaking more business than its working capital can cope with.

Question 15

Synergy

Answer 15

The idea that the value and performance of two businesses combined will be greater than the sum of the two parts.

Question 16

Greiner’s model of growth

Answer 16

Described the different phases of a business’s growth and provides a framework to help understand different organisational structures and coordination methods.

Question 17

Phase 1: Growth through creativity

Answer 17

• Companies form because of a creative force
• Do whatever is needed to make things work.

Question 18

Phase 2: Control through direction

Answer 18

• Informal communication starts to fail
• Business is now too big for leader to get involved in everything

Question 19

Phase 3: Growth through delegation

Answer 19

• Business now has functional management
• But founder/ leader still struggling to let go

Question 20

Phase 4: Growth through coordination

Answer 20

• More formal management structures in place
• New layers of hierarchy to keep control

Question 21

Phase 5: Growth through collaboration

Answer 21

• A dangerous growth in organisational bureaucracy
• Slowing decision making and missing changes in the external environment

Question 22

Phase 6: Growth through alliances

Answer 22

• Growth slowing as business runs out of ideas
• Alliances are sought

Question 23

Criticisms of Greiner’s model of growth

Answer 23

• 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

Question 24

Issues with retrenchment

Answer 24

• Involves downsizing which results in inevitable job losses and redundancy
• Possibility of workforce alienation
• Requires careful consideration with early consultation and collaboration

Question 25

Impact of growth or retrenchment on functional areas of the business

Answer 25

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

Question 26

Backward vertical integration

Answer 26

Involves acquiring a business operating earlier in the supply chain. Greater control over suppliers and prices.

Question 27

Forward vertical integration

Answer 27

Involves acquiring a business further up in the supply chain. Guarantees access to markets.

Question 28

Horizontal integration

Answer 28

Businesses in the same industry and which operate at the same stage of the production process are combined.

Question 29

Conglomerate integration

Answer 29

Involves the combination of firms that are involved in unrelated business activities.

Question 30

Reasons for failure of takeover/ mergers

Answer 30

• 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

Question 31

Joint ventures

Answer 31

A business arrangement where two or more businesses agree to pool their resources for the accomplishment of a specific task.

Question 32

Franchising

Answer 32

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.

Question 33

Benefits of franchising

Answer 33

• Relatively quick
• Finance is provided by the franchisee
• Franchisee is likely to be highly motivated
• Organisational structure is less complex