9.1 Assessing changes in scale

Question 1

what is change?

Answer 1

Business alters its structure, size or strategy to respond to external or internal influences.
May be necessary for business to meet its aims and objectives.
Creates opportunities and threats
Must be managed carefully to ensure business maintains/ increases its competitiveness as result of change.

Question 2

Importance of growth

Answer 2

-motivation; in terms of careers and progression, can give sense of achievement (maslow)
-financial benefits; opportunities arise
-momentum in organisation, people stay focused, engaged
-improves staff retention
-attract desirable employees

Question 3

Growth

Answer 3

Increasing size of operations:

-increases shareholder value
-increases market share
-reduces average costs
-fulfill objective of growth
-stakeholder’s perception of success.

Question 4

Retrenchment

Answer 4

Downsizing scale of business’ operations e.g closing branches, delayering, selling off parts of business

-restructure to increase efficiency
-turn around poor performance
-focus on core competences
-sell off less profitable parts to improve overall performance

Question 5

Organic growth (internal)

Answer 5

-expand in size e.g opening new stores, branches, functions etc
-can be achieved nationally or multinationally scale
-control easier to maintain

Question 6

Inorganic growth (external)

Answer 6

-expands in size by merging or taking over another business
-expand rapidly as it is buying businesses already established
-high risk if two businesses not compatible

Question 7

Benefits of growth

Answer 7

economies of scale
lower unit costs; can reduce prices, selling more whilst keeping same profit margin
Or maintain same price, earn more profit per unit

Question 8

Economies of scale

Answer 8

The advantages enjoyed by a business as it increases the scale of its operations leading to fall in unit costs.
(Unit costs fall as output increases.)

Question 9

Technical economies of scale

Answer 9

Benefits enjoyed by business when able to spend more on larger and more efficient machinery, fall in average costs.

Question 10

Ads of technical economies of scale

Answer 10

-fixed costs spread over greater level of output
-increased competitiveness
-can spend more on scientific research and technical development

Question 11

Purchasing economies of scale

Answer 11

Benefits enjoyed when business able to negotiate with suppliers; discounts, bulk buying, leading to fall in average costs
Advantage: Increases buyer power of business

Question 12

Managerial economies of scale

Answer 12

Benefits enjoyed when business can employ specialist personnel leading to fall in average costs.
Advantage: Can employ internal specialist e.g accountant, or have own HR department rather than use services of external organisations

Question 13

Financial economies of scale

Answer 13

Larger businesses get lower interest rates,as they are seen to be lower risk

Question 14

Economies of scope

Answer 14

Advantages enjoyed by business as it increases scale of operations by expanding scope (range) of activities it undertakes leading to fall in unit costs.
e.g entering new markets, introducing new products and diversification (ansoff’s)
-market brand rather than individual products
-share expertise
-maximise use of resources
-increase brand loyalty

Question 15

Difference between economies of scale and economies of scope

Answer 15

-Economies of scale; unit costs drop as you increase output
-Economies of scope; benefit from operating in several markets, can increase savings from increasing scope not just output.

Question 16

The experience effect
(experience curve)

Answer 16

Cost advantages that occur having been in an industry for some time, therefore being able to make better decisions.
Experience helps reduce costs and help improve cash flow, overall profitability.

Question 17

Synergies

Answer 17

Occurs when put 2 businesses together as combined unit- they perform better than they did individual parts.

Question 18

Cost savings synergy

Answer 18

-eliminate duplicated functions and services
-better deals from suppliers
-higher productivity and efficiency from shared assets.

Question 19

Revenues synergy

Answer 19

-cross selling to customers of both businesses
-new distribution channels
-brand extensions
-new geographic markets opened up

Question 20

Diseconomies of scale
(issue with growth)

Answer 20

Disadvantages suffered as a result of a business increasing scale of its operations that lead to rise in unit costs.

Question 21

impact of a rise in unit costs

Answer 21

Makes business less competitive, may have to rise prices, selling less, in attempt to cover increased average costs
or may have to maintain same price and earn less profit per unit (reduces profit margins)

Question 22

Diseconomies of scale include

Answer 22

1) Lack of motivation- feel more isolated in larger businesses, managers can’t stay in contact, lack team environment and sense of belonging; reduces productivity, increases labour costs per unit
2) Poor communication- chain of command more difficult, more layers in hierarchy, distorts messages, less feedback and communication.
3) Loss of direction & co ordination- harder for managers to supervise subordinates, wide span of control, manager may be forced to delegate, leaves less control for manager

Question 23

Overtrading
(issue with growth)

Answer 23

Business expanded too rapidly, resulting in operating at a level beyond its resources, potential liquidity problems can arise.
Can also refer to a business where supply is exceeding demand as result of growth.

Question 24

Horizontal integration
(external)

Answer 24

2 businesses at same stage within a process integrate.
e.g Volkswagen buying Porsche.

Question 25

Vertical integration (external)

Answer 25

2 businesses at different stages within process integrate. e.g Record labels and radio stations.

Question 26

Forward vertical growth

Answer 26

Joining with a business at the NEXT stage in the process. e.g a manufacturer with a retailer

Question 27

Backwards vertical growth

Answer 27

Joining with a business at an earlier stage in the process. e.g manufacturer with supplier of raw materials

Question 28

Conglomerate

Answer 28

2 UNrelated businesses integrate

Question 29

Advantages of horizontal and vertical integration

Answer 29

-internal economies of scale -cost savings from rationalisation -potential to secure revenue 'synergies' -wider range of products (diversification) (opportunities for economies of scope) -increases market share -reduce competition by removing rivals (increases market share and pricing power) -make entry barriers higher for new rivals

Question 30

what is 'strategic fit'?

Answer 30

Concept used to evaluate motives of a takeover or merger. -does the transaction fit with capabilities of the firm? -does the transaction fit with the corporate objectives of the firm?

Question 31

3 main motives

Answer 31

Strategic motives Financial motives Managerial motives

Question 32

Strategic motives

Answer 32

Focused on improving and developing the business. Closely linked to competitive advantage

Question 33

Financial motives

Answer 33

Focused on making best use of financial resources for shareholders. Concerned with improved financial performance.

Question 34

Managerial motives

Answer 34

Focused on self interest of managers. Not necessarily in best interest of shareholders

Question 35

Conglomerate

Answer 35

Has a larger number of diversified businesses e.g Tata group-one of worlds most diversified businesses Samsung Google (digital conglomerate)

Question 36

Evaluating takeovers and mergers

Answer 36

-size / scale of takeover or merger; how significant is it? does firm have successful track record of m&a? (reduces risks involved in transactions of similar size/type) -was takeover/merger consistent with firms corporate objectives? -was there alternative takeover/merger with similar benefit but at lower risk? -3 main motive types; strategic, managerial, financial? which was most influential/significant?

Question 37

'depends on' points for takeover and mergers

Answer 37

-is firm at competitive advantage? (if so, strategic acquisition may have potential to transform its position) -does acquiring firm have resources to pursue external growth strategy? -is takeover/merger opportunistic or part of long term strategic plan?

Question 38

Are cost synergies enough to justify a takeover? (cost synergy= the savings in operating costs expected after the merger of two companies.)

Answer 38

-depends on nature of transaction -likely IMPORTANT where: transaction involves horizontal integration, economies of scale vital to achieve cost leadership, target believed to be operating efficiently( e.g too many layers in organisational structure or low productivity?) -likely to be LESS important where: takeover led by private equity firm (financial motives remain important) target operates in different market or country, no significant changes proposed to target business.

Question 39

common ways shareholder value can be destroyed by takeover

Answer 39

-paying too much(over valuation or poor negotiation) -poor quality due diligence (e.g fails to identify potential liabilities or highlight poor profit quality) -lack of integration planning -too much focus on cost synergies rather than revenue synergies -failure to retain elements which make target attractive in first place (e.g innovation, culture, skills)

Question 40

What factors influence success?

Answer 40

1) price paid for takeover- if paid over the odds for its target, will struggle to make investment work particularly in short term 2) speed of integration- m&a more successful if post takeover integration quick and decisive 3) ability to retain key staff- once acquired can key management and staff be retained? 4) relative focus on cost synergies vs revenue synergies- too many takeovers rely on short term cost savings rather than exploiting longer term opportunities for higher revenues.

Question 41

benefits of takeovers

Answer 41

quick access to resources and skills needed overcomes barriers to entry helps spread risk, wider product range and geographical spread revenue growth opportunities (synergy) cost saving opportunities (synergy) reduce competition enable economies of scale

Question 42

drawbacks of takeovers

Answer 42

high cost problems of valuation clash of cultures upset customers problems of integration (change management) resistance from employees non existent synergy incompatibility of management styles, structures and culture questionable motives high failure rate diseconomies of scale

Question 43

key strategic drivers of M&A activity

Answer 43

rapid technological change (strategic motive) need for scale to remain competitive need to be able to supply customers globally low demand growth in mature economies access to wider distribution networks invest in faster growing emerging markets

Question 44

Joint ventures

Answer 44

2 or more businesses agree to act collectively to set up new business venture with all parties contributing equity to fund set up and purchase of assets.

Question 45

Advantages of a joint venture

Answer 45

-combine expertise -local knowledge -shared risk and control -access to established markets and distribution channels -financed through equity not debt -greater potential capacity -secure a supplier outlet -synergies

Question 46

Disadvantages of a joint venture

Answer 46

-shared revenue -conflict between stakeholder objectives -cultural differences -difficult to work effectively together -local partner may learn from partnership and then themselves become global competitor

Question 47

Demergers

Answer 47

firm decides to split into separate firms

Question 48

motivations for de merger

Answer 48

focus on core businesses, streamline costs, improve profit margins. reduces risk of diseconomies of scale/scope by reducing range of functions, lower management costs. Raise money from asset sales and return to shareholders Defensive tactic to avoid attention of competition authorities who may be investigating possible monopoly power in industry/market

Question 49

Franchising

Answer 49

Occurs when owner of a business (Franchisor) licenses use of trademarks and proven business ideas to another party (franchisee) Each business outlet is owned by franchisee. Franchisor retains control over way goods/services marketed and sold, controls quality and standards of business.

Question 50

Franchise

Answer 50

One business, franchisor, gives another business, franchisee, permission to trade using franchisors name and selling their goods and services- can mean additional costs and loss of independence

Question 51

Franchisee

Answer 51

Given permission from another business to trade using its name or goods/services in return for a fee and share of profits. Less autonomy in decision making, but franchisor gives support.

Question 52

Franchisor

Answer 52

sells a license giving permission to another business to trade using its name/ goods/services- allows franchisor to grow more rapidly, may damage reputation if standards not maintained.

Question 53

Benefits of franchising

Answer 53

-rapid expansion -optimum size, max profitability -investment from others -motivation- franchisee has own capital tied up in business -economies of scale, buying power, mass advertising -lower risk -established product, experienced business -brand awareness -assistance in; entering new market, management, financial, marketing, training

Question 54

Drawbacks of franchising

Answer 54

-managing growth; enough staff? enough resources? -litigation- taking legal action (failed franchisee is a court case waiting to happen) -lack of control, have to follow rules, cannot sell without franchisors permission, must buy supplies from franchisor -higher than expected costs e.g start up, royalties, supplies and franchise renewals can be expensive.

Question 55

Retrenchment

Answer 55

Downsizing of a business, necessary to increase competition and achieve objective of cost minimisation. Reducing scale of operations affects employees(delayering, redundancies), customers(closures, product withdrawals), suppliers(orders) and community(jobs).

Question 56

what drives retrenchment?

Answer 56

-uncompetitive cost structure -inadequate returns on investment -poor competitive position -financial distress (e.g high debt, high gearing= susceptible to interest rates, hard to borrow money to invest) - market decline -failed takeovers -economic downturn e.g cost of living -change of ownership

Question 57

Changed organisational structures and possible implications for change

Answer 57

-changed management responsibilities -greater work loads (higher stress) -new teams and collegues

Question 58

New leadership and/or ownership and possible implications for change

Answer 58

-diff leadership style -uncertainty (amongst management particularly) -threat to corporate structure -new priorities, aims and objectives -prev projects abandoned -new sense of urgency

Question 59

Fewer people and possible implications for change

Answer 59

-loss of morale and increased de motivation- maslow -bad new for some external stakeholders e.g suppliers, local community

Question 60

new owners/leaders may be result of

Answer 60

takeover, downsize unprofitable parts merger(combined owners and leaders) shut stores, stop duplication of stores next to one another (combined owners and leaders) management buy out next generation newly appointed directors floatation on stock exchange

Question 61

impacts of retrenchment: finance

Answer 61

short term= high redundancy expenses, cost of re training long term= HR costs go down

Question 62

impacts of retrenchment: HR

Answer 62

short term= lower labour productivity- training/ re training, redeployment long term= change recruitment and selection processes

Question 63

impacts of retrenchment: Operations

Answer 63

short term= more responsive, take orders quicker as not as big as used to be (flexible) long term= get rid of diseconomies of scale, lower running costs

Question 64

impacts of retrenchment: Marketing

Answer 64

short term= lower costs, lower prices long term= more integration and consistency- focused on smaller core.

Question 65

Implications for change management

Answer 65

depends on scale and scope of retrenchment, small scale, incremental retrenchment has limited impact. significant retrenchment often associated with fundamental reappraisal of business (business model isn't working).