9.1 Assessing changes in scale Flashcards
what is change?
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.
Importance of growth
-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
Growth
Increasing size of operations:
-increases shareholder value
-increases market share
-reduces average costs
-fulfill objective of growth
-stakeholder’s perception of success.
Retrenchment
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
Organic growth (internal)
-expand in size e.g opening new stores, branches, functions etc
-can be achieved nationally or multinationally scale
-control easier to maintain
Inorganic growth (external)
-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
Benefits of growth
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
Economies of scale
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.)
Technical economies of scale
Benefits enjoyed by business when able to spend more on larger and more efficient machinery, fall in average costs.
Ads of technical economies of scale
-fixed costs spread over greater level of output
-increased competitiveness
-can spend more on scientific research and technical development
Purchasing economies of scale
Benefits enjoyed when business able to negotiate with suppliers; discounts, bulk buying, leading to fall in average costs
Advantage: Increases buyer power of business
Managerial economies of scale
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
Financial economies of scale
Larger businesses get lower interest rates,as they are seen to be lower risk
Economies of scope
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
Difference between economies of scale and economies of scope
-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.
The experience effect
(experience curve)
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.
Synergies
Occurs when put 2 businesses together as combined unit- they perform better than they did individual parts.
Cost savings synergy
-eliminate duplicated functions and services
-better deals from suppliers
-higher productivity and efficiency from shared assets.
Revenues synergy
-cross selling to customers of both businesses
-new distribution channels
-brand extensions
-new geographic markets opened up
Diseconomies of scale
(issue with growth)
Disadvantages suffered as a result of a business increasing scale of its operations that lead to rise in unit costs.
impact of a rise in unit costs
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)
Diseconomies of scale include
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
Overtrading
(issue with growth)
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.
Horizontal integration
(external)
2 businesses at same stage within a process integrate.
e.g Volkswagen buying Porsche.
Vertical integration
(external)
2 businesses at different stages within process integrate.
e.g Record labels and radio stations.
Forward vertical growth
Joining with a business at the NEXT stage in the process.
e.g a manufacturer with a retailer
Backwards vertical growth
Joining with a business at an earlier stage in the process.
e.g manufacturer with supplier of raw materials
Conglomerate
2 UNrelated businesses integrate
Advantages of horizontal and vertical integration
-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
what is ‘strategic fit’?
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?
3 main motives
Strategic motives
Financial motives
Managerial motives
Strategic motives
Focused on improving and developing the business.
Closely linked to competitive advantage
Financial motives
Focused on making best use of financial resources for shareholders.
Concerned with improved financial performance.
Managerial motives
Focused on self interest of managers.
Not necessarily in best interest of shareholders
Conglomerate
Has a larger number of diversified businesses
e.g Tata group-one of worlds most diversified businesses
Samsung
Google (digital conglomerate)
Evaluating takeovers and mergers
-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?
‘depends on’ points for takeover and mergers
-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?
Are cost synergies enough to justify a takeover?
(cost synergy= the savings in operating costs expected after the merger of two companies.)
-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.
common ways shareholder value can be destroyed by takeover
-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)
What factors influence success?
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.
benefits of takeovers
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
drawbacks of takeovers
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
key strategic drivers of M&A activity
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
Joint ventures
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.
Advantages of a joint venture
-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
Disadvantages of a joint venture
-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
Demergers
firm decides to split into separate firms
motivations for de merger
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
Franchising
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.
Franchise
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
Franchisee
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.
Franchisor
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.
Benefits of franchising
-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
Drawbacks of franchising
-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.
Retrenchment
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).
what drives retrenchment?
-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
Changed organisational structures and possible implications for change
-changed management responsibilities
-greater work loads (higher stress)
-new teams and collegues
New leadership and/or ownership and possible implications for change
-diff leadership style
-uncertainty (amongst management particularly)
-threat to corporate structure
-new priorities, aims and objectives
-prev projects abandoned
-new sense of urgency
Fewer people and possible implications for change
-loss of morale and increased de motivation- maslow
-bad new for some external stakeholders e.g suppliers, local community
new owners/leaders may be result of
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
impacts of retrenchment: finance
short term= high redundancy expenses, cost of re training
long term= HR costs go down
impacts of retrenchment: HR
short term= lower labour productivity- training/ re training, redeployment
long term= change recruitment and selection processes
impacts of retrenchment: Operations
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
impacts of retrenchment: Marketing
short term= lower costs, lower prices
long term= more integration and consistency- focused on smaller core.
Implications for change management
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).
