9.1g Other Issues With Growth Flashcards
When do economies of scope occur?
When it is cheaper to produce a range of products rather than specialise in a handful of products
Example of a business that benefits from economies of scope:
Amazon
How do economies of scope work?
The business uses the same facilities, equipment, labour force and technology to produce a range of products
Benefits of economies of scope:
- Increase a firm’s value
- Increase in performance
- Reduce risk
What does the experience curve suggest?
As a business grows and increases sales volume, it will produce more products, workers will get more experienced and efficient at making products causing cost per unit to decrease
Drawback of the experience curve concept:
- Market leaders often become complacent
- Experience may cause resistance to change
- Old theory that is less relevant in a rapidly changing competitive environment
Businesses with the highest share are likely to have the most experience meaning what is a key barrier to entry?
Experience
Synergy definition
The joining of two businesses to create a combined effect greater than their separate effect
Synergy is a concept associated with what?
External growth
Cost synergy definition
Where cost savings are achieved as a result of external growth
Revenue synergy definition
Where additional revenues are achieved as a result of external growth
Two ways synergy arises in an acquisition:
- Cost synergy
- Revenue synergy
How can cost synergies occur?
- Eliminate duplicated functions
- Better deals from suppliers
- Higher productivity from shared assets
How can revenue synergies occur?
- Cross-selling to customers of both businesses
- Access to new distribution
- Reduced competitive
What is the primary objective of a takeover?
To create value for shareholders that exceeds the cost of the acquisition
