Assessing a change in scale

Question 1

What is organic growth?

Answer 1

Organic growth occurs when a business grows through expanding its own operations

Question 2

What is external growth?

Answer 2

Growth by joining with other businesses, merger or takeover.

Immediate jump in the scale of the business

Culture clash

Question 3

What is retrenchment?

Answer 3

Retrenchment is when a business decides to significantly cut or scale-back its activities

Question 4

What is economies of scale?

Answer 4

Economies of scale occur when the unit costs fall as the scale of operations increases.

Question 5

What are purchasing economies of scale?

Answer 5

As a business gets bigger it will purchase more supplies, more bargaining power over suppliers for reduced prices.

Question 6

What are technological economies of scale?

Answer 6

Occur when a large scale of operations enables particular technologies to be used efficiently.

Cost of car production line spread out over total production, unit costs fall.

More bang for buck

Question 7

What is financial economies of scale?

Answer 7

Financial economies of scale occur when a business gets bigger it has more assets, meaning a bank may be more willing to lend at lower interest rates

Question 8

What are managerial economies of scale?

Answer 8

Managerial economies of scale is when a business expands it may bring in specialists to focus on parts of the business.

Question 9

What is economies of scope?

Answer 9

Economies of scope are cost savings from operating in several markets or providing several products.

Transportation costs
Advertising costs

Question 10

What is the experience effect?

Answer 10

The experience effect is the cost advantage that occur when operating within an industry on a large scale and, therefore, being able to make better decisions.

Question 11

What is the experience curve?

Answer 11

As business grows and operates on a larger scale, employees gain experience.

Decision making becomes faster and better, increased efficiency.

Major barrier to entry for small and inexperienced firms.

Question 12

What is synergy?

Answer 12

Synergy occurs when you put two businesses together and as a combined unit they perform better than they did as individuals.

2 + 2 = 5

Question 13

What is diseconomies of scale?

Answer 13

Diseconomies of scale occur when unit costs increase as a business expands

Question 14

What can cause diseconomies of scale?

Answer 14

• Communication problems
• Control and coordination problems
• Motivation issues

Question 15

What is overtrading?

Answer 15

Overtrading occurs when there are liquidity problems linked to the financing of rapid growth

Question 16

What is Greiner’s model of growth?

Answer 16

Greiner’s model of growth considers the challengers a business is likely to encounter as it gets bigger and older. Horizontal axis is age, vertical axis is size.

As we move along the line the business is increasing in size and age

Question 17

What are the stages of Greiner’s model of growth?

Answer 17

Phase 1, Growth through creativity
- leads to leadership crisis

Phase 2, Growth through direction
- leads to autonomy crisis

Phase 3, Growth through delegation
- leads to control crisis

Phase 4, Growth through coordination
- leads to red tape crisis

Phase 5, Growth through collaboration
- leads to growth crisis

Phase 6, Growth through alliances

Question 18

What four methods of growth are there?

Answer 18

• Merger
• Takeover
• Venture
• Franchise

Question 19

What is a merger?

Answer 19

A merger occurs when the owners of two or more businesses become owners of a new shared organisation.

Agreed deals and so all parties involved should be relatively open about their assets and strengths.

Question 20

What is a takeover?

Answer 20

One business gains control of the other and gains ownership of it.

Can be voluntary, where both sides agree it is in their interest.

Can be hostile, when one company wants to buy control of the other but the directors of the target company do not advise that shareholders sell.

• business has to convince shareholders to sell
• price offer may have to increase
• won’t have access to all information as it’s hostile

Question 21

What is a venture?

Answer 21

Involves businesses sharing information and resources on some projects, but each retaining their own identity.

May combine expertise and finance to undertake shared R&D in one specific area, and share results.

Question 22

What is a franchise?

Answer 22

A franchise occurs when one business sells the rights to another business to use its name and sell its goods or services in return for a fee.

Question 23

What are the advantages of selling a franchise?

Answer 23

• Quick growth as funds are provided by franchisee
• Franchisees may be very motivated as they own part of the business

Question 24

What are the disadvantages of selling a franchise?

Answer 24

• Lose complete control over what franchises do
• Do not gain all the profits from the operations

Question 25

What are the advantages of buying a franchise?

Answer 25

• Buying an established product, no need to think of own idea
• Data should exist on the success of the business and also on important issues such as buyer behaviour and costs
• May be provided with training, experience and support and ideas of other franchisees

Question 26

What are the disadvantages of buying a franchise?

Answer 26

• Do not have complete independence to decide what to do
• Do not gain all the profits from the operations, have to pay money to the franchisor

Question 27

What 3 forms of integration of there?

Answer 27

• Vertical
• Horizontal
• Conglomerate

Question 28

What is vertical integration?

Answer 28

Vertical integration occurs when a business joins with another business at a different stage of the same production process.

Backward vertical
- One business joins with a business that supplies it
- better price of supplies than external supplier

Forward vertical
- Join together with organisation closer to the final customer
- Manufacturer joins with retailer
- Guaranteed access for products to reach markets

Question 29

What is horizontal integration?

Answer 29

Horizontal integration occurs when one business joins together with another business at the same stage of the same production process

Question 30

What is conglomerate integration?

Answer 30

Conglomerate integration occurs when one business joins together with another business in a different production process.

• spreads the risk of a business being affected by change in one market

Question 31

What is retrenchment?

Answer 31

Retrenchment occurs when a business reduces the scale of its operation