Assessing a change in scale Flashcards
What is organic growth?
Organic growth occurs when a business grows through expanding its own operations
What is external growth?
Growth by joining with other businesses, merger or takeover.
Immediate jump in the scale of the business
Culture clash
What is retrenchment?
Retrenchment is when a business decides to significantly cut or scale-back its activities
What is economies of scale?
Economies of scale occur when the unit costs fall as the scale of operations increases.
What are purchasing economies of scale?
As a business gets bigger it will purchase more supplies, more bargaining power over suppliers for reduced prices.
What are technological economies of scale?
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
What is financial economies of scale?
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
What are managerial economies of scale?
Managerial economies of scale is when a business expands it may bring in specialists to focus on parts of the business.
What is economies of scope?
Economies of scope are cost savings from operating in several markets or providing several products.
Transportation costs
Advertising costs
What is the experience effect?
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.
What is the experience curve?
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.
What is synergy?
Synergy occurs when you put two businesses together and as a combined unit they perform better than they did as individuals.
2 + 2 = 5
What is diseconomies of scale?
Diseconomies of scale occur when unit costs increase as a business expands
What can cause diseconomies of scale?
- Communication problems
- Control and coordination problems
- Motivation issues
What is overtrading?
Overtrading occurs when there are liquidity problems linked to the financing of rapid growth
What is Greiner’s model of growth?
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
What are the stages of Greiner’s model of growth?
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
What four methods of growth are there?
- Merger
- Takeover
- Venture
- Franchise
What is a merger?
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.
What is a takeover?
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
What is a venture?
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.
What is a franchise?
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.
What are the advantages of selling a franchise?
- Quick growth as funds are provided by franchisee
- Franchisees may be very motivated as they own part of the business
What are the disadvantages of selling a franchise?
- Lose complete control over what franchises do
- Do not gain all the profits from the operations
What are the advantages of buying a franchise?
- 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
What are the disadvantages of buying a franchise?
- 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
What 3 forms of integration of there?
- Vertical
- Horizontal
- Conglomerate
What is vertical integration?
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
What is horizontal integration?
Horizontal integration occurs when one business joins together with another business at the same stage of the same production process
What is conglomerate integration?
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
What is retrenchment?
Retrenchment occurs when a business reduces the scale of its operation
