Assessing Change in Scale 3.9.1 Flashcards
what is organic growth
Growth from within the business, this can be done through increasing capacity(production on a larger scale) or increasing sales through market penetrating market development or diversification.
what is external growth
This is growth from outside the business, this can be done through takeovers and mergers. This is a lot faster growth than organic
what are some reasons why businesses grow
To increase profitability (go global)
To become more efficient (lower unit costs, better capacity utilisation)
market dominance (reduce number of competitors)
name some problems created by growth
Overtrading
problems created by companies integrating (clashes in culture)
dis-economies of scale
name some problems created by retrenchment
Redundancies, these cause lower motivation in staff how haven’t been made redundant due o fear of it or because friends have been made redundant. This can lower product quality and production.
what is economies of scale and name some things that cause it
It is when average unit cost falls when the scale of output increase due to different factors
some factors that cause this are:
bulk buying
being able to afford more high tech machinery
increased capacity utalisation
what is economies of scope
Costs can be decreased by increasing your product portfolio. Your fixed costs from machinery and maybe rent will be spread out over more products, (utilising fixed costs better), or from bulk buying raw materials.
what is diseconomies of scale and what are the causes
Factors causing average costs to rise as the scale of output increases
some of these factors include:
decrease in employee motivation due to poor communication in the business and through business becoming more capital intensive. this will cause production to decrease, increased absenteeism, higher recruitment costs.
in-effective co-ordination of the different branches of a business. keeping the business co-ordinated can be expensive (meetings), and money can be wasted if they are not all working together to the same objective
Control, monitoring the productivity and the quality of output from thousands of employees in big, complex corporations is imperfect and expensive
what is synergy
Synergy is a key concept associated with external growth. Synergy happens when the value of two businesses brought together is higher than the sum of the value of the two individual businesses. in other words, when synergy happens, 1 + 1 = more than 2!
what is overtrading
it is when a business expands too quickly without suitable finance or resources to support the expansion.
This causes stress on cash flow and on management
how might business avoid the problems of diseconomies of scale
Out-sourcing is a tried and tested way of reducing costs whilst retaining control over production
Performance related pay schemes (PRP) can provide financial incentives for the workforce leading to an improvement in industrial relations and higher productivity.
Human resource management (HRM) focuses on improvements in recruitment, communication, training, promotion, retention and support of faculty and staff.
how might a business avoid the problems of overtrading
The most effective steps to avoid overtrading are essentially those that would be taken as part of a sensible cash flow and working capital management
- Reducing inventory levels
- Leasing rather than buying capital equipment
- Obtaining better payment terms from suppliers
- Enforcing better payment terms with customers (e.g. less credit)
what is the impact of growth on operations
Production methods may have to be adapted to ensure that the additional demand created by the marketing department can be supplied (become more capital intensive)
increased capacity utilisation
what is the impact of growth on marketing
To expand, firms operation in the competitive markets might have to emphasise better value for money in the marketing mix
what is the impact of growth on HR
Additional staff may be required to handle the additional work load
what is the impact of growth on finance
price cuts used to increase market share will reduce profit margins, Over rapid expansion can also cause cash flow problems
gearing ratio will increase
what is the impact of retrenchment on operations
Investment in new machinery and equipment is likely to be halted. Poor staff morale is likely to reduce productivity and therefore make the firm less efficient
what is the impact of retrenchment on marketing
A firm retrenching might opt to scale down their operations by reducing their product range, or by exiting existing markets. Budgets for promotion and new product development might be reduced
what is the impact of retrenchment on HR
Redundancy programmes can cause morale to decline amongst the workers who survive the job cuts. Some of the company’s more talented members of staff might decide to leave before the next round of redundancies
what is the impact of retrenchment on finance
redundancy payments could cause additional cash outflows in the short run. however, in the long run a smaller workforce should reduce the break even output level by lowering fixed costs
what are the different methods of growth
Takeovers and Mergers
increased market share (sales)
integration methods
franschising
what are the advantages and disadvantages of merges and takeovers
advantages: Quick significant growth cost synergies diversification market power
disadvantages:
Clashes in culture
demotivated staff caused by redundancies due to synergy
what are ventures
it is a agreement to co-operate in a specific venture within a country for a limited period of time with another business. gives you the advantage of local experience plus clear financial incentives for the local partner, without the risk of losing control of this branch of its operation.
what is franchising
Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products.
what are the different types of growth
organic growth
external growth
why is co-ordination hard for a large business
because communications are weakened by the extended vertical distance between the bottom and the top
why might a growing business choose not to buy in bulk
lean producers you JIT ordering and inventory systems, so bulk buying isn’t appropriate
what are some reasons why businesses retrench
To survive recession (lower fixed costs, therefore lower breakeven point)
Delayering to improve competitiveness (greater delegation, more motivated workers)
A strategic change in direction (selling unprofitable parts in the business so you can invest in long term potential parts of the business)
name some cost synergies through mergers and takeovers
Cost Synergies:
Eliminating duplicated functions & services
Getting better deals from suppliers-(greater bargaining power over suppliers)
Higher productivity & efficiency from shared assets
name some renvenue synergies through mergers and takeovers
Marketing and selling complementary products
Sharing distribution channels
Access to new markets (e.g. through existing expertise of the takeover target)
Reduced competition
what is Greiner’s growth model
To keep growing, businesses have to pass through the same 6 stages
Moving through each stage is usually triggered by a crisis which is resolved by a change in management leadership or organisational structure
businesses that cant over come the crisis’s get stuck in difficult places
what are the 6 stages of Greiner’s growth model in order
growth though creativity
growth through direction
growth through delegation
growth through co-ordination and monitoring
growth through collaboration
growth trough extra organisational solutions
what are the aspects of growth through creativity phase of Greiner’s growths model
This about growth at the beginning of a new business. The growth comes from long working hours of the founder. As it grows it encounters a leadership crisis to over come the crisis the fonder has formally manage the business or appoint someone to do it for them.
what are the aspects of growth through direction phase of Greiner’s growths model
The business has specialists each functional area. All decisions are made by the fonder which creates a unmanageable work load that creates an autonomy crisis, to overcome this the fonder must delegate.
what are the aspects of growth through delegation phase of Greiner’s growths model
Managers have been appointed and empowered. these managers make the business grow through spotting gaps in the market or by identifying new markets for products. This creates a control crisis, functional specialists make decisions that benefit their branch but damages the firm as a whole. the resolve this, someone must be appointed to oversee the co-ordination of the business.
what are the aspects of growth through co-ordination and monitoring phase of Greiner’s growths model
The business can start expanding again after the control crisis as all functional areas work to a common goal. This phase of growth is ended by a red tape crisis, wasteful and inefficient bureaucracy causes a slow response to external change and growth opportunities are lost
what are the aspects of growth through collaboration phase of Greiner’s growths model
the firm must ditch functional structure that encourages bureaucracy in favour of matrix management where functional areas work together on team projects
what are the aspects of growth through extra organisational solutions phase of Greiner’s growths model
According to Greiner, most business stop growing because they run out of ideas. To grow again business must start making alliances through takeovers, mergers or joint ventures
what is the experience curve
the experience curve shows the reduction in the average costs that occurs when increased total output allows producers to learn from experience how to produce more efficiently.
what is vertical integration
vertical integration occurs when one firm takes over or merges with another at a different stage in the production process, but within the same industry
backwards vertical integration is when a firm buys a supplier
forward vertical integration is when buys a customer
what are the advantages and disadvantages of backward vertical integration
advantages:
closer links with suppliers aid new product development and give more control over product quality and timings of supplies
increased job security for supplier firm
absorbing the suppliers profit margins
disadvantages:
supplier division may become complacent if there is no need to compete for customers
redundancies may be made due to synergy
costs might arise, delivery and quality become slack
what are the advantages and disadvantages of forward vertical integration
advantages:
control over competition in own retail outlets; prominent displays of own brands
increased control over the market could mean greater job security
firm put into direct contact with consumers
disadvantages:
consumers may resent the dominance of one firms products in retail outlets, causing sales to decline
what is horizontal integration
It is when one firm buys out another in the same industry in the same stage of the supply chain
what are the advantages and disadvantages of horizontal integration
advantages:
huge scope for cost cutting by elimination duplication sales force, distribution and marketing overheads, and by improving capacity utilisation
economies of scale
reduction in competition enable prices to be pushed up (more power to the firm)
disadvantages:
clashes in culture
poor motivation of staff due to redundancies
what is conglomerate integration
when a firm buys another that has no clear line of connection to its own (buying into a different market). It is usually prompted by the desire to diversify to achieve rapid growth.
Although the achievement of successful diversification helps to spread risk, conglomerate integration is usually un-successful. This is because managers know very little of the market they are going into.
