Business Growth Flashcards
What are the four reasons firms grow?
- increase profitability
- achieve economies of scale
-increased market power over customers and suppliers - increased market share and brand recognition
Why do firms grow by increasing profitability?
- growth means more customers
- more customers more revenue
- more profit
What are economies of scale?
reductions in unit costs caused by the growth of a business
Types of economies of scale?
- purchasing (negotiate cheaper unit costs from supplier)
- managerial (specialist managers)
- technical (firm can afford to buy specialised equipment)
What is external economies of scale?
the whole industry expands
Five problems arising from growth?
- diseconomies of scale
- poor internal communication (more layers)
- poor employee motivation (lower personal contact)
- poor managerial coordiantion (boss cant control everything)
- overtrading
Explain overtrading?
- occurs when a business experiances cash flow problems as a result of expanding too quickly without sufficient cash in bank
What is organic growth?
growth that takes place without any merger or takeover
What is inorganic growth?
means growth that occurs as a result of taking over or merging with another business
When would inorganic growth be used?
- poor record of new product development or innovation
- quick growth
- business looking to eliminate a competitor
Give some methods of growing organically?
- staff devlopment
- using retained profits
Three advanatages of organic growth?
- leaders influence stays strong (preserve organisational structure)
- reduction of financial risk
- secure career paths ( better management positions, internal promotions)
Disadvantages of organic growth?
- limited speed leading to limited size
- failing to fully exploit a short lived opportunity
- predictability
WHy is limited speed leading to limited size a drawback of organic growth?
- organic growth is a slow process
- business may fall behind rivals who grow inorganically
- rivals could then use economies of scale and become cheaper
Why is failing to fully exploit a short lived opportunity a disadvantage of organic growth?
- as product life cycles shorten rate of change in market increases
- business may fail to fully expand on product before it hits decline, missing out on significant levels oof sales
How is predictability a disadvantage of organic growth?
- organic growth can become repetative and can prevent staff who are looking for exciting opportunites staying in the business long term
What are the four reasons for mergers and takeovers?
- growth
- cost synergies
- diversification
- market power
Why is growth a reason for MandT?
- increase size of organisation
What are synergies?
benefits of two things coming together that could not exist when they are separate (economies of scale)
What is a merger?
occurs when two businesses of roughly same size agree to come together to create brand new business (owners share leadership)
What is a takeover?
occurs when one business buys over 50% of another businesses shares, gaining control
What are the four types of intergration?
- backward vertical
- forward vertical
- horizontal
- conglomerate
What is vertical intergration?
merger or takeover of two companies at differant stages in the same supply chain
What is horizontal integration?
business buys or merges with a rival in the same industry at the same stage of supply chain
What is conglomerate integration?
merger or takeover involves two unrelated businesses coming together
Benefits of backward vertical?
- secures suppliers
- lower cost of supplies
Drawbacks of backward vertixal?
- can tie business into supplier that may not offer best option
Benefits of forward vertical?
- guaranteed outlet for the businesses products
drawbacks of forward vertical?
- consumers may resent the loss of choice (one firm dominating these outlets)
Benefits of horizontal ?
- clear economies of scale
Drawbacks of horizontal?
- can lead to diseconomies
- culture clashes
benefits of conglomerate?
- diversifies business
Drawbacks of conglomerate?
- potential failure to understand target company
- may distract management from orgicinal objective
when would a takeover be worth it?
return on investment > interest rate on loans required
What are the problems with rapid growth?
- management issues (culture clashes)
- staff have to adjust
- customers or suppliers may have had long term relationship and so may be discomforted to work with others
What are the four reasons for staying small?
- product differentions and USPs
- flexibility in responding to customers needs
- customer service
- e- commerce
