Business Growth Flashcards
What is business growth?
Implies an increase in one of these things:
-assets
-sales value
-operating profit
-market share
-value added
-employee numbers
-branch numbers
What is economies of scale?
Where the unit costs/average costs fall as production increases
-growth enables a business to benefit from economies of scale with a huge impact on the cost of production, it can gain competitive advantage
What are the types of economies of scale?
-Purchasing
-Technical
-Specialisation/managerial
-Financial
-Marketing
-Risk Bearing
What are the objectives of growth?
-Increased market share and brand recognition (better customer loyalty, more sales)
-Increased profitability (better investment opportunities, expansion, innovation)
What are diseconomies of scale?
Where the business grows to a point where more costs are increasing the cost per unit
What are the problems with growth?
-Lack of motivation = workers in large companies may feel demotivated which can lead to absenteeism and lateness
-Lack of coordination = must control resources so operations run smoothly
-Internal communication impact = as the workforce size increases there will be less face to face communication
-Risk of over trading = accepting more orders than it can cope with
What is inorganic growth?
A business has grown by buying its way into being larger
e.g. merger, takeover, joint venture
What is a merger?
When two businesses have agreed to join forces to make a third company
What is a takeover?
-Friendly = a business struggling with cash flow and invite a takeover from a stronger business
-Hostile = board of directors can try to resist the takeover but if someone owns over 51% of shares they can gain control
Why do companies choose to merge?
-Increase market share
-Access to new technology and staff
-Access to new markets
-Improved brands
What are the advantages of mergers?
-Synergy = combined company is worth more than the sum of its parts
-Economies of scale
-Increased revenue and market share
-Cross selling = the companies sell each other’s products
-Diversification = widening the product portfolio to avoid falling demand in other parts of the business
-Acquiring unique capabilities and resources = simpler to buy them
-International expansion = acquiring a local competitor helps get over cultural issues, governmental policies, regulation and other issues related to international expansion
What is organic growth?
Growth a company achieves from its existing businesses rather than newly acquired ones
How can you grow organically?
-Increasing the product range
-Opening more branches
-Taking on more staff
-Expanding into foreign markets
-Expansion in workforce
What are the benefits of growing organically?
-Avoids the risks of merging
-Cheaper than merging
-Retains company culture
-Can be planned for, unlike a takeover
-Higher production means economies of scale can be generated
-More influence meaning potential of more market share
What are the drawbacks of growing organically?
-High risk because opening new stores and taking on new staff is capital intensive
-Long wait period between investment and a return
-Limited growth as it is dependant on sales
-Moving into new markets and countries can be dangerous without buying a business already in that market
What is a small business?
A business with fewer than 250 employees
What is a micro-business?
A business with 0-9 employees
What are the benefits of staying small?
-Product differentiation creates value and customer loyalty
-USP’s can promote the features of a product e.g. the quality
-Flexibility can help gain competitive advantage if businesses respond quickly to customer needs
-Customer service
-E commerce is useful as 85% of the UK’s 18+ shop online
What is horizontal integration?
Involves two businesses merging where their operations are at the same level in the industry
What is vertical integration?
When two businesses merge in the same industry but are at different stages of production
What are the financial risks of mergers and takeovers?
-Original purchase cost
-Cost of changing into a new business
-Redundancies of duplicate staff
-Cost if it goes wrong
What are the financial rewards of mergers and takeovers?
-Increased revenue
-Economies of scale
What problems could arise from acquisitions?
-Clash of cultures
-Communication problems
-Diseconomies of scale
-Moving away from the strengths of the original business
-Lack of understanding in new markets
What are risk bearing economies of scale?
Where bigger companies can spread the risk by investing more products and accessing more markets
What are purchasing economies of scale?
Businesses can earn discounts and lower prices for the raw materials as they need to purchase more
What are technical economies of scale?
Businesses with large scale production can use more advanced machinery, use machinery more efficiency or invest in new technology
What are specialisation/managerial economies of scale?
Businesses can afford specialist managers
What are financial economies of scale?
Where larger firms can find potential lenders easier and raise money at a lower interest rate
What are marketing economies of scale?
As a business gets larger it can spread the cost of marketing over a wider range of products and sales
