Business Growth 3.2 Flashcards
What is the definition of growth:
When a business increases in size and status
What are 4 different ways that businesses can grow?
- market share
- percentage increase in revenue
- accrue (collect) more non current assets (buildings etc)
- percentage increase in volume
- increase in profitability
What are some reasons why businesses want to grow? (4)
1 - increased profitability
2 - increased market share
3 - increased market power (to try and dominate the market)
4 - to take advantage of economies of scale
What is the definition of economies of scale?
As the output increases, the average fixed and variable cost per unit decreases
What are the 6 internal economies of scale?
- Purchasing (bulk buying from suppliers)
- Managerial specialisation
- Technical
- Financial
- Marketing
- Network ( adding extra customers/ users to a network already established)
Describe the network from internal eos:
Adding extra customers/ users to a network already established
Describe the purchasing from internal eos:
Bulk buying from suppliers and raw material costs decrease
Describe the technical from internal eos:
Use non current assets - spread cost of machine over number of units
Describe the financial from the internal eos:
Lower interest rates from banks - seen as lower risk
Describe the marketing from internal eos:
Spread the cost of marketing over large sales volumes
Describe the managerial/ specialisation from internal eos:
They have expertise so it costs the business less
What is the definition of external economies of scale:
When a firm benefits from lower unit costs as a result of the whole industry growing in size
What are four problems arising from growth:
Diseconomies of scale
Overtrading
Less control of business
Loss of motivation
Why may diseconomies of scale occur? (3)
1 poor internal communication
2 poor employee motivation
3 poor managerial coordination
What does diseconomies of scale lead to?
- Coordination/ control - problems in monitoring productivity and work quality leading to an increase of wasted resources
- Motivation - in large businesses employees may feel more alienated and have a loss or moral
- Communication - workers in large businesses may have less opportunity to communicate
- Negative effects of internal politics - information overload, unrealistic expectations among managers and cultural clashes
What are three problems of communication when a business grows:
1- layers of hierarchy increase
2- employers have a wider span of control
3- people in the business become more dispersed
What are 4 actions which can be taken in a business to readdress communication issues:
1- delayering the business
2- Performance related pay (may motivate employees)
3- shorter span of control
4- have targets linked to corporate objectives
What is the definition of overtrading?
When a business expands too quickly without having the financial resources, leading to usually experiencing a cash flow problem
Give 5 symptoms of overtrading:
- High revenue growth, but low gross and operating profit margins
- Persistent use of bank overdraft facility
- Significant increase in the current ratio
- Low levels of capacity utilisation
- Very low inventory turnover ratio
Strategies to overcome overtrading (4):
- Less clients at once - demand carefully
- Manage inventory better
- Regularly check capacity utilisation
- Lease equipment rather than buy
To increase market share what are the two main strategies:
- Work harder on innovation - should help improve the long term quality of the new product development
- Invest more heavily in branding and marketing to try and differentiate your products more clearly
What is the definition of average cost:
This is the cost of producing one unit of output
How do you calculate average cost:
By dividing the total cost by the current output level
What is the definition of delegate:
Passing authority down the hierarchy
What is the definition of diseconomies of scale:
Factors that cause average costs to rise as the scale of output rises
What is the definition of economies of scale:
Factors that cause average costs to fall as the scale of output increases
What is the definition of market dominance:
It describes a situation where a firm sells a product that achieves a very high market share. This ascendancy over the competition enables the dominant firm to raise prices without losing too many customers
What is the definition of organic growth:
Comes from within the business, as compared with inorganic growth achieved by takeovers or mergers
What are three advantages of organic growth:
- Keeping it personal
- Minimising financial risk
- Providing a secure career path
What are two disadvantages of organic growth:
- The difficulty of getting scale to match your competitors, especially if they are involved in merger or takeover activity
- Many products have relatively short life cycles, so it may be vital to generate as much cash as quick as you can, organic growth may mean missing much of the economic opportunity
What is the definition of inorganic growth:
It is via a merger or takeover but not from within the business
What is the definition of strategic fit?
Buying another business that can provide a real boost to long term growth and profitability
What is the definition of a takeover:
When one business buys majority ownership in another, thereby gaining full control
What is the definition of integration:
When two businesses are brought together through a merger or takeover
What are the four types of integration:
- Backward vertical integration
- Conglomerate integration
- Forward vertical integration
- Horizontal integration
What is vertical integration:
Involves acquiring a business in the same industry but at a different stage in the supply chain. e.g. primary to secondary
What is forward vertical integration?
An integration of a business that is closer to final consumers (e.g. a manufacturer buying a retailer)
What is backward vertical integration:
An integration of a business that is further from final consumers (e.g. a manufacturer buying a raw material supplier)
Give 4 advantages of vertical integration:
- To smoothen the supply chain
- Increase the barriers to entry for new entrants
- Make its distribution and after sales service more efficient and cheaper
- Gain insights of customer needs
Describe horizontal integration:
It’s a merger of companies at the same stage of production in the same or different industries. When the products of both companies are similar it is a merger of competitors. e.g. primary to primary
Give 4 advantages of horizontal integration:
- Exploit economies of scale - purchasing eos
- Wider range of products (diversification)
- Reduces competition by removing key rivals
- Buying an existing well known brand can be cheaper than starting a brand new one
Give four disadvantages of horizontal integration:
- Creating a monopoly
- Costs
- Increased work load
- Increased responsibilities
Give two disadvantages of vertical integration:
- The quality of goods supplied earlier by external sources may fall due to lack of competition
- Flexibility to increase/ decrease production of materials/ components may be lost as need to maintain certain levels due to economies of scale
What is conglomerate/ lateral integration:
Happens when companies join together that produce similar but related products
Give two advantages of conglomerate integration:
- Economies of scale
2. Product diversification
Give three disadvantages of conglomerate integration:
- Extra layers of management increase costs (tall structures)
- May create a lack of focus
- Brand dilution where the brand loses its brand association with a market segment/ product area.
What is revenue and cost synergies:
Benefits of being one business are better than 2 separate parts
what are four reasons for mergers and takeovers?
- Growth
- cost synergies
- diversification
- market power
what is a merger?
combination of previously separate firms which is achieved by forming a complete firm into which the two original firms are integrated under one new board of directors
what is a takeover?
when one firm buys a majority of the shares in another and therefore achieves full management control
what is the definition of private equity?
investment groups that buy up businesses in the expectation that they will be able to sell them on for a profit
what is the definition of a synergy?
this occurs when the whole is greater than the sum of the two separate parts. It is often the reason given for mergers and takeovers
Give 4 advantages of merging:
- a merger combines the finances from both businesses, leading to greater cash flow/ access to finance
- combination of two companies results in a businesses key competitor being lost leading to greater power in the market
- can reduce risk for the business (issues with supplier etc)
- in forward vertical merging, the smaller business could have access to a larger global market
Give 4 disadvantages of merging:
- can create job loss for employees as there is a duplication of roles
- could create leadership issues
- cultural cohesion may be difficult - cultural clash
- consumer perceptions
what is a small business? (3)
- under a certain number of employees
- legal status (LTD, partnership, PLC)
- no. of stores/ outlets
what is the definition of an SME?
any business with fewer than 250 employees
what does SMEs stand for?
small and medium sized enterprises
why are SMEs good for the UK? (4)
- creates employment
- generates/ encourages innovation
- stimulate growth (GDP)
- encourage competition - leading to a downward pressure on prices
what are 5 barriers to entry for smaller businesses?
- predatory pricing - undercutting from big businesses
- strong relationships/ influence over suppliers
- Assets they have invested in - high capital achievable by big businesses
- economies of scale, lower costs - big businesses
- patents
What are 6 strategies small businesses use to survive?
- flexible to customer needs/ close relationships with customers
- USP (successful in niche markets) can be premium priced
- customer service adds value
- convenience
- e-commerce - through third parties
- product differentiation - creates value and brand loyalty
what are 4 methods of differentiating as a small business?
- creates value
- non price competition
- brand loyalty
- no perceived substitute
what is the definition of m-commerce?
electronic transactions carried out while on the move
