Business Growth and Strategic Methods Flashcards
what are economies of scale
as the scale of production increases, the cost of producing each item decreases
what are the four types of economies of scale
technical, managerial, purchasing and marketing
what are technical economies
technical economies of scale are related to production. Production methods for large volumes are often more efficient.
what are managerial economies
where large businesses can employ managers with specialist skills to manage specific departments. They oversee plans and strategies which can result in work being done more quickly and efficiently
what are purchasing economies
purchasing economies are to do with discounts. Big businesses can negotiate and bargain.
what are marketing economies
market costs are usually fixed, so a business with a large output can spread the cost over more units
what are external economies of scale
when industries are concentrated in small geographical areas. Either being located close to suppliers means the business can negotiate with a range of suppliers. Labour supply can also be better
what is the experience curve
whereas a business grows and increases its sales volume, it will be to produce more products
how does production follow the experience curve
as the total units produced increases, the cost per unit decreases at a constant rate
how does efficiency follow the experience curve
efficiency increases as total units produced increases
when doing economies of scope arise
when a business produces multiple products instead of specialising in one
what are economies of scope
when more variety is cheaper. It is cheaper for one business to produce many products than it is for many businesses to produce one product each
what do economies of scope allow
for businesses to charge lower prices due to lower unit costs, giving a competitive advantage
what are diseconomies of scale
where unit costs increase as the scale of production increases
what can cause diseconomies of scale with coordination
poor coordination leads to lower efficiency. In bigger firms, it’s hard to coordinate activities between different departments
how can motivation cause diseconomies of scale
it is harder to motivate people in a large firm. People may feel like they don’t belong and that there is no point in their work
how can management help avoid diseconomies of scale
strong leadership, delegation and decentralisation
what is retrenchment
when businesses become purposefully smaller
when may retrenchment be necessary
when businesses are experiencing diseconomies of scale, in declining markets, economic recession or there is improved competitor performance
How can retrenchment be achieved
cutting jobs, reducing output, withdrawing from markets and splitting the business up (demerging).
What is the issue with quickly retrenching
it may affect workers and lead to decreased productivity
what is organic growth
when a business grow from within
what is external growth
when a business grows through mergers or takeovers
advantages of organic growth
they can maintain the current management style, culture and ethics. There is less risk as it is financed using profits. It’s easy for the business to manage internal growth. Less disruptive changes mean that workers’ efficiency, productivity and morale remain high
disadvantages of organic growth
it can take a long time, it is dependent on whether the market grows and the business might miss out on opportunities for more ambitious growth
what is the issue with business growth
potential for diseconomies of scale
it may be difficult to manage cash flow
risk of overtrading
the change from LTD to PLC can make running the company more complicated
businesses have to avoid becoming a monopoly
why may businesses choose to restrict growth
to maintain culture
bigger businesses are more complicated to manage
growth require more finance
they may not want to put too much strain on cash flow
which model is used to show growth
Greiner’s Model of Growth
what is phase 1 of Greiner’s model of growth
CREATIVITY -> LEADERSHIP CRISIS
there is a need for strong leadership to give the company direction and structure
what is phase 2 of Greiner’s model of growth
DIRECTION -> AUTONOMY CRISIS
Leaders set up a formal organisational structure with defined departments and roles. It is where the business is too big for senior managers to manage everything
what is phase 3 of Greiner’s model of growth
DELEGATION -> CONTROL CRISIS
more power and responsibility is delegated down to middle-managers and organisational structure may become decentralised. Leaders may try to regain some control
what is phase 4 of Greiner’s model of growth
COORDINATION -> RED TAPE CRISIS
Decisions become more centralised and new procedures to coordinate different areas of the business are implemented. However, there can be too many procedures, which will decrease efficiency
what is phase 5 of Greiner’s model of growth
COLLABORATION -> GROWTH CRISIS
formal procedures are replaced by collaboration between departments and teams. At this point, the company might struggle to grow internally and may have to consider external growth
what is a franchise
a franchise is an agreement that allows a new business to use the business idea, name and reputation of an established business
what does franchising allow
it allows the franchisor to grow quickly as most of the costs and risks are taken on by the franchisee. For example, SUBWAY increased the number of its fast-food restaurants from 100 to 2000 between 2002 and 2015.
what is the risk of franchising to the franchisor
if just one of their franchisees has poor standards and gets a bad reputation, then it will affect the reputation and profits of the franchisor
what is synergy
where two businesses become more profitable after merging than before
what is a joint venture
where businesses share their resources but there is no change of ownership for the businesses involved
what three ways can external growth come
horizontal, vertical and conglomerate
what is horizontal integration
when a firm combines with another firm in the same industry at the same stage of the production press e.g two suppliers. E.g Vodafone India and Idea Cellular merged in 2018
what is vertical integration
when a firm combines with another firm in the same industry but at a different stage of the production process e.g a retailer taking over a manufacturer or distributor
what is forward vertical integration
when a business combines with another business that is further on in the production process e.g a manufacturer merging with the outlets where its protect are sold gives the manufacturer direct access to the retail market
what is backward vertical integration
when a business combines with another business at an earlier stage of the production process. For example, a retailer taking over its suppliers allows them to control the production of their suppliers so they can be sure that suppliers won’t be disrupted
what are conglomerate mergers
mergers between unrelated firms.
what are the reasons for external growth
diversification reduction in competition geographical benefits economies of scale and scope switching production to lower-cost countries to gain technology or expertise
why is external growth risky?
there may be tensions between merged staff
some parts of the organisation may need to be closed
culture clash
businesses have to takeover liabilities of businesses they takeover
the competition and markets authority investigates whether a proposed merger will restrict competition
diversification would equal limited experience
moving overseas, businesses have to consider different laws, languages and cultures
