CH 3 - Size of Business Flashcards
What is External Growth?
Merger / Takeover (inorganic)
Faster than internal growth more expensiveness
Why would a business undergo inorganic growth (External) ?
Economies of scale - horizontal integration (bigger volume from suppliers)
Increase market share - bigger percentage of market / less rivals
Secure point of sale - forward/vertical integration - secure place to sell product refuse rival use
Secure supplies - backward vertical - stop rivals
Reduce risk - conglomerate reduce risk mitigate ,
Acquire knowledge - acquire intellectual property
Acquire talent - common in tech industries
What is a Merger ?
Conciliated of two entity (company A + Company B = Company C ) New entity
Is a takeover organic or inorganic growth?
Inorganic + External Growth
A merger is also inorganic growth
What is a Takeover ?
One take over another entity - hostile (Company A [buy shares] + Company B = Company A ) Part of Company A
= Bigger business
Problems associated with growth
- Diseconomies of scale , growing too large making it different to control and manage
- Internal communication , growing quickly can affect communication channels may lead to miscommunication
- Overtrading, a company takes on business it can’t handle causing a strain on resources and inability to meet obligations (finical)
Problems associated with Rapid growth
‘Note - can be caused also by inorganic growth’
- Customer Service, can be affected and decrease as other areas of the business require to be look at more (increase strain in other areas)
- Quality Control, can be affected and decrease as other areas of the business require to be look at more (increase strain in other areas)
Cash Flow, in a merger or takeover may require investment for new tech/equipment and possibly staff can cause financial strain especially if the company’s revenue doesn’t grow or keep up with the business
What can effect the size/growth of a small business?
- Changes of tech , can work in favour either for small business or large
- Internet , low cost access to markets ( e-commerce )
- Technology , if effectively used can help with prices needs for small markets ( often where small business are ) can reduce costs between mass produced or niche products [ may work in favour of personalised and small scale ]
- Niche markets , targeted by small business due to smaller expenses and sales volume is lower than required for large competitors
What is Organic growth (Internal Growth) ?
Cheaper / slower
New products - (sell in existing market ) innovation research and development
- Increase product range
- Better meet customer needs
Increase in sales
- Use patent to prevent rivals copying
Lower competition and increase prices
Research is time consuming (changing consumer needs/ tech change ) and expensive - no guarantee of success
New markets - ( sell in new )
Adapting marketing mix
Increase promotion
Pricing strategies
Change of distribution (e-commerce - cost effective)
Depends on product and life cycle
International markets :
Exchange rate
Trade barriers - tariffs and price increases
What are economies of scale?
Occurs when average cost decreases as output increases
What are diseconomies of scale ?
Occurs when average cost increases as the output increases
What are internal economies of scale ?
A result of the growth in scale productions within the business
Beneficial for a business if they lowered the average costs generated from inside the business
What are external economies of scale ?
A result of a size increase in the industry the business operates in
Can benefit from lower average costs generated by outside the business
What are the types of integration ?
Horizontal , Forward Vertical , Backward Vertical & Conglomerate
What is Horizontal Integration?
Acquisition/merger of firms in same industry and production stage
