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
What is Forward Vertical Integration?
Acquisition / merger of firm in same industry different production stage
What is Backwards Vertical Integration?
acquisition / merger of firms same industry in earlier production stage
What is Conglomerate Integration?
acquisition / merger of firms in different industries (reduced exposer to risk )
Reasons for business growth
- Owners/shareholders/managers desire to run a large business
- Owners/Shareholders desire for large share of market / high profit levels
- Desire for strong power in market (Monopoly)
- Desire to reduce cost by benefiting form economies of scale
- Growth opportunities provided by product diversification
- Larger firms have easier access to finances
Taking Netflix into consideration what would it look like for the business to partake in all levels of integration
Production company (Backwards Vertical)
Cinemas / theatres (Forwards Vertical)
Streaming sites (Horizontal)
Clothing ect (Conglomerate)
What are cause for “hold backs” on business growth ?
- Market size
- Access to finances
- Owner objectives
Regulation
