Chapter 1.5 - Growth and evolution Flashcards
Acquisition
A method of external growth that involves one company buying a controlling interest (majority stake) in another company, with the agreement and approval of the target company’s Board of Directors
Average cost
The cost per unit of output
Backward vertical integration
Occurs when a business amalgamates with a firm operating in an earlier stage of production
(ex: a car manufacturer taking over a supplier of tyres or other components)
Conglomerates
Businesses that provide a diversified range of products and operate in a range of different industries
Demerger
Occurs when a company sells off a part of its business, thereby separating into two or more businesses.
It usually happens due to conflicts, inefficiencies, and incompatibilities following an earlier merger of two or more companies
Diseconomies of scale
The cost disadvantages of growth.
Average costs are likely to eventually rise as a firm grows due to a lack of control, coordination, and communication
Economies of scale
Refer to lower average costs of production as a firm operates on a larger scale due to gains in productive efficiency, such as easier and cheaper access to sources of finance
External diseconomies of scale
Occur due to factors beyond its control which cause average costs of production to increase as an industry grows
External economies of scale
Occur when an organization’s average cost falls as the industry grows.
(All firms in the industry benefit)
External growth (inorganic growth)
Occurs when a business grows and evolves by collaborating with, buying up, or merging with other organizations
Financial economies of scale
Cost savings made by large firms as banks and other lenders charge lower interest because larger businesses represent lower risk
Forward vertical integration
A growth strategy that occurs with the amalgamation of a firm operating at a later stage in the production process, such as a book publisher acquiring book retailers
Franchising
An agreement between a franchisor selling its rights to other businesses to allow them to sell products under its corporate name in return for a fee and regular royalty payments
Horizontal integration
External growth strategy that occurs when a business amalgamates with a firm operating in the same stage of production
Internal diseconomies of scale
Occurs due to internal problems of mismanagement, causing average costs of production to increase as a firm grows
Internal economies of scale
Occurs within a particular organization as it grows in size
Internal growth (organic growth)
Occurs when a business grows using its own capabilities and resources to increase the scale of its operations and sales revenue
Joint venture
A growth strategy that combines the contributions and responsibilities of two or more different organizations in a shared project by creating a separate legal enterprise
Lateral integration
Refers to the external growth of firms that have similar operations but do not directly compete with each other
Marketing economies of scale
Occurs when larger businesses can afford to hire specialist managers, thereby improving the organization’s overall efficiency and productivity
Merger
A form of external growth whereby two (or more) firms agree to form a new organization, thereby losing their original identities
Optimal level of output
The most efficient scale of operation for a business. This occurs at the level of output, where the average cost of production is minimized
Purchaser
Refers to the aquiring company in an acquisition or the buyer or another company in a takeover
Purchasing economies of scale
Occurs when larger organizations can gain huge cost savings per unit by purchasing vast quantities of stocks
