Enterprise - Size of business Flashcards
Why businesses wants to grow? (6)
- > Economies of scale
- > Strategy to increase market share
- > Survival
- > Popularity
- > Increase profit
- > Reduce risk of getting out of business
Define Internal/ Organic growth
Internal growth happens when an organisation:
- > Sells more of its products (Selling more chocolate)
- > Enters new market (Cadbury launching Tridents)
- > Starts to sell new products (Selling different types of chocolate products e.g: Caramel Nibbles, Krunchie Rock)
Define External Growth
Business expansion achieved by means of merging with or taking over another business, from the either same or different industry. Often referred at ‘integration’
2 ways of Integration
- Merger: A friendly deal where 2 businesses join together
e. g) Cadbury Schweppes merger - Take-over: A forced and sometimes hostile deal where 1 firm buys a share of the other business
e. g) Kraft bought Cadbury
Name for 4 types of integration
- Horizontal
- Vertical integration forward
- Vertical integration backwards
- Conglomerates integration
Define horizontal integration
This occurs when firms in the same industry and at the same stage of the production process combine to form a larger business
e.g) Cadbury merges with Nestle
Positive of Horizontal integration (6)
- Reduce in competition -> Market share increase
- New, innovative ideas
- Greater control on prices to make more profit
- Posible economies of scale ( the more you make the lower your costs)
- Become more efficient by redundancy of workers because they won’t need all of them
- Increase power over suppliers
Negative of Horizontal integration
- Rationalisation may bring bad publicity
2. May lead to monopoly investigation if the combined business exceeds certain market share limits
Impact of Horizontal integration on Stakeholders
- For firms
- > Business have different objectives & target -> argument
- > Communication problems
- > Costs lot of money to merge with or take over another business
- > Rassionaliselation - For customers:
- > Less choice
- > They have to pay higher prices due to lack of competition - For suppliers:
- > Economies of scale -> they make less profit
- > They have less customer ( from 2 to 1)
Define verticle integration
This occurs when a firm expands by combining with existing business in the same industry but at a different stage of the production process.
e.g) A chain of retailers ←——-> Cadbury ←——> Cocoa beans farm or dairy farmers
Define verticle forward integration
This occurs when a firm expands by combining with business in the same industry but a customer of the existing business
Advantage of verticle forward integration
- Able to control the promotion & pricing its own product
- Secures an outlet for the firm’s product -> can exclude competitor’s product
Disadvantages of verticle forward integration
- Inexperience in the new market
2. Consumer may suspect uncompetitive activity & react negatively
Impact of verticle forward integration on stakeholders
- Workers: Have greater job security because the business has secure outlets
- More varied career opportunities - Customers: Consumers have less option of product because of the elimination of competitors in the outlet
Define vertical backward integration
This occurs when a firm expands by combining with business in the same industry but a supplier of the existing business
Advantages of backward integration
- Gives control over quality, prices & delivery time of supplies
- Encourage joint research & development into improved quality of supplies of components
- May be able to control supplies of materials to competitors
- Reduced cost -> gained of competition
Disadvantages of backward integration
- May lack in experience in managing suppliers which may lead to inefficiency
- Supplying business may overconfident due to having a guaranteed customer
Impact of backward integration on Stakeholders
- Employees: Possibility of greater career opportunities
2. Consumers: May obtain improved quality and more innovative products
Define Merger
An agreement by shareholders and managers of 2 businesses to bring both firms 2gether under a common board of directors w/ shareholders in both businesses owning shares in the newly merged business
Define takeover
When a company buys over 50% of the shares of another company and becomes the controlling owner of it. Often referred as an ‘acquisition’
Define Synergy
The whole is greater than the sum of parts. So in integration, it’s often assumed that the new, larger business will be more successful than the 2, formerly separate businesses were.
Why would integrated businesses be more effective and effective and efficient than the 2 separate companies? (3)
- Sharing of research facilities and more ideas
- Economies of scale
- Save costs on marketing and distribution by using the same sales outlets
Why wouldn’t integrated businesses be more effective and efficient than the 2 separate companies (3)
- Diseconomies of scale
- If the firms have different markets, there may be little mutual benefit from sharing research facilities and marketing and distribution systems.
- Contrasting management culture
Definition joint ventures
2 or more businesses agree to work closely together on a particular project and create a separate business division to do so.
Importance of joint ventures (6)
- Costs and risks of new business venture are shared
- Sharing of expertise of the business which could fit together
- Exploiting each other’s markets
- However, there may be a culture clash (different style of management that don’t blend)
- Error and mistakes might lead to one blaming the other
- A business failure of one of the partners might put the whole project at risk
Define strategic alliances
Agreements between firms in which each agrees to commit resources to achieve an agreed set of objective
Importance of strategic alliances (3)
These alliances can be made with stakeholders like:
- Universities: to allow new training specialist courses for employees (off the job training)
- Supplier: To design and produce components and materials for new range of products which may reduce total development time and average costs
- Competitor: To reduce risks of entering a market that neither firms operate in.
