Growth Flashcards
Why does a business want to grow (chain of argument)
1 )Take advantage of economies of scale - unit costs decrease - increase profit margins - increase profitability - allows business to lower prices and increase demand
2) Increase market share - increase market power - makes brand more recognisable - increase sales
What are mergers and takeovers
Mergers are when businesses join together to make a single business
Takeovers are when one business gains a controlling interest in another (over 50% shares)
What is organic growth
Organic growth is growth from within a business - for example by opening more stores or make new products. Growth is financed through reinvesting profits.
Reasons for mergers and takeovers
The new business after the merger/takeover is more profitable than all the individual businesses - as the new business will generate more revenue and cost savings (through economies of scale)
Strategic/Tactical decision - Tactical to gain access to new technologies of other business, or strategic to gain access to new markets
Organic growth pros and cons
Pros: Less risky as it expands upon what the business is already good at 2) Allows business to grow at sensible rate, meaning they won’t suffer from overtrading 3) maintains management
Cons: 1) Slower growth, shareholders may prefer more rapid growth 2) Business growth restricted to growth of market. Therefore if the market isn’t growing, the business will struggle to grow unless it increases market share or sells to a new market
Organic growth pros and cons
Pros: Less risky as it expands upon what the business is already good at 2) Allows business to grow at sensible rate, meaning they won’t suffer from overtrading
Cons: 1) Slower growth, shareholders may prefer more rapid growth 2) Business growth restricted to growth of market. Therefore if the market isn’t growing, the business will struggle to grow unless it increases market share or sells to a new market
What is a joint venture
A legal agreement between firms to work together on a joint project
Inorganic growth pros and cons
Pros:
Cons: 1) Businesses involved may have different objectives - lead to clashes in important issues and inefficiency - can result in diseconomies of scale
2) Causes duplicate roles - staff made redundant - adds redundancy costs - reduce profitability
3) Lead to overtrading - lead to diseconomies of scale - higher cost per unit - decreased profit
Reasons for GLOBAL joint ventures and mergers
Spreading Risk: 1) Foreign Firms have good knowledge of local market
2) If in multiple countries downturn in one country will not impact others sales
3) Risk is spread between partners
Access to different markets:
1) Allows firm to access others trading bloc, means they don’t have to pay tariffs, decreases costs
2) Firms can join together with businesses in LEDC, as there is more potential for growth
Securing supplies:
1) Allows firms to access supplies of raw materials
2) Can access strong supplier relationship of other firm
How can global mergers and joint ventures increase competitiveness?
Will increase size of firms global market - can take advantage of economies of scale - reduce unit costs - firm can decrease prices and increase competitiveness
Removes partner firm from market
Gives firm access to new tech, skilled labour - leads to increased innovation - increase comp
Relocate into country with lower tax - tax savings can be reinvested into more machinery and increase efficiency - lower costs and increase comp
Assess impact of organic growth
Good : Business maintains control (good if family business) - as it maintains existing management - this allows business to plan and control growth (decisions to enter markets and open factories)
Bad: 1) Growth is slower 2) Limited finance to fund growth (only internal finance) 3) Growth is limited (could only be in one market)
Counter: Organic growth is right as it allows business to maintain control
