Growth Flashcards
Horizontal Intergration
When two businesses in the same industry at the same stage of production merge.
Mergers
When two businesses agree to merge their operations and become one single company.
Vertical intergration
Where a firm develops market dominance by integrating with different stages of production in the industry. Forward integration occurs when a business merges with another business further forward in the supply chain. Backward integration occurs when a firm merges with another business at a previous stage of the supply chain.
Conglomerate Merger
The merger of firms in different industries.
Takeover
When one company buys another.
Demerger
When a firm splits into two or more independent businesses.
Synergy
When merging the activities or two firms can create a greater outcome than the sum of their individual parts.
Internal Growth
When a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses.
Economies Of Scale
A fall in the long run average costs as output rises. This opens up the possibility of them making a bigger profit margins and also building a competitive advantage in their own chosen markets. For consumers, lower costs per unit can be translated into reduction in market prices which leads to a rise in their real purchasing power and a potential improvement in economic welfare.
Internal Economies of Scale
Occur due to an increase in the scale of production within a firm.
External Economies of Scale
Occur due to an increase in the size of an industry within which a firm operates.
Diseconomies of Scale
When a business expands beyond a certain size, average costs per unit may start to increase. As firms grows, management finds it more difficult to organise production efficiently. It is much easier to lose control of costs in a large organisation than in a small business.
Why would a firm integrate?
- Quicker to achieve economies of scale
- Existing factors of production
- Rationalisation reduces cost
- Achieves greater concentration within market (reduces competition- one less competitor)
What do businesses gain from growth?
- Economies of Scale
- The Risk Motive-> Diversify, E.g. Virgin
- Managerial motives (linked to pay)
- Increase quantity -> Greater revenue -> Greater profit
- Market Power -> provides pricing power
- Increased awareness of product (lowers advertising)
Measures of growth?
- Increased Output
- Increased Sales
- Greater retail outlets
- More online clicks
Synergy
When merging the activities or two firms can create a greater outcome than the sum of their individual parts.
Cost Synergies
Refer to the ability to cut costs of the combined firms due to consolidation of operations e.g. Marketing, rationalising etc.
Revenue Synergies
Revenue synergies refer to the ability to sell more products/ services to raise prices due to the deal e.g. R&D and innovation, cross selling etc.
How can cost synergies be achieved?
By reducing unnecessary duplicates.
Rationalisation
Using capital more effectively when merging.
Cross selling
When a consumer purchases one product and the supplier attempts to sell additional products, this is facilitated by mergers.
Why may firms demerge?
- No common ground
- Reputation
- Different target market
- Lack of synergy -> information a-symmetry (over- estimation)
- Recession
- Different target market/ Culture clash
- Diseconomies of Scale
- Effect on staff productivity -> may be high staff turnover
Examples of purchasing and marketing economies of scale…
- the bigger the business, the more raw materials they buy so therefore prices are lower.
- have lower average costs, it costs the same to advertise in the same way as smaller businesses.
Examples of managerial economies of scale…
- specialisation leads to greater efficiency.
- lowers cost of division of labour occurs.
Examples of financial economies of scale…
- large firms can get bank loans more easily.
- banks charge smaller interest rates to larger firms - less risk.
- invest in capital to increase money.
Examples of technical economies of scale…
- exist due to increasing and decreasing returns to scale.
- arise from what happens during production process, as firms may not make full use of equipment.
- unit costs can change due to the firms size changing.
Examples of external economies of scale…
- existing infrastructure.
- labour, locally skilled - less training etc.
- supplies/ raw materials avaliable in the area.
- good transportation network.
- area with a reputation for a product or service - less marketing needed.
Why do external economies of scale occur?
- suppliers congregate in an area
- existing workforce
- better infrastructure
- good transportation
- reputation
Why do internal diseconomies of scale occur?
- poor communities
- division of labour becomes repetitive
- alienated and demotivated workforce
- lack of effective communication
- corporate bureaucracy
- standardisation
Why do external diseconomies of scale occur?
- competition for employers and suppliers
- traffic and congestion
- higher land prices
Causes of demergers
- culture clash
- labour productivity
- conglomerates hard to manage
- lack of synergies
- share prices falling
- SR costs vs LR benefits
- change in business cycle
Benefits of being a small firm
- easier to manage
- lower start up costs
- local monopolies
- niche market
- lower barriers to entry
