Theme 3 Flashcards
Key reasons for Growth
- Increasing profits
- Achieve economies of scale
- Increase market power
- Increase market share and brand recognition
- Grow business and shareholder value.
Internal Economies of Scale Advantages and Disadvantages
+ Less Risky
+ Maintain company culture and ethics
+ Control the rate of growth
- Usually slower growth
- Miss opportunities for growth
- Takes time to adapt to changes.
Classic symptoms of overtrading
- High revenue growth but low gross and operating profit margins
- Persistent use of a bank overdraft facility
- Significant increases in the payable days and receivable days ratio.
- Significant increase in the current ratio
- Very low inventory turnover ratio
- Low levels of capacity utilisation
What is overtrading?
When a business expands too quickly without having the financial resources to support such a quick expansion.
What is portfolio analysis?
A method of analysing a business’ product according to their potential.
Based on Boston Matrix, which assesses each product in terms of the market growth in its segment plus its market share.
Aim of Portfolio Analysis
To provide a framework for a business to look at the opportunity cost of investing in its different product, e.g. where to spend limited marketing budget for the greatest return.
SMART Objectives
Specific
Measurable
Achievable
Realistic
Timed
Uses of the Mission Statement
- Track progress
- Public relations
- Strategic planning
What is a Mission Statement?
Long term objective of the business that includes the overriding goal of the business and the reason why it exists.
Relatively brief outline of the business and includes a relatively broad number of topics.
Limitations of the Mission
- Not always supported by business actions
- Too vague
- Viewed as public relations stunt
What is a merger?
Where two or more companies come together to form a new company.
Combine their assets in hope of becoming more efficient ad competitive.
Drawbacks of takeovers
- High cost involved
- Problems of valuation
- Upset customers and suppliers
- Problems with integration
- Resistance from employees
- Non-existent cost savings
- Incompatibility of management styles, structures and cultures
- High failure rates
- Questionable motives
What is a takeover?
A takeover (or acquisition) involves one business acquiring control of another business.
Possible reasons for takeovers
- Increase market share
- Acquire new skills
- Access economies of scale
- Secure better distribution
- Acquire intangible assets (brads, patents, trade marks)
- Spread risks by diversifying
- Overcome barriers to entry to target markets
- Defend itself against a takeover threat
- Enter new segments of a existing market
- Eliminate competition
Why might takeovers be preferred?
- Existing products are in later stages of their life cycle.
- Business lacks knowledge or resources to develop organically.
- Speed of growth is a high priority.
- Competitors enjoy significant advantages that are hard to overcome.
Advantages and Disadvantages of inorganic growth
+ Increase in revenue
+ Economies of scale
+ Reduced competition
- Regulators
- Initial cost of takeover
- Different corporate culture
Key reasons to stay small
- Product differentiation & USP
- Flexibility in meeting customer needs
- Deliver high standard of customer service
- Exploit opportunities from e-commerce.
What is the Boston Matrix?
A portfolio analysis tool categorising product based on their market growth rate and relative market share.
What are the 4 parts of the Boston Matrix?
Question Marks, Star, Cash Cow and Dog.
What is PESTLE Analysis?
Looks at external factors ad how they might impact on a business.
What are the 5 PESTLE factors?
Political, Economical, Social, Technological, Legal, Environmental.
What is SWOT Analysis?
An analytical tool used by businesses to identify, internal strengths and weaknesses, and external opportunities and threats.
What is Porter’s Five Forces?
A tool used by businesses in order to access the nature of the competition in the current market.
What are Porter’s Five Forces?
- Threat of New Entrants
- Threat of Substitutes
- Bargaining Power of Suppliers
- Bargaining Power of Buyers
- Rivalry
3 Methods of Investment Appraisal
- Payback Period
- Average Rate of Return
- Discounted Cash Flow (NPV)
What is Payback Period?
Time it takes for a project to repay its initial investment.
What is Average Rate of Return?
Looks at the total accounting return for a project to see if it meets the target return.
Benefits of Using Payback Period
- Simple and easy to calculate + easy to understand results.
- Focuses on cash flow.
- Emphasises speed of return; good for markets which change rapidly.
- Straightforward to compare competing projects.
Drawbacks of Using Payback Periods
- Ignores cash flows after payables has been reached.
- Takes no account of the ‘time value of money’
- May encourage short-term thinking
- Ignores qualitative aspects of a decision.
- Does not create a decision for the investment.
