Theme 3.2 Business Growth

Question 1

Why do businesses grow?

Answer 1

-increase market share and brand recognition
-increase market power
-achieve EoS
-increasing profits
-to grow business and shareholder value

Question 2

What is EoS?

Answer 2

Economies arise when unit cost fall as output increases

Question 3

Unit cost formula

Answer 3

Total production costs in period of time / total output in period of time

Question 4

Internal economies of scale

Answer 4

-purchasing economies
-marketing economies
-specialisation and managerial economies
-financial economies
-risk-bearing economies

Question 5

What are purchasing economies?

Answer 5

Buying in greater quantities usually resulting in lower price (bulk buying)

Question 6

What are marketing economies?

Answer 6

Spreading a fixed marketing spend over a large range of products, markets and customers

Question 7

What are specialisation and managerial economies?

Answer 7

-Use of specialist equipment/ processes to boost productivity
-Specialist managers can be employed to help reduce unit costs and boost efficiency

Question 8

What are financial economies?

Answer 8

Larger firms benefit from access to more and cheaper finance

Question 9

What are risk-bearing economies?

Answer 9

-Larger firms benefit from having wider, more diversified product range
-they are better able to withstand the risk of a fall in demand

Question 10

External economies of scale

Answer 10

-labour
-ancillary and commercial services
-reputation
-integration

Question 11

What is labour?

Answer 11

-local workforce who already have the skills needed – have them working for other firms in the area = reduced training cost

Question 12

What are ancillary and commercial services?

Answer 12

Suppliers will choose to locate near their customers
-reduces delivery times, transport costs and the need to hold large quantities of stock

Question 13

What is reputation?

Answer 13

The area will build up a good rep for particular products
-will benefit firms in the area and encourage other firms to locate there

Question 14

What is integration?

Answer 14

Firms will receive support from the local council and national government e.g. motorways may be built which makes distribution easier

Question 15

What are diseconomies of scale?

Answer 15

When the business expands beyond the minimum efficient scale and average unit cost starts to rise as production rises

Question 16

Why would costs rise?

Answer 16

-worsening communication/miscommunication
-increased layers of hierarchy can reduce efficiency
-poor coordination
-lack of control
-poor employee motivation

Question 17

Internal diseconomies of scale

Answer 17

-communication
-coordination
-control

Question 18

External diseconomies of scale

Answer 18

-high rents cost in an area
-high wage cost due to demand for skilled labour
-congestion on roads = delays delivery
-raw materials are scarce = suppliers increase costs due to demand

Question 19

What problems arise from growth?

Answer 19

-diseconomies of scale
-lack of motivation
-overtrading
-increase market power over customers and suppliers too much
-increased market share and brand recognition = need to keep innovating

Question 20

What is profit?

Answer 20

The difference between total revenue and total costs

Question 21

What is profitability?

Answer 21

The amount of profit that has been (or can be) generated by a business, relative to revenue/investment

Question 22

What is inorganic growth?

Answer 22

Growth from outside the business

Eg. Takeovers, mergers, joint ventures, strategic alliance

Question 23

What is organic growth?

Answer 23

Expansion from within the business

Eg. Exporting, franchising, new products, new locations

Question 24

What methods can a business use to grow organically?

Answer 24

Exporting
Franchising
New business model (e commerce)
Expansion of work force
New customers/ target market
New products
New markets (foreign markets)

Question 25

+ves of organic growth

Answer 25

-lower risk than external growth -can be financed through internal funds -build on business strengths e.g. brand, customers -allows the business to grow at a more sensible rate -easy to manage and control how much it will grow -can maintain current management style, culture and ethics

Question 26

-ves of organic growth

Answer 26

-growth achieved maybe dependent on growth of market overall -hard to build market share if already the market leader -slow growth, shareholders may prefer more rapid growth -franchises can be hard to manage effectively -might miss out on opportunities for ambitious growth

Question 27

What characteristics does a business need to grow successfully with organic growth?

Answer 27

-distinctive brands and portfolios -use market and product development -resources to support expansion -sustained investments in new products -strong distribution channels

Question 28

What is a merger?

Answer 28

Two or more firms become integrated (join) to form one management

Question 29

What is a takeover?

Answer 29

One firm gains control over another and becomes the owner

Question 30

What are the reasons for takeovers and mergers?

Answer 30

-increase market share -acquire new skills -access EoS -secure better distribution -acquire intangible assets (brand, patents) -spread risks by diversifying -overcome barriers to entry to target markets -defend against a takeover threat -enter new segments of an existing market -to eliminate competiton

Question 31

When are takeovers an appropriate method of growth?

Answer 31

* Existing products are in the later stages of their life cycles * Business lacks knowledge or resources to develop organically * Speed of growth is a high priority * Competitors enjoy significant advantages that are hard to overcome

Question 32

What are the drawbacks of a takeover?

Answer 32

* High cost involved * Problems of valuation * Upset customers and suppliers * Problems of integration (change management) * Resistance from employees * Non-existent cost savings * Incompatibility of management styles, structures, and culture * Questionable motives

Question 33

Why do takeovers fail?

Answer 33

* Price paid for the takeover was too high (over-estimate of synergies) * Lack of decisive change management in the early stages * The takeover was mishandled * Cultural incompatibility between the two businesses * Poor communication, particularly with management, employees, and other stakeholders of the acquired business * Loss of key personnel & customers post-acquisition * Competitors take the opportunity to gain market share while the takeover target is being integrated

Question 34

What are the financial risks and rewards of a merger or takeover?

Answer 34

* The original purchase cost- usually funded by debt * Cost of adjusting the new business * Redundancies and staffing costs of those holding duplicate roles * Immediate increased revenue from the new business * Economies of scale leading to reduced costs.

Question 35

What are the problems with rapid growth?

Answer 35

-coping with change -overtrading -diseconomies of scale -poor employee motivation -alienating customers

Question 36

What is a conglomerate?

Answer 36

Where acquisition has no clear connection to the business buying it

Question 37

What is a synergy?

Answer 37

The value of 2 businesses together is higher than the sum of 2b individual businesses (1+1=3)

Question 38

What are the cost savings of having a synergy?

Answer 38

-eliminate duplicate functions and services -better deals from suppliers -higher productivity and efficiency from shared assets

Question 39

What are the revenues of having a synergy?

Answer 39

-cross selling to customers -access to new distribution -brand extensions -new geographic markets open up