Theme 3.2 Business Growth Flashcards
Why do businesses grow?
-increase market share and brand recognition
-increase market power
-achieve EoS
-increasing profits
-to grow business and shareholder value
What is EoS?
Economies arise when unit cost fall as output increases
Unit cost formula
Total production costs in period of time / total output in period of time
Internal economies of scale
-purchasing economies
-marketing economies
-specialisation and managerial economies
-financial economies
-risk-bearing economies
What are purchasing economies?
Buying in greater quantities usually resulting in lower price (bulk buying)
What are marketing economies?
Spreading a fixed marketing spend over a large range of products, markets and customers
What are specialisation and managerial economies?
-Use of specialist equipment/ processes to boost productivity
-Specialist managers can be employed to help reduce unit costs and boost efficiency
What are financial economies?
Larger firms benefit from access to more and cheaper finance
What are risk-bearing economies?
-Larger firms benefit from having wider, more diversified product range
-they are better able to withstand the risk of a fall in demand
External economies of scale
-labour
-ancillary and commercial services
-reputation
-integration
What is labour?
-local workforce who already have the skills needed – have them working for other firms in the area = reduced training cost
What are ancillary and commercial services?
Suppliers will choose to locate near their customers
-reduces delivery times, transport costs and the need to hold large quantities of stock
What is reputation?
The area will build up a good rep for particular products
-will benefit firms in the area and encourage other firms to locate there
What is integration?
Firms will receive support from the local council and national government e.g. motorways may be built which makes distribution easier
What are diseconomies of scale?
When the business expands beyond the minimum efficient scale and average unit cost starts to rise as production rises
Why would costs rise?
-worsening communication/miscommunication
-increased layers of hierarchy can reduce efficiency
-poor coordination
-lack of control
-poor employee motivation
Internal diseconomies of scale
-communication
-coordination
-control
External diseconomies of scale
-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
What problems arise from growth?
-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
What is profit?
The difference between total revenue and total costs
What is profitability?
The amount of profit that has been (or can be) generated by a business, relative to revenue/investment
What is inorganic growth?
Growth from outside the business
Eg. Takeovers, mergers, joint ventures, strategic alliance
What is organic growth?
Expansion from within the business
Eg. Exporting, franchising, new products, new locations
What methods can a business use to grow organically?
Exporting
Franchising
New business model (e commerce)
Expansion of work force
New customers/ target market
New products
New markets (foreign markets)
+ves of organic growth
-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
-ves of organic growth
-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
What characteristics does a business need to grow successfully with organic growth?
-distinctive brands and portfolios
-use market and product development
-resources to support expansion
-sustained investments in new products
-strong distribution channels
What is a merger?
Two or more firms become integrated (join) to form one management
What is a takeover?
One firm gains control over another and becomes the owner
What are the reasons for takeovers and mergers?
-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
When are takeovers an appropriate method of growth?
- 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
What are the drawbacks of a takeover?
- 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
Why do takeovers fail?
- 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
What are the financial risks and rewards of a merger or takeover?
- 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.
What are the problems with rapid growth?
-coping with change
-overtrading
-diseconomies of scale
-poor employee motivation
-alienating customers
What is a conglomerate?
Where acquisition has no clear connection to the business buying it
What is a synergy?
The value of 2 businesses together is higher than the sum of 2b individual businesses
(1+1=3)
What are the cost savings of having a synergy?
-eliminate duplicate functions and services
-better deals from suppliers
-higher productivity and efficiency from shared assets
What are the revenues of having a synergy?
-cross selling to customers
-access to new distribution
-brand extensions
-new geographic markets open up
