Topic 9.1 - Assessing a change in scale Flashcards
Reasons a business grows
- increase profitability
- become more efficient
- market dominance
Reasons a business retrenches
- to survive a recession
- delayering to improve competitiveness
- prevent losses at the end of a products life cycle
- strategic change of direction
Organic growth
Expand from within
- product portfolio
- new stores
External
Growth by takeover or merger
Purchasing economies of scale
Businesses reach a large size and can bulk buy from suppliers leading to cheaper prices
Technical economies of scale
Adopt new technology allowing a lower unit cost
Managerial economies of scale
Large enough to employ specialists for each business function
Economies of scope
Spread costs over several markets or products
Diseconomies of scale
- difficult communication
- harder to motivate
- harder to control and coordinate
The experience curve
Better knowledge makes better decisions which makes cost advantages
Synergies
Two or more businesses combine and are worth more than them individually
Overtrading
Business experiences liquidity problems associated with the cost of growth
Problems associated with growth
Overtrading
- inflows come in after outflows
- cash forecasting
- arrange new capital
Mergers and takeover
- inherit bad debt
- different organisational cultures
Problems associated with retrenchment
Redundancies
- harms overall staff morale
Impact of growth and retrenchment on the functional areas
Marketing
- growth - competitive markets may have to have better value for money
- retrenchment - scale down production so less promotion and less new product development
Finance
- growth - cash flow problems
- retrenchment - redundancy payments affect cash outflows
HR
- growth - additional staff for extra workloads
- retrenchment - improve staff morale
Operations
- growth - ensure additional demand can be met
- retrenchment - investment in new machinery and equipment likely to be halted
Mergers
A merger is a combination of two previously separate firms which is achieved by forming a completely new business into which the two original firms are integrated
Takeover
A takeover (or acquisition) involves one business acquiring control of another business
Reasons for a merger or takeover
- growth
- cost synergies
- diversification
- market power
- acquire new skills
- Increase market share
- secure better distribution
- acquire intangible assets (brands, patents, trade marks)
- overcome barriers to entry to target markets
- defend itself against a takeover threat
- eliminate competition
Risks of takeovers
- high costs
- employee resistance
- incompatible management styles
Venture
A joint venture (JV) is a separate business entity created by two or more parties, involving shared ownership, returns and risks
Franchising
When franchisee pay to be able to use your brand, menu or assets
Vertical integration
When one firm takes over or mergers with another at a different stage of the production process
Horizontal integration
When one firm buys out another a the same stage of the supply chain
Conglomerate integration
One firm buys out another with no clear link to its line of business
Advantages of backwards vertical integration
- closer links to suppliers allowing higher control over quality and timing
- ## higher profit margins
Disadvantages of backwards vertical integration
- suppliers may lose aspects of team morale
- reduce variety of goods available
Advantages of forward vertical integration
- control competition
- direct contact with customers
- increase control
-
