unit 9 Flashcards
organic growth
when a business expands its own operations e.g sells more existing products
external growth
when a business joins with another business
acquisitions/takeovers - when one business gains a controlling share of another
mergers - one business joins with another business and owners become joint owners
organic growth benefits and disadvantages
slower growth
gradual increase in scale
easier to manage
often requires a lot of investment and commitment
external growth benefits and disadvantages
overnight change in scale
quick increase in the number of employees
new management challenges
difficulties in joining the two together
culture clash
vertical intergration
coming together of two firms in the same industry but at different stages of the production process.
e.g a manufacturer integrating with supplier i.e Tesco & Booker
results in a position to control supplies or sales of the product and reduces cost. also builds new barriers to entry for new competition.
horizontal intergration
coming together of business at the same operating stage of production and in the same market.
e.g Wal-Mart and ASDA, VIrgin Media & O2
likely to create significant economies of scale and reduces the amount of competition in the market.
conglomerate intergration
coming together of business operating in unrelated markets
e.g co op group expanded to travel, farming, insurance services, legal services and funerals.
good for a business that is in a current declining market and the business can achieve large scale growth.
benefits of growth
economies of scale - occur when unit costs fall as a business expands, relate to volume of output
purchasing - a reduction in unit costs as result of buying in large quantities
technological - lower unit costs because larger firms are able to use more efficient technologies of production
financial - large firms have a greater access to sources of finance at lower costs
managerial - large firms have greater scope to benefit from specialisation of labour at supervisory and managerial level in each of the functional areas. will be able to make better decisions and lower unit costs.
economies of scope - when a business gains cost advantages from providing a variety of products rather than specialising in the production or delivery of a single item
the experience curve - indicates the higher volume of production, th lower the direct cost per new unit produced; essentially a business gets better at making a product, the better, faster and cheaper it is likely to be at making it.
synergy - when the whole sum is greater than the sum of parts, synergy is sometimes summarised as a 1+1=3 e.g a team of people work better than individual people or synergy can be claimed as a benefit of a merger or takeover.
i.e Kraft buying Cadbury, cadbury had a supply chain in india, kraft didnt
problems with growth
diseconomies of scale - occur when unit costs start to increase as a business expands
communication problems
control and coordination problems
motivation issues
culture
overtrading occurs when there are liquidity problems linked to financing rapid growth
e.g brings in too much stock, sale it, people wait for new season stock to be price dropped.
symptoms of overtrading - very low inventory turnover ratio, persistent use of bank overdraft facility
retrenchment
id the cutting back of an organisations scale of operation
reasons for retrenchment
- poor financial performance
- difficult economic conditions
- strong competition, resulting in declining market share
- diseconomies of scale caused by growth
- diversified to far, need to refocus and allow for specialisation again.
methods of retrenchment / managing retrenchment
- reducing the workforce gradually by freezing recruitment, offering early retirement or voluntary redundancy
- delayering, which removed a layer of management from the organisational hierarchy
- closing a factory, outlet or division of business
- making targeted cutbacks and redundancies throughout the business
problems with retrenchment
- damage to employee morale due to job losses
- damage to relationships with customers and suppliers if they are affected by reductions in the products available for sale or by reduction sin the purchase of supplies
- general reputation damage with stakeholders adversely affected.
- loss of corporate knowledge when experienced employees leave
ventures
a range if different arrangements between two or more firms, normally inolving companies in the early stage of development with high growth potential; venture capitalists or larger companies invest in these companies knowing both risk and reward is high.
franchise
when a business (the franchisor) gives another business (the franchisee) the right to supply its product or service.
franchisee pays the franchisor an inital fee to the franchisor then a percentage royalty on sales
organic/internal growth
franchising - benefits for franchisor
- quick method of growth
- does not need to invest in additional premises or staff to grow, instead focus on developing business idea
-still retains control over the quality of the products and the way they are marketed and distributed - franchisee may have better local knowledge which can ncrease chances of success
franchising benefits forfranchisee
- least risky way of starting a business
- fanchise business usually have established brand names - increased chances of success e.g. Starbucks
- franchisor offers support and training
- lower advertising and promotional costs as done by franchisor
- relationships with supplrs already established
