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A-Level Business > unit 9 > Flashcards

unit 9 Flashcards

1
Q

why do business grow

A
  • increase shareholder value
  • increase market share
  • reduce average cost
  • fulfil an objective of growth
  • stakeholders perception of success
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2
Q

reasons for retrenchment

A
  • downsizing the scale of the business operations eg closing branches, selling off parts of the business, delayering
    - Possible reasons include
  • restructure to increase efficiency
  • turn around poor performance
  • focus on core business
  • sell of less profitable parts of business to improve overall performance
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3
Q

organic growth

A

when a firm grows with its existing business eg increasing capacity and outlets

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4
Q

external growth

A

is growth that is dependant on other businesses and may be via mergers, takeover or joint ventures

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5
Q

how to calculate unit costs

A

total output in period (units)

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6
Q

economies of scale

A

economies of scale arise when unit costs fall as output increases

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7
Q

internal economies of scale

A

arise from the increased output of the business itself

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8
Q

external economies of scale

A

occur within an industry: i.e. all competitors benefit

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9
Q

technical economies of scale

A

as firms grow, they are often able to invest heavily in automation in order to further improve their efficiency and productivity.

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10
Q

managerial economies of scale

A

smaller firms are often unable to afford manager with specialist expertise (eg in finance, HR, marketing)

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11
Q

purchasing economies of scale

A

the major grocery supermarket chains are able to obtain much lower prices from key suppliers than smaller independent retailers

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12
Q

marketing economies of scale

A

spreading a fixed marketing spend over a larger range of products, markets and customers

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13
Q

network economies

A
  • adding extra customers or users to a network that is already established (eg mobile phones, Netflix)
  • adding an extra customer adds little extra costs to the business and spreads the fixed over more customers
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14
Q

whats external economies of scale

A
  • external economies of scale occur when a whole industry grows larger and firms benefit from lower long run average costs
  • often associated with particular geographic areas eg creative and media in London
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15
Q

economies of scope

A
  • where it is cheaper to produce a range of products rather than specialise in a very limited number
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16
Q

diseconomies of scale

A
  • diseconomies lead to a rise in unit costs
  • they happen when a business expands beyond an optimum size and loses productive efficiency, causes:
  • control
  • negative effects of internal politics
  • co operation
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17
Q

what is over trading

A

overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion

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18
Q

overtrading is most likely to happen when

A
  • growth is achieved my significant capital investment in production or operations capacity before revenues are generated
  • sales are made on credit and customers take too long to settle amounts owed
  • significant growth in inventories is required in order to trade from the expanding capacity
  • a long term contract requires a business to incur substantial costs before payments are made by customers under the contract
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19
Q

classic symptoms of over trading

A
  • high revenue growth but low gross and operating profit margins
  • persistent use of a band overdraft facility
  • significant increases in the payables days and receivables day ratios
  • significant decrease in the current ratio
  • very low inventory turnover ratio
  • low levels of capacity utilisation
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20
Q

how to manage the risk of overtrading

A
  • reducing inventory levels
  • scaling back the pace of growth until profit margins and cash reserves have improved
  • leasing rather than buying capital equipment
  • obtaining better than payment terms from suppliers
  • enforcing better payment terms with customers
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21
Q

what is synergy

A

happens when the value of two business brought together is higher than the sum of the value of the two individual businesses ie 2 is better than 1

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22
Q

what is retrenchment

A

‘to cut down or reduce something’
‘use resources more carefully’

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23
Q

examples of retrenchment in business

A
  • reduce output and capacity
  • job loses
  • product / market withdrawal
  • disposal of business unit
  • scaling back investment
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24
Q

what drives retrenchment

A
  • costs too high
  • low ROCE
  • high gearing
  • loss of market share
  • failed turnover
  • economic downturn
  • change of ownership
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25
Q

implications for change management

A
  • will depend on the scale and scope of the retrenchment
  • small scale, incremental retrenchment has only limited impact
  • significant retrenchment is often associated with a fundamental reappraisal of the business
26
Q

retrenchment and change and the possible implications

A

changed organisation structures
- changed managements responsibilities
- greater workloads/higher stress
- new teams and colleagues
- different reporting structures

new leadership and/or ownership
- different leadership style
- uncertainly
- new priorities, aims and objectives
- a threat to the prevailing corporate culture
- previous projects often abandoned

fewer people
- loss of morale and motivation
- bad news for some external stakeholders

27
Q

what are strategic methods

A

Strategic methods refer to the different strategies a business might pursue to achieve its objectives

28
Q

what are the forms of growth

A

organic
external
merger

29
Q

whats organic growth

A

This occurs when a business grows through expanding its own operations; for example, it sells more of its existing products or launches new products for its customers.

30
Q

whats external growth

A

This involves growth by joining with other businesses; for example, one business may gain a controlling share of another organisation.

31
Q

whats merger growth

A

In a merger the owners of company A and company B become joint owners of a new organisation.

32
Q

what are purchasing economies of scale

A

As a business gets bigger it will purchase more supplies. This gives it more bargaining power over suppliers. Suppliers become dependent on the business and may be willing to reduce their prices to keep the orders.

33
Q

whats technological economies of scale

A

These occur when a large scale of operations enables particular technologies to be used efficiently. For example, imagine a small farm has to have various pieces of equipment, such as a tractor and harvesting equipment

34
Q

what are financial economies of scale

A

As a business gets bigger it has more assets and this may mean a bank is willing to lend to it at lower interest rates as the risk is lower.

35
Q

what are managerial economies of scale

A

As a business expands it may bring in specialists to focus on parts of the business.
For example, an expanding business may create a specialist HR department which is probably not cost effective in a small business.

36
Q

what are economies of scope economies of scale

A

Whereas economies of scale refers to unit costs falling when more of one product is produced, economies of scope are cost savings from operating in several markets or providing several products.

37
Q

whats the experience curve

A

As businesses grow employees gain experience. Their managers become more familiar with what needs doing when, who to ask to do what, where to get supplies from, how to fix problems and how to deal with particular issues. This makes decision making faster and better.

38
Q

whats synergy

A

Synergy occurs when you put two businesses together and as a combined unit they perform better than they did as individual parts.

39
Q

why can diseconomies of scale occur / problems with growth

A
  • communication
  • control and coordination
  • motivation issues
40
Q

benefits of organic growth

A
  • less his than external growth
  • can be financed through internal funds
  • builds on business strengths
41
Q

disadvantages of organic growth

A
  • growth achieved may be dependant on the growth of the overall market, generally slower
  • hard to build market share if business is already a leader
  • franchises (if used) can be hard to manage effectively eg McDonalds
42
Q

what is franchising

A

franchising arises when a franchisor grants a licence (franchise) to another business (franchisee) to allow it trade using the brand / business format

43
Q

drawbacks of franchising

A
  • not cheap, initial fees + royalties and commission
  • restrictions on actions, including selling
  • franchisor owns the brand
  • franchisor may fail
44
Q

benefits of franchising

A
  • running own business
  • tried and tested brand
  • advice, support, training
  • easier to raise finance
  • buying power to franchisor
  • lowers the risk of market entry
45
Q

why franchising works for the franchisor

A
  • a classic growth strategy for a proven business format
  • enables much quicker geographical growth for a relativity low investment
  • still have the option to open locations that are operated by the franchisor
  • capital investment by franchisees is an important source of growth finance
46
Q

whats is a joint venture

A

a separate business entity created by two or more parties, involving shared ownership, returns and risks

47
Q

potential benefits of a joint venture

A
  • JV partners benefit from each other expertise and resources
  • each JV partner might have the option to acquire in the future the JV business based on agreed terms if it proves successful
  • reduces the risk of a growth, particularly if it involves entering a new market or diversification
48
Q

potential drawbacks of a joint venture

A
  • there may be an imbalance in the level of expertise, investment and assets bought to the venture
  • the objectives of each party may differ
  • different cultures and management styles may hinder progress
49
Q

what is a takeover

A

a takeover (or acquisition) involves one business acquiring control of another business

50
Q

possible reasons for take over

A
  • increase market share
  • access economies of scale
  • secure better distribution
  • acquire intangible assets
  • spread risks by diversifying
  • overcome barriers to entry to target markets
  • defend itself against a take over threat
  • enter new segments of an existing market
  • to eliminate competition
51
Q

types and direction of integration

A
  • forward vertical
  • backward vertical
  • horizontal
  • conglomerate
52
Q

whats forward vertical direction of integration

A

acquiring a business further up in the supply chain eg manufactures buys a distributor

53
Q

whats backward vertical direction of integration

A

acquiring a business operating earlier in the supply chain eg a retailer buys a wholesaler

54
Q

whats horizontal directions of integration

A

acquiring a business at the same stage of the supply chain eg a manufacturer buys a competitor

55
Q

potential benefits of horizontal integration

A
  • achieve economies of scale
  • cost synergies from the rationalisation of the business and revenue singers from distribution
  • wider range of products
  • reduces competition
55
Q

whats conglomerate directions of integration

A

where the acquisition has no clear connection to the business buying it

56
Q

eg of horizontal integration

A
  • Dec 2015 dominoes buys largest German pizza chain for $86m
57
Q

potential benefits of vertical integration

A
  • enables a business to capture a greater share of the profit on each sale
  • secures important sources of supply or distribution
  • create a barrier to entry to potential new competitors
  • gain greater insights into customer needs and wants at each stage of the supply chain
58
Q

eg of vertical integration

A
  • Netflix, producing their own originals
  • Nov 2015 apple buys Star Wars notion capture company face shift
59
Q
A

A-Level Business (18 decks)

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