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business > unit 9 > Flashcards

unit 9 Flashcards

1
Q

reasons for growth

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

reasons for retrenchment

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

what is organic growth

A

when a firm grows with its existing businesses (increasing capacity and outlets)

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4
Q

what is external growth

A

is growth that is dependent on other businesses and may be via merges, takeovers or joint ventures

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5
Q

economies of scale

A

economies of scale arise when unit costs fall as output increases

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6
Q

concept links to economies of scale

A
  • efficiency
  • unit costs
  • productivity
  • market share
  • competitive advantage
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7
Q

unit cost formula

A

total output in period (units)

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8
Q

internal economies of scale

A

arise from the increased output of the business itself

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9
Q

external economies of scale

A

occur within an industry: all competitors benefit

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10
Q

technical economies of scale

A

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

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11
Q

managerial economies of scale

A

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

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12
Q

what is marketing economies of scale

A

spring a fixed marketing spend over a larger range of products, markets and customer

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13
Q

what is network economies

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

what is financial economies

A

larger firms benefit from access to more and cheaper finance

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15
Q

what’s external economies of scale

A
  • occur when a whole industry grows
    larger ad firms benefit from lower
    long-run average costs
  • associated with particular geographic
    areas
  • examples
    (having many specialists suppliers
    close by,
    access to research and development
    facilities,
    pool of skilled labour to choose from)
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16
Q

economies of scope

A

where its cheaper to produce a range of products rather than specialise in a very limited number.
- hypermarkets
- amazon
- proctor & gamble

17
Q

what is overtrading

A

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

18
Q

when is overtrading most likely to happen

A
  • growth is achieved by making 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 I investors 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
19
Q

symptoms of overtrading

A
  • high revenue growth but low
    gross and operating profits
  • persistent use of bank overdraft
    facility
  • significant increases in the
    payable days and receivables
    days ratio
  • significant decrease in the
    current ratio
  • very low inventory turnover
    ratio
  • low levels of capacity utilisation
20
Q

what are the most effective steps to avoid overtrading are essentially those that would be taken as part of a sensible cash flow and working capital management

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

synergy definition

A

happens when the value of two businesses brought together us higher than the sum of the value of the two individual businesses. in other words, when synergy happens, 1+1 = more than 2!

22
Q

what are the two types of synergy

A

cost saving :
- eliminate duplicated functions and
services
- better deals from suppliers
- higher productivity and efficiency
from shared assets

revenue:
- cross-selling to customers of both
businesses
- access to new distribution
- brand extensions
- new geographic markets opened up

23
Q

what is retrenchment

A
  • to cut down or reduce something
  • use resources more carefully
24
Q

examples of retrenchment in business

A

reduce output & capacity
- product/market withdrawal
- disposal of business unit
- job losses
- calling back investment

25
Q

what drives retrenchment

A
  • costs too high
  • low ROCE
  • high gearing
  • loss of market share
  • failed takeover
  • economic downturn
  • change of ownership
26
Q

implication 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
27
Q

what is organic growth

A

involves expansion from within a business, for example by expanding the product range, or number of business units and locations

28
Q

advantages of organic growth

A
  • less risk than external growth
  • can be financed through internal
    funds
  • builds o a business strengths
29
Q

disadvantages of organic growth

A
  • growth achieved may be dependent
    on the growth of the overall market
  • hard to build market share if business
    is already a leader
  • franchisees can be hard to manage
    effectively (McDonalds)
30
Q

what is franchising

A

arises when a franchisor grants a licence to another business to allow it trade using the brand/business format

31
Q

advantages of franchising

A
  • running your own business
  • tried & tested brand
  • advice, support, training
  • easier to raise finance
  • buying power of franchisor
  • lowers the risk of market entry
32
Q

disadvantages of franchising

A
  • not cheap! initial fees + royalties &
    commission
  • restrictions on actions, including
    selling
  • franchisor owns the brand
  • franchisor may fail
33
Q

why does franchising work for the franchisor

A
  • a classic growth strategy for a proven
    business format
  • enables much quicker geography
    growth for a relatively 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
34
Q

potential benefits of a joint venture

A
  • JV partners benefit from each others
    expertise and resources (market,
    knowledge, customer base,
    distribution channels, R&D expertise)
  • 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 strategy -
    particularly if it involves entering a
    new market to diversification
35
Q

potential drawbacks of a joint venture

A
  • there may be an imbalance in the
    level of expertise, investment and
    assets bought to venture
  • the objectives pf each party may differ
  • different cultures and management
    styles may hinder progress
36
Q

what is a takeover

A

involves pone business acquiring control of another business

37
Q

possible reasons for takeovers

A
  • increase market share
  • access economies of scale
  • secure better distribution
  • acquire intangible assets
  • spread risks by diversifying
  • overcome barriers to entry to
    target market
  • defend itself against a takeover
    threat
  • enter new segments of an
    existing market
  • to eliminate competition
38
Q
A

business (14 decks)

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