Unit 9.1 Flashcards
growth can be seen as important because..
- shows progress -> managers shows shareholders why they are valuable
- financial benefits -> higher revenues
- market power + lower costs due to greater bargaining power
organic growth
grows through expanding its own operations eg sells more existing products or launches new products eg Costa, Apple. tends to be slower, easier to manage
Economies of scale
Occurs when unit costs fall as a business expands, these economies relate to the volume of output
economies may occur due to:
PTFM
- Purchasing economies
- Technological economies
- Financial economies
- Managerial economies
what are the benefits of growth?
EES
Economies of scope
- Cost savings from operating in several markets or providing several products. -> increasing scope of activities rather than the scale
The experience curve
- As business grows + operates on a larger scale, employees gain more experience. Makes decisions making faster and better. Barrier to entry, difficult for new firms to enter markets because their initial unit costs will be so much higher.
Synergy
- When you put two businesses together and as a combined unit they perform better than they as individual parts. 2+2 = 5
problems of growth?
CCMO
Diseconomies
Can occur due to:
- Communication problems -> as a business grows, likely to operate in range of market, means communications can become more complex, thus inefficiency, slower decision maker
- Control + coordination problem -> more employees, more products, more decisions being made + communication flows, controlling who does what + monitoring the quality can become more difficult. Meaning greater chance if mistakes made and problems occur = increasing unit costs
- Motivation issues -> as grows, employees lose contact with senior managers + overall vision of business. May feel not very significant to the success of the business as a whole + may lead to demotivation, may reduce productivity + lead to more mistakes + higher costs.
Overtrading
- Occurs when there liquidity problems linked to the financing of rapid growth
- Danger of liquidity crisis as business runs out of cash
Greiners growth model
LACRG
the 5 crises:
- leadership -> Business now too big for leader to get involved in everything
- autonomy -> Business now has functional management, leader still struggling to let go
- control -> new layers of hierarchy needed to keep control
- rep tape -> Slowing decision-making & missing external changes
- growth -> Growth slowing as business runs out of ideas, alliances sought
Types of integration
Vertical
Horizontal
Conglomerate
Retrenchment
occurs when a business reduces the scale of its operations
- May happen as business experiences diseconomies of scale + wants to refocus its operations
- May be because of changes in market conditions + the fact that there is now a lack of demand for products of the business
Impact of growth on functions
Finance -> needed to grow, need to be able to manage cashflow
Human resources -> growth can be positive for employees in that it can provide opportunities for new responsibilities + promotion. But in ST may mean extra duties, greater burden on staff. Growth will usually require additional staff.
Operations -> in ST, growth may improve capacity utilisation but this can place additional burdens on the business if resources are working to absolute max.
Marketing -> increased efforts may be required to generate the demand for growth. This may be in existing or new markets.
Impact of retrenchment on functions
Finance -> scaling down the operations is likely to cost money in the ST as redundancy payment have to be paid. May improve if business is able to raise funds from selling off assets or particular divisions of the whole organisation.
Human resources -> likely to be redundancies + managers may have to negotiate who is made redundant. May be other job opportunities within business.
Operations -> scale will be reduced, this may be more efficient in many cases, the business will be scaling back bc of diseconomies of scale. Thus may reduce unit costs
Marketing -> likely to be more focused on a small core business, may enable better integration + More consistency in approach.
Buying a franchise
adv + dis
+ Buying an established product, no need to think of own idea
+ Data should exist on the success of the business + also + important issues such as buyer behaviour + costs
+ May be provided with training, experience + support + ideas of other franchisees
- Do not have complete independence to decide what to do
- Do not gain all the profits from the operations: have to pay money to the franchisor
Selling a franchise
adv + dis
+ Quick growth as funds provided by franchisee
+ Franchisees may be very motivated as they own part of the business
- Lose complete control over what franchises do
- Do not gain all the profits from the operations
mergers
two companies join together to form one company -> main motive = synergy where the merger is more profitable than all the businesses before
takeover
when one business buys enough shares more than 50% of total shares
hostile = PLC buys majority of shares in another PLC against the will of the directors of that company. the company will encourage existing shareholders to sell their shares by offering a premium
agreed = shareholders agree that they’ll sell the business -> owners believe it will benefit the survival of the business
external growth
growth by joining with other businesses through a merger or takeover eg Daimler + Chrysler. RBS ABN AMNO. likely to be clashes in way operations operate, sudden change in scale
vertical integration
When a business joins with another business at a different stage of the same production progress
- Benefits of backward vertical integration are that business will be able to gain control of supplies at a better than it would have from external supplier
- Forward vertical integration -> business join together with an organisation closer to the final customer
horizontal integration
Occurs when one business joins together with another business at the same stage of the same production process
- Enables businesses to share facilities + resources
- Portfolio of products of combined business may complement each other, providing a better range of services to customers
conglomerate integration
- Occurs when one business joins together with another business in a different production process
- May spread the risk of business of being affected by change in one market
purchasing economies
As bigger purchases more supplies, more bargaining power -> suppliers become dependent on the business + may be willing to reduce their prices to keep the orders
technological economies
When a large scale of operations enables particular technologies to be used efficiently
financial economies
As business gets bigger it has more assets + means a bank is willing to lend to it at lower rates as risk is lower. Reduces interest costs.
managerial economies
As business expands it may bring in specialists to focus on parts of the business. The expertise may enable better decision making in the larger company, which can increase efficiency and reduce unit costs.
reasons for failure of takeovers + mergers?
- lack of knowledge of target company -> due diligence -> senior managers motivated by higher pay
- HR issues eg culture class -> Handy’s culture model
- lack of post merger planning
- clash of brands eg Daimler + Chrysler
