1.5 Growth and evolution Flashcards
(31 cards)
Environment
various conditions external to the business
STEEPLE analysis
focuses on external elements and examine how they influence or the potential influence on the business
Economies of scale
as a business increases in size, average unit cost decreases as output increases
Diseconomies of scale
as a business increases in size, average unit cost increases as output increases
‘Scale of operations’
size or volume of output
Fixed costs
costs which do not change according to the amount of goods or services produced by the business
Variable costs
costs which increase or decrease according to the amount of goods or services produced
How is efficiency measured?
in terms of costs of production per unit
Total cost
Total cost = fixed cost + variable cost
Average cost
Average cost = total cost / quantity produced
or
AC = FC + VC / Q
Internal EOS
- Technical
- Managerial
- Financial
- Marketing
- Purchasing
- Risk bearing
External EOS
- costumers
- employees
Internal DOS
- Technical
- Managerial
- Financial
- Marketing
- Purchasing
- Risk bearing
External DOS
- employees
Reasons for businesses to grow
Survival
EOS
Higher status
Market leader status
Increased market share
Reasons for businesses to stay small
Greater focus
Greater prestige
Greater motivation
Competitive advantage
Less competition
Characteristics of internal growth
- Slowly and steadily
- Grows out of the existing operations of the business
- Business expands by simply selling more products or by developing its product range
- Most of the expansion from internal growth is self-financed using retained profits, but some other firms borrow money from the bank
Characteristics of external growth
- Quicker and riskier
- The business expands by entering into some type of arrangement to work with another business, such as a: merger and acquisitions, takeover, joint venture, strategic alliance, franchise
- Usually requires significant external financing
- Potential rewards: business can increase market share and decrease competition very quickly
Name 5 external growth methods
- mergers and acquisitions
- takeover
- joint venture
- strategic alliance
- franchise
Merger
occurs when 2 companies that are theoretically “equal” legally become one company
Acquisition
when one company purchases a majority or all the shares of another company
Mergers and acquisitions
- Only publicly held companies (company that sells shares to the public, allowing shareholders to own part of the company) can be taken over, as the shareholders in a privately held company do not have to sell their shares if another company wants to buy them
Types of integrations
- Horizontal integration: 2 firms being integrated are in the same broad industry and in the same line of business and in the same chain of production
–> increased market share, market power and adv of EOS - Vertical integration - backwards or forward: When one firm integrates with another firm at a different stage in the chain of production or when a business begins operations in an earlier stage through internal growth. Backwards (business becomes involved in an earlier stage in the chain of production)
Forward (business integrates further forward in the chain of production)
–> ensure reliable supply, avoid govt. regulation (such as price controls or taxes), reduce transaction costs, and eliminate the market power of other businesses - Conglomeration:
When 2 firms in unrelated lines of business integrate
–> reduce overall corporate risk and to have complementary seasonal activity, so long periods of inactivity are avoided
Disadvantages of Mergers and Acquisitions
- high cost of acquiring business
- high legal and consulting fees
- culture clash between employees from the different firms
