3.2 Flashcards
Objectives of growth
- To achieve economies of scale (internal and external)
- Increased market power over customers and suppliers
- Increased market share and brand recognition
- Increased profitability
Problems with growth
- Diseconomies of scale
- Internal communication
- Overtrading
Why businesses grow
- Increase sales
- Increase market share
- Economies of scale
- More competitive
+ Synergies: 2 businesses, better than 1
+ Experience: Bigger businesses usually have more than smaller ones
- Communication issues
- Less flexibility/motivation
Merger
Merger: A+B=AB
2 or more businesses agree to become integrated to form one business under joint leadership
Takeover
Takeover: A+B = A
1 business gains control over another and becomes the owner. Can be achieved by buying 51% of shares
Integration
Horizontal: 2 businesses at the same stage within a process integrate
Vertical: 2 businesses at different stages integrate
Forwards: Joins with business in the next stage
Backwards: Joins with business in an earlier stage
Conglomerate: 2 unrelated businesses integrate
Issues with rapid growth
- Morale may drop if staff cannot cope with the extra work
- Productivity can decrease
- There may be a shortage of cash to meet expansion costs
- Taking on more and more work to generate more income places additional pressure on your premises and staff
Organic and inorganic growth
Organic - Internal within business
Inorganic - External environment
Organic growth
+ Lower risk
+ No interfere from stakeholders
+ Higher/continued production
+ Stability on long term basis
- Slow
- Reduce ability to act against competitors
-Distance between investment and return
- Stifle innovation
Inorganic growth
+ Faster
+ Increased market presence
+ Competitive advantage created
+ Larger customer/material base
- Large risk
- Requires additional funding
- Competition drives market
- Unpredictable
Reasons for staying small
- Product differentiation and USPs
- Flexibility in responding to customer needs o customer service
- E-commerce
Economies of scale
The reductions in average costs enjoyed by a business as output increases
Diseconomies of scale
Rising average costs as a business expands beyond its minimum efficient scale.
Internal economies of scale
The cost reductions enjoyed by a single business as it grows
External economies of scale
The cost reductions available to all business as the industry grows
