3.2 Flashcards
(25 cards)
What is business growth
Business growth is the point at which a business needs to expand and seeks options to generate more profits
Objectives of growth
To achieve economies of scale
Increase market power over consumers or suppliers
Increase market share and brand recognition
Increased profitability
What is the advantages of having EOS
• By having more funds to buy stock, so being able to get better deals by buying in bulk
• By having more power
• By having more funds to pay for specialist staff
• By having a better reputation so banks are more willing to lend
How to calculate the total cost of production
VC x output + FC
Problems arising from growth
diseconomies of scale
2.internal communication
3. overtrading
What can overtrading cause
When a business accepts too many orders that they can cope with, may cause cash flow problems
What can diseconomies of scale cause
As the business increases unit price increases
As it may cause a lack of motivation and lack of co ordination, also a lack of communication
How can less effective communication effect a business
Means mistakes made
• Means more wastage
• Therefore higher average unit costs
What is a merger
• A merger is a legal deal to bring two businesses together under one board of directors
two businesses have agreed to join forces to make a third company
What is a take over
This is a legal deal where one larger business purchases a smaller one
What are reasons for mergers and takeovers
Tactical:
Attempt to ensure increased market share
Access to technology, staff or intellectual property
Strategic:
Access to new markets
Improved distribution networks
Improved brand awareness
What is a hostile and friendly takeover
Friendly is when a business may have cash flow problems and they may invite a big business for a takeover
Hostile is when a business takes over 51% of the business and forces a takeover
What is horizontal integration
Business operating in the same sector (e.g tertiary) merge or takeover another business in the same sector
What is vertical integration
Vertical integration is when one business in one sector takes over or mergers with a business in another sector or part of the supply chain
What are risks of mergers and takeovers
Original purchase cost
• Cost of change into a new business
• Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.
• Cost if it all goes wrong
What are problems with rapid growth
The businesses that have merged may outgrow their premises in the short- term. There may not be enough space for everyone to work efficiently.
• Morale may drop if staff cannot cope with the extra work so 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 the premises and staff.
• CMA investigating Vision Express and Tesco opticians
Problem with mergers
Clash of cultures
• Possible communication problems
• Possible move away from core competencies of original business may cause issues of control
• Unreliable merger partners
• Diseconomies of scale
• Lack of understanding of local markets leading to wrong promotional message
• 75% of all mergers fail
What is organic growth
Organic growth is the process of business growth which comes from within the business, as opposed to mergers and takeovers.
What is inorganic growth
This means that a business has grown by buying its way into being larger, this may be through;
• A merger
• A takeover (also known as an
acquisition)
• A joint venture
Methods of organic growth
New product launches
Opening new stores or branches
Expanding into foreign markets
Expansion of the workforce
Advantages of organic growth
This avoids all the risks and pitfalls of merging with another business
• Cheaper than merging
• Retains the company culture
• Can be planned for unlike a takeover
• Higher production means EOS and lower average costs
• More influence comes with more market share, can start setting prices for the industry
What is disadvantages of organic growth
This is a very high risk strategy, opening lots of stores and taking on thousands of new staff is very risky and capital intensive
• Long period between investment and return on investment
• Growth may be limited and is dependent on reliability of sales forecasts
• New markets and countries can be dangerous to enter into without buying a business already operating in that country
How will a differentiation strategy work for a small business
Creates value; highlights quality or durability of the product
• Non-price competition; a differentiation strategy will focus on other ways of attracting customers such as taste and style
• Brand loyalty; a differentiation strategy can gain customer loyalty
• No perceived substitute; a differentiation strategy that focuses on quality and design may give the impression that there are no suitable substitutes in the market place
What is USP
Unique selling point
It is a way of promoting the features of the product or service of the business; quality, customer service, delivery, price, technical features or functions e.g. a feature is the reliability of the product, the benefit to the customer is less breakdowns and repairs
