9.1g - Other Issues With Growth Flashcards
Economies of scope definition
When it is cheaper to produce a range of products using the same facilities rather than specialise in a handful of products
Advantages of economies of scope:
- Increase firm’s value
- Increase in performance
- Higher returns for shareholders
- Reduce risk
What does the experience curve suggest?
The more experienced a firm gets at making a product, the better, faster and cheaper it is at making it
Disadvantages of the experience curve concept?
- Market leaders often become complacent
- Experience may cause resistance to change and innovation
- Old theory that is less relevant in a rapidly changing competitive industry
Synergy definition
The joining of two businesses to create a combined effect greater than their separate effect
Cost synergy definition
Where cost savings are achieved as a result of external growth
Revenue synergy definition
Where additional revenues are achieved as a result of external growth
How can cost synergies occur?
- Eliminating duplicated functions
- Obtaining better deals from suppliers
- Higher productivity from shared assets
How can revenue synergies occur?
- Cross-selling to customers of both businesses
- Access to new distribution
- Reduced competition
How is overtrading most likely to occur?
- Growth is achieved by making significant capital investment in production before revenues are generated
- Sales are made on credit and customers take too long to pay
What are the symptoms of overtrading?
- High revenue growth but low profit margins
- Persistent use of an overdraft
- Significant increase in current ratio
- Low levels of capacity utilisation
How can a business avoid overtrading?
- Reduce inventory levels
- Scale back pace of revenue growth until profit margins improve
- Lease rather than buy capital equipment
- Obtain better payment terms
