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Flashcards in Business Growth 3.2 Deck (62):

What is the definition of growth:

When a business increases in size and status


What are 4 different ways that businesses can grow?

- market share
- percentage increase in revenue
- accrue (collect) more non current assets (buildings etc)
- percentage increase in volume
- increase in profitability


What are some reasons why businesses want to grow? (4)

1 - increased profitability
2 - increased market share
3 - increased market power (to try and dominate the market)
4 - to take advantage of economies of scale


What is the definition of economies of scale?

As the output increases, the average fixed and variable cost per unit decreases


What are the 6 internal economies of scale?

1. Purchasing (bulk buying from suppliers)
2. Managerial specialisation
3. Technical
4. Financial
5. Marketing
6. Network ( adding extra customers/ users to a network already established)


Describe the network from internal eos:

Adding extra customers/ users to a network already established


Describe the purchasing from internal eos:

Bulk buying from suppliers and raw material costs decrease


Describe the technical from internal eos:

Use non current assets - spread cost of machine over number of units


Describe the financial from the internal eos:

Lower interest rates from banks - seen as lower risk


Describe the marketing from internal eos:

Spread the cost of marketing over large sales volumes


Describe the managerial/ specialisation from internal eos:

They have expertise so it costs the business less


What is the definition of external economies of scale:

When a firm benefits from lower unit costs as a result of the whole industry growing in size


What are four problems arising from growth:

Diseconomies of scale
Less control of business
Loss of motivation


Why may diseconomies of scale occur? (3)

1 poor internal communication
2 poor employee motivation
3 poor managerial coordination


What does diseconomies of scale lead to?

1. Coordination/ control - problems in monitoring productivity and work quality leading to an increase of wasted resources
2. Motivation - in large businesses employees may feel more alienated and have a loss or moral
3. Communication - workers in large businesses may have less opportunity to communicate
4. Negative effects of internal politics - information overload, unrealistic expectations among managers and cultural clashes


What are three problems of communication when a business grows:

1- layers of hierarchy increase
2- employers have a wider span of control
3- people in the business become more dispersed


What are 4 actions which can be taken in a business to readdress communication issues:

1- delayering the business
2- Performance related pay (may motivate employees)
3- shorter span of control
4- have targets linked to corporate objectives


What is the definition of overtrading?

When a business expands too quickly without having the financial resources, leading to usually experiencing a cash flow problem


Give 5 symptoms of overtrading:

1. High revenue growth, but low gross and operating profit margins
2. Persistent use of bank overdraft facility
3. Significant increase in the current ratio
4. Low levels of capacity utilisation
5. Very low inventory turnover ratio


Strategies to overcome overtrading (4):

1. Less clients at once - demand carefully
2. Manage inventory better
3. Regularly check capacity utilisation
4. Lease equipment rather than buy


To increase market share what are the two main strategies:

1. Work harder on innovation - should help improve the long term quality of the new product development
2. Invest more heavily in branding and marketing to try and differentiate your products more clearly


What is the definition of average cost:

This is the cost of producing one unit of output


How do you calculate average cost:

By dividing the total cost by the current output level


What is the definition of delegate:

Passing authority down the hierarchy


What is the definition of diseconomies of scale:

Factors that cause average costs to rise as the scale of output rises


What is the definition of economies of scale:

Factors that cause average costs to fall as the scale of output increases


What is the definition of market dominance:

It describes a situation where a firm sells a product that achieves a very high market share. This ascendancy over the competition enables the dominant firm to raise prices without losing too many customers


What is the definition of organic growth:

Comes from within the business, as compared with inorganic growth achieved by takeovers or mergers


What are three advantages of organic growth:

1. Keeping it personal
2. Minimising financial risk
3. Providing a secure career path


What are two disadvantages of organic growth:

1. The difficulty of getting scale to match your competitors, especially if they are involved in merger or takeover activity
2. Many products have relatively short life cycles, so it may be vital to generate as much cash as quick as you can, organic growth may mean missing much of the economic opportunity


What is the definition of inorganic growth:

It is via a merger or takeover but not from within the business


What is the definition of strategic fit?

Buying another business that can provide a real boost to long term growth and profitability


What is the definition of a takeover:

When one business buys majority ownership in another, thereby gaining full control


What is the definition of integration:

When two businesses are brought together through a merger or takeover


What are the four types of integration:

1. Backward vertical integration
2. Conglomerate integration
3. Forward vertical integration
4. Horizontal integration


What is vertical integration:

Involves acquiring a business in the same industry but at a different stage in the supply chain. e.g. primary to secondary


What is forward vertical integration?

An integration of a business that is closer to final consumers (e.g. a manufacturer buying a retailer)


What is backward vertical integration:

An integration of a business that is further from final consumers (e.g. a manufacturer buying a raw material supplier)


Give 4 advantages of vertical integration:

1. To smoothen the supply chain
2. Increase the barriers to entry for new entrants
3. Make its distribution and after sales service more efficient and cheaper
4. Gain insights of customer needs


Describe horizontal integration:

It’s a merger of companies at the same stage of production in the same or different industries. When the products of both companies are similar it is a merger of competitors. e.g. primary to primary


Give 4 advantages of horizontal integration:

1. Exploit economies of scale - purchasing eos
2. Wider range of products (diversification)
3. Reduces competition by removing key rivals
4. Buying an existing well known brand can be cheaper than starting a brand new one


Give four disadvantages of horizontal integration:

1. Creating a monopoly
2. Costs
3. Increased work load
4. Increased responsibilities


Give two disadvantages of vertical integration:

1. The quality of goods supplied earlier by external sources may fall due to lack of competition
2. Flexibility to increase/ decrease production of materials/ components may be lost as need to maintain certain levels due to economies of scale


What is conglomerate/ lateral integration:

Happens when companies join together that produce similar but related products


Give two advantages of conglomerate integration:

1. Economies of scale
2. Product diversification


Give three disadvantages of conglomerate integration:

1. Extra layers of management increase costs (tall structures)
2. May create a lack of focus
3. Brand dilution where the brand loses its brand association with a market segment/ product area.


What is revenue and cost synergies:

Benefits of being one business are better than 2 separate parts


what are four reasons for mergers and takeovers?

1. Growth
2. cost synergies
3. diversification
4. market power


what is a merger?

combination of previously separate firms which is achieved by forming a complete firm into which the two original firms are integrated under one new board of directors


what is a takeover?

when one firm buys a majority of the shares in another and therefore achieves full management control


what is the definition of private equity?

investment groups that buy up businesses in the expectation that they will be able to sell them on for a profit


what is the definition of a synergy?

this occurs when the whole is greater than the sum of the two separate parts. It is often the reason given for mergers and takeovers


Give 4 advantages of merging:

1. a merger combines the finances from both businesses, leading to greater cash flow/ access to finance
2. combination of two companies results in a businesses key competitor being lost leading to greater power in the market
3. can reduce risk for the business (issues with supplier etc)
4. in forward vertical merging, the smaller business could have access to a larger global market


Give 4 disadvantages of merging:

1. can create job loss for employees as there is a duplication of roles
2. could create leadership issues
3. cultural cohesion may be difficult - cultural clash
4. consumer perceptions


what is a small business? (3)

- under a certain number of employees
- legal status (LTD, partnership, PLC)
- no. of stores/ outlets


what is the definition of an SME?

any business with fewer than 250 employees


what does SMEs stand for?

small and medium sized enterprises


why are SMEs good for the UK? (4)

1. creates employment
2. generates/ encourages innovation
3. stimulate growth (GDP)
4. encourage competition - leading to a downward pressure on prices


what are 5 barriers to entry for smaller businesses?

1. predatory pricing - undercutting from big businesses
2. strong relationships/ influence over suppliers
3. Assets they have invested in - high capital achievable by big businesses
4. economies of scale, lower costs - big businesses
5. patents


What are 6 strategies small businesses use to survive?

1. flexible to customer needs/ close relationships with customers
2. USP (successful in niche markets) can be premium priced
3. customer service adds value
4. convenience
5. e-commerce - through third parties
6. product differentiation - creates value and brand loyalty


what are 4 methods of differentiating as a small business?

1. creates value
2. non price competition
3. brand loyalty
4. no perceived substitute


what is the definition of m-commerce?

electronic transactions carried out while on the move