Chapter 3 - Continuation Flashcards
What is internal growth/organic growth?
IG occurs when a business expands by:
- Increasing the number of goods it can produce, for example by buying more or better machinery
- Developing new products
- Finding new markets for its products
- Much slower
What is external growth?
External growth takes place when a business merges with or takes over another business in the same or a different industry. This process is known as integration.
What are the types of integration?
- Horizontal integration
- Forward vertical integration
- Backward vertical integration
- Conglomerate integration
What is horizontal integration?
Horizontal integration brings together two firms in the same industry who are also in the same sector of business activity, for example two wheat farmers (primary sector), two chocolate manufacturers (secondary sector) or two banks (tertiary sector).
What is forward vertical integration?
Forward vertical integration brings together two firms in the same industry, but one is a customer of the other, for example, a shoe manufacturer and a shoe retailer.
What is backward vertical integration?
Backward vertical integration brings together two firms in the same industry, but one is the supplier to the other, for example a chocolate manufacturer and a cocoa producer.
What is conglomerate integration?
Conglomerate integration is the bringing together of two businesses who are in completely different industries, for example a cosmetics manufacturer and a fizzy drinks manufacturer.
What are the problems linked to business growth? (Card 1)
- Internal growth is usually slow. There’s a risk that other businesses, using an external growth strategy, grow much faster.
- These larger firms may the dominate the market and remove the opportunity for other businesses to expand.
- When two separate businesses are brought together, managers and employees in each business may fear loss of their jobs or status.
What are the problems linked to business growth? (Card 2)
- If a business becomes too large then diseconomies of scale may occur, increasing the business’s average costs and reducing its profit margins.
- Any two businesses that are brought together through integration are likely to have different ways of doing things.
- The integration of two firms will change the control of the business for the original owners and there will be a loss of control.
What is diseconomies of scale?
Factors that cause average costs to rise as the scale of operations increases.
What are the risks for a business if they have growth as an objective?
- Often additional capital must be borrowed to finance expansion plans
- If growth is too slow or profits don’t increase, the business may not be able to finance its borrowing
- The business will not survive
*The owners of unincorporated businesses, such as sole traders and partnerships, have unlimited liability for the debts of the business, so they’ll have to use their own wealth to pay business debts.
Why do some businesses remain small?
- Owner’s choice
- Market size
- Access and availability
- Market domination
Owner’s choice
- The owner doesn’t want the responsibility or workload of managing a larger business
- Lifestyle choice
- Owner wants to keep total control of the business
- Fears that growth will reduce the level of control they have over decision-making and day-to-day management
- Owner wants to maintain a close relationship with customers and provide personal service
- Owner doesn’t want to take the risk of having growth as an objective
Market size
- Not all businesses have market size as their objective
- E.g. businesses that serve a local market, such as hairdressers, taxi firms or dentists - may not want to offer their services beyond the local neighbourhood
- They know that consumers in other neighbourhoods will not want to travel to their businesses when there are similar businesses closer to where they live
Access and availability of capital
- Important factor influencing growth is the access and availability of capital to finance growth plans
- Small businesses often have difficulty in obtaining loans from banks and other lenders because of a poor credit history and low cash flow
- Prevents most businesses of this type from expanding
Market domination
- Certain industries are dominated by a few very large companies and it’s difficult for smaller businesses to compete
- Market domination often means that consumers have a brand loyalty to the larger businesses that can offer lower prices than smaller firms due to them enjoying the benefits of economies of scale
10 reasons for business failure
- Poor planning
- Liquidity problems
- Poor management skills
- Lack of objectives
- Failure to invest in new technologies
- Lack of finance
- Poor choice of location
- Poor marketing
- Competition
- Economic influences
Poor planning and lack of objectives
- Lack of a detailed business plan
- Clear objectives are essential for success
- Failure to set objectives result in a lack of focus and direction for the business
Liquidity problems (Card 1)
- A business receives cash from the sale of its products
- However, most businesses sell their products on a credit basis
- This means they’ll receive the cash from sales on a later date, for example 30 days after delivery to the customer
- Cash will go away when the business spends it on supplies of raw materials, employees’ wages and other business expenses
Liquidity problems (Card 2)
- There must be enough cash coming into the business to pay the expenses and other debts
- Sometimes businesses don’t manage the inflow and outflow of cash effectively
- Poor cash management can result in liquidity problems which is that the business doesn’t have enough cash to pay its expenses and debts
Poor choice of location
- Location is a very important business decision
- Especially businesses such as retailers, restaurants and leisure facilities which need to be located close to their market
Poor management
Many owners of new businesses may have excellent ideas and products, but they often lack the management skills and experience to run their business efficiently.
Failure to invest in new technologies
- A business that doesn’t invest in the latest technologies will often find it’s unable to compete in terms of price, design and quality
- Instead, consumers may buy their competitors’ products and the business will fail to survive
Poor marketing
- Successful businesses are ones that identify and meet the needs of their customers
- Market research is essential to new businesses for identifying the potential size of the market, level of competition and what consumers want
- Businesses that don’t carry out market research are likely to fail
