Define business growth
The point at which a business needs to expand and seeks options to generate more profits
What are the 4 objectives of growth?
- To achieve economies of scale
- Increased market power over customers and suppliers
- Increased market share and brand recognition
- Increased profitability
When does economies of scale occur?
Occurs when unit costs or average costs fall as a result of an increase in the level of output of the business.
Why is EoS (economies of scale) a good thing?
- higher profit margins
- more funds for investment or even for giving shareholders higher dividends
- being able to lower prices to increase demand
Types of economies of scale?
- purchasing/bulk buying
- marketing
- technical (more efficient machinery)
- specialisation/managerial
- risk bearing
- financial
What does increased market power over customers and suppliers involve?
Involves reducing power of suppliers and customers (to reduce costs from suppliers whilst maintaining prices to consumers).
Involves:
What is diseconomies of scale?
When unit costs rise as the business grows and starts to lose some of the efficiencies gained from growth
What may growth lead to? (Diseconomies of scale)
:( Communication problems - becomes harder to communicate a clear message across the organisation
:( Control - layers of management are added to control organisation but this slows down decision-making and quality becomes harder to monitor
:( Flexibility - owing to the issues of communication and control the business may be less flexible in its ability to adapt to the changing business environment
:( Motivation - workers in large organisations find it difficult to see the impact they have and feel less significant
What is overtrading?
When businesses grows too fast and overstretch their financial resources such as cash
May lead to a failure to manage cash flow
Why may a business need to reduce it’s scale?
May be to counteract the problems of diseconomies of scale or to improve efficiency and reduce costs as demand falls, perhaps as a result of a downturn in the economic climate.
Strategies to deal with growing too large?
- redundancies
- closure of branches
- discontinuing product lines
- pulling out of international markets
- de-layering
- reallocating business resources
- cancelling expansion plans
- outsourcing aspects of business operations
Rewards of inorganic growth?
- Speedy growth - far quicker than organic growth
- Higher remuneration for senior staff
- Rewards for previous owners - large pay-outs for those selling a company
- Greater profitability if merger/takeover is successful
Risks of inorganic growth?
- Regulatory intervention - industry regulators may intervene in some cases of a merger or takeover if they believe it to be anti-competitive
- Resistance - morale and productivity can be very low when a business has been taken over
- Financial strain - both mergers and takeovers can stretch a firm’s finances. This is especially the case if a bidding war begins.
Reasons for mergers or takeovers?
Tactical reasons:
- ensure an increase in market share
- access to new technology
- access to staff
- access to intellectual property such as patents
- cross-selling
Strategic reasons:
- access to new markets
- improved distribution networks
- improved brand awareness
- market power
Financial risks and rewards of mergers and takeovers?
Risks:
- original purchase cost
- cost to change into a new business
- redundancies of duplicate stand
- cost of it going wrong
Reward:
- increased revenue
- economies of scale
Methods of growing organically?
- New product launches
- Opening new stores/branches
- Expanding into foreign markets
- Expansion of the workforce
- Franchising
- New business model
Advantages of organic growth?
:) Less risk - avoids risk and pitfalls of merging with another business such as duplicate staff and a risk of culture clashes
:) Controlled pace - steadily increases the scale as and when it’s internal operations are ready
:) Cheaper than external growth - less strain on cash and capital investment
:) Diseconomies of scale minimised as growth is gradual
:) Retains company culture
Disadvantages of organic growth?
:( Slow pace - may be too slow for some shareholders who want rapid returns on their investment
:( External expertise - does not take advantage of the resources, skills and knowledge that might exist through a potential takeover or merger
:( Competition - a business growing organically may be left behind by others that use external growth to dominate the market
:( New markets and countries very risky to enter into without buying a business already operating in that country
Reasons for staying small?
- Personal service
- Costs
- Convenience as a USP
- Owner preferences
- Control and efficiency
- Flexibility
