Problems With Growth

Question 1

What is a merger

Answer 1

Integrating 2 separate firms into one large one

Question 2

What are 3 big issues of growth

Answer 2

Communication issues: lack of communication between employees
Diseconomies of scale: unit cost rising as a result of inefficiencies
Overtrading: Business expanding without having the financial resources to support the expansion

Question 3

What are the causes of communication issues

Answer 3

People in the business become more spread out
Organisational hierarchies become taller: Senior management may be unaware of customer centric issues
Decreased motivation as less focused on mission statement

Question 4

What are the causes of diseconomies of scales

Answer 4

Control - problems in monitoring productivity and work quality which increases wastage of resources
Co-operation - workers in large firms may develop a sense of alienation and loss of moral
Negative effects of internal politics, cultural clash’s
Decreased productivity = increased unit costs

Question 5

What is overtrading

Answer 5

Expanding too quick to the point you don’t have enough cash to actually cover day 2 day expenses

Question 6

What are the causes of overtrading

Answer 6

Significant investment in production before revenues are generated

Question 7

What to look for in a case study for overtrading

Answer 7

High revenue growth but low gross and operating profit margin
Persistent use of a bank overdraft facility
Low payable days, high receivable days
Very low inventory turnover ratio
Low level of capacity utilisation