Business Growth 3.9
Organic growth- expansion from within the business
Issues with growth: economies of scale, diseconomies of scale, economies of scope, experience curve, synergy,
overtrading
Franchising- arises when a franchisor grants a license to another business to allow it to trade using the brand/ business
format
Larger businesses are more stable than small businesses. Change- business alters size, structure to respond
Inorganic
int/ extnlgrowth- growth with resort to takeovers and mergers
Merger- whensize-
§ Business 2 or more firms
revenue, unitemarket
profit, under common ownership
share, number of employees, assets. When a business grows, these increase.
§ An increase in sales volume and revenue – greater profits= re-invested – stimulate more growth
Takeover- when one firm acquires another
§ Bigger market share- business has more influence . high market share- influence to control prices
§ Larger
Synergy- businesses
value benefit from
of two businesses E.O.S together
brought and economies ofthan
is higher scope-
thelower unit
sum of thecosts
value of the two individual
§ Bigger businesses – range of products or service- adapt to market changes. Businesses
businesses. E.g. shared resources, increased expertise, joint marketing, complimentary productschange- increase dividends
Joint venture- separate business entity created by 2 or more parties- shared ownership, returns and risk. Permanent or
temporary
Retrenchment- to cut down, use resources more carefully
Economies of scale- the benefits the business receives as result of business growth that leads to a fall in average cost per
unit of output
Overtrading- when a business expands too rapidly, putting pressure on s/t working capital, operating beyond its resources
leading to potential liquidity problems
Multinational Company- A multinational company (MNC) is a business that has operations in more than one country.
Offshoring- Involves the relocation of business activities from the home country to a different international location
Reshoring- Involves the repatriation of business activities from overseas back to the home country
Outsourcing- An agreement in which one company hires another company to be responsible for a planned or existing
activity that is or could be done internally
Indirect exporting is the process of selling products to an intermediary, who will then sell your products directly to
customers or importing wholesalers.
E-commerce-Involves digitally enabled commercial transactions between and among organizations and individuals
Big Data-The process of collecting and analysing large data sets from traditional and digital sources to identify trends and
patterns that can be used in decision-making
Data mining -The process of analyzing data from different perspectives and summarising it into useful information,
including discovery of previously unknown interesting patterns, unusual records or dependencies
Enterprise resource planning-A software system that a system that helps businesses integrate and manage their financial,
supply chain, manufacturing, operations, reporting, and human resource systems
,Larger businesses are more stable than small businesses. Change- business alters size, structure to respond int/ extnl
§ Business size- revenue, profit, market share, number of employees, assets. When a business grows, these increase.
§ An increase in sales volume and revenue – greater profits= re-invested – stimulate more growth
§ Bigger market share- business has more influence . high market share- influence to control prices
§ Larger businesses benefit from E.O.S and economies of scope- lower unit costs
§ Bigger businesses – range of products or service- adapt to market changes. Businesses change- increase dividends
Experience curve issues: Old- 1966
§ Complacency- Market leaders
§ Experiences vs resistance to
change
§ Labour efficiency- less wate
§ Labour specialisation
§ Advances in capital
§ Input mix
External economies of scale makes a whole industry or area more efficient
Occurs when industries are more concentrated in small geographical areas
§ Having large number of suppliers to choose from gives E.O.S. locating near lots of suppliers- negotiate with a
range – increase quality and reduce prices
§ A good skilled local labour supply – industry more efficient. Most imp for industries where training is expensive
Experience curve:
§ As a business grows – increases its sales volume- begin to produce more products. Workers- experienced-
efficient= cost per unit to decrease. BTE
§ Cost adv porters generic strategy
§ Lower prices- MS inc EC
§ Monopoly BTE- inc price. E.O.S
§ Lower costs. MAX MS
Finance: Operations: cap intns Marketing HR:
§ Cash flow in place to § E.O.S – more § Firms adapt Mark § Hire additional staff
grow- overtrading efficient- high CU mix to use diff putting pressure of HR
§ budget low unit costs. pricing strategies flow
§ Recruitment- higher
§ Sources of finance § lea § Distributional
wage bill
§ Grows internationally- § D.E.O.S- M.E.S channels or increase § Training- induction
consider E/R within § Rapid growth- spend on § Redeployment- need
decision making quality issues. QA promotional mix experienced staff -new
§ Retrenchment- sell and QC vital § Marketing e.o.s outlets to support growth
assets to increase § Retrenchment-sell § Retrenchment- § Org structure. Employee
sources of finance assets to raise decreasing product employer work
conditions
§ Inc share price. finance portfolio
investors § R&D- market
§ Financial economies of scale- loans at lower i/r, borrow more at lower i/r- thus lower unit costs
research
§ Network economies of scale- adding extra customers or users to a network that is already established
,Economies of scope- more variety is cheaper. ACPU decrease- price comp. leverage existing brand loyalty
§ Business produced multiple products instead of specialising in one- cheaper for one business to produce many
products. Extending product range, specialist expertise or competency, current equipment, where similar raw
mat inputs, distribution, logistics
§ Maximise use of resources. Share expertise. ADV- spread risk
§ Business that have people/ infrastructure = more efficient at producing an additional product. Able to expand
the production dept without having to expand other dept- unit costs decrease
§ Existing businesses benefit from brand loyalty- know the brand, more likely to buy other products they make
§ Economies of scope- charge lower prices due to lower unit costs= comp adv – force rivals out the market
Diseconomies of scale Unit costs rise as the scale of production increases- larger firms are harder to manage
§ Poor communication and organisation- cause inefficiency. Slow and difficult to get messages to right people esp
with long chain of commands. Amount of info circulating increase at a faster rate than business is growing
§ Harder to motivate people in a large firm. Small firm – managers are in close contact – easier to belong –
working towards same aims. Different aims= demotivated. More employees= less significant
§ Diseconomies of scale- problems with management. Strong leadership, delegation, decentralisation can help
prevent diseconomies of scale- keep costs down
§ Hard to coordinate activities between diff dept
§ Different objectives of department/ Loss of direction and coordination.
Business may become smaller
§ Retrenchment – may be necessary to remain profitable. Often due to D.E.O.S, declining markets, economic
recession. improved competitor performance, low ROCE, high gearing, failed takeover to survive
Retrenchment means that business will have to downsize in some areas. Achieved by:
§ Cutting jobs- sales are decreasing, business decrease its wage bill by cutting jobs- reduce labour costs
§ Reducing output- selling fewer units- reduce output and capacity- reduce costs
§ Withdrawing from markets- businesses cost to stop selling in less profitable market
§ Splitting the business up (de merging) easier to manage and control a smaller business, might split up into
several smaller ones and focus on making each one profitable
§ Reduce product portfolio- reduce losses from a particular product being unprofitable
1. Retrenchment affects workers- if a business retrenches too quickly (e.g. a recession), impact on workers is
significant- lead to decreased productivity- problem even worse (may)
2. Leave unprofitable markets due to low ROCE. Leave market due to economic downturn. Reduce D.E.O.S. Focus
on core competencies
Why firms restrict growth or retrench:
Problem with Retrenchment:
§ Maintain culture of small business.
§ Lose gain from E.O.S/ economies of scope if product portfolio Is reduced Conflicts between shareholders
§ Lose gains from experience curve If redundancy issues- less corporate and owners
knowledge- increase avg cost p/u § Business will become too
§ Reduce motivation. Wider impact on stakeholders. complicated to manage
§ Growth required additional
Impact of retrenchment:
financial resources
§ Finance- ease cash flow issues, generate cash to reduce gearing/ debt § May not want to strain cash flow
§ Less focus on e/r fluctuations – support cost cutting
§ Operations- E.OS- depends on positioning to min efficient scale. Capacity utilisation- high =efficient
§ HR- impact organisational structure. Delayering-flatter structure- motivational gains Redundancy package.
Depends on which staff have been made redundant
§ Marketing- reduce product portfolio, pricing strategies, distributional channels
,The scale and scope of retrenchment can have limited or significant changes.
§ Small-scale, incremental retrenchment has only limited impact
§ Significant retrenchment is often associated with a fundamental reappraisal of the business
Common Actions Possible Implications for Change
Changed organisation Changed management responsibilities
structures Greater workloads / higher stress (possibly)
New teams and colleagues
Different reporting structures
New leadership and/or Different leadership style
ownership Uncertainty (particularly amongst management)
New priorities, aims and objectives
A threat to the prevailing corporate culture
Previous projects often abandoned (e.g. investment)
A new / renewed sense of urgency
Fewer people Loss of morale and increased de-motivation
Bad news for some external stakeholders (e.g. local community, local
suppliers)
,Organic growth (internal growth) means increasing production scale: investing and employing more resources
§ Growth as a result of a firms increasing capacity through retained profit- increasing output - building a larger
factory, hiring more workers, increasing raw mat, product portfolio, distribution channel or outlets, overseas
expansion. Offshoring, outsourcing, e-commerce
Advantage: a firm has control over exactly how this growth occurs, less risk than inorganic growth (risk – averse)
§ Integration is expensive, time-consuming, evidence suggesting that the long-term share price of the company falls
following integration. Maintain current management style, culture
§ Existing shareholders retain control over firm, reduce conflicts in objectives. No divorce of ownership and con
§ Firms grow by building upon their strengths and using own funds, retained profits, fund the growth. Firm is not
building up debt- growth is more sustainable
§ Less disruptive changes- workers efficiency, productivity, morale is high. Under armour, LEGO (examples)
Disadvantage: slow,
§ Organic growth - too slow for directors who wish to maximise their salaries, rapid growth of revenues and profits
§ More difficult for firms to get new ideas.
§ Difficult to build market share if one business is already a clear leader
§ Firms might rely on the strength of the market to grow, - limit how much and how fast their can grow.
§ Sometimes another firm has market or asset which company would be unable to gain through organic growth.
§ Businesses might miss out on opportunities for ambitious growth- if rely on internal
External growth (inorganic growth) means combining firms:
Growth as a result of takeovers and mergers:
1. A takeover is when one firm buys another firm, becomes part of the first firm (controlling interest). Agreed/
hostile
2. A merger is when two firms unite to form a new company. Merger – motive= synergy- more rev and cost savings
3. External growth can happen through horizontal integration, vertical integration, or conglomerate integration
4. Horizontal and vertical integration happen between firms in the same market
§ External growth can rapidly increase the capacity, workforce, technology, skills and assets- increasing MS. Spread
risks
§ Main motive for mergers = synergy- business after the merger is more profitable than the business before the
merger. Merged businesses = more rev/ cost savings than independent businesses. Could be synergy failure, high
risk
Growing large brings problems:
§ Diseconomies of scale, poor communication, organisation- only solution may be retrenchment
§ Growing companies- difficult to manage cash flow- invest in assets- less cash available for day to day expenses
§ Fast growth- risk of overtrading. Increased demand – firms have to buy more and more materials and employ
more people- they don’t have money available to pay bills. Strain on working capital. Reduce receivables, increase
payable. Growing can change it from an LTD to PLC.
Original owners lose control (affects strategy)
§ Make managers shorter – termism. Shareholders see quick ROI
§ More open to a hostile takeover- controlling interest
§ Businesses need to avoid growing so much they dominate the market and become a monopoly- attracts CMA
, Why businesses grow:
§ Increase shareholder value
§ Shareholder pressure- beyer and Monsanto
§ Increase market share
§ Growth
§ Economies of scale
Forward and backward vertical integration: integration of firms in the same industry but at different stages in the
production process/ VALUE CHAIN
§ If merger takes the firm back towards the supplier of a good= backwards integration. Forward integration is
when the firm is moving towards the eventual consumer of a good
Advantages: Firms can increase their efficiency, through gaining economies of scale- reduce their AC= lower prices.
Creates barriers to entry
§ Firms have more control of the market. Removing suppliers, crucial information from competitors- market less
contestable, taking market intelligence away. Vertical- can sell directly to public
§ Backwards integration- firms can control the price they pay for their supplies, and they could raise the price for
other firms= cost advantage over their competitors.
§ Backwards - tighter control of supply chain, can dictate who you supply to
§ Backwards - control the quality of suppliers, ensure delivery is reliable. Not concerned - exploited by suppliers,
costs low, lower prices for consumers- increase comp and sales
§ Firms have more certainty over their production, with factors such as quality, quantity, and price.
§ Less risk -suppliers don’t worry about buyers not buying their goods and buyers don’t worry about suppliers not
supplying their goods
§ Forward integration secures retail outlets - restrict access to these outlets for competitors. Better control over
retail distribution channels, build revenues
Disadvantages: Firms may have no expertise in industry they took over. Diseconomies of scale could be considered.
§ Vertical integration- barriers to entry- might discourage or limit the entrance of new firms- lead to a less
efficient market- firm has little incentive to reduce average costs when their market share is high.
§ Mergers can often create new problems of communication and coordination- DEOS
Franchising- franchisors grants a license to another Advantages of franchising
businesses to allow it to trade using the brand/ business
format § Running your own business
§ Pre established business- less risk
Internal growth. Organisations may look to franchise § Easier to raise finance
their brand to grow- useful strategy as: § Buying power of franchisor
§ Low risk methods
§ Classical growth strategy for proven business format
§ Enables much quicker geographical growth for Disadvantages of franchising for franchisee:
relatively low investment
§ Not cheap – initial fees + commission
§ Option to open locations that are operated by
§ Restrictions in action.
franchisor
§ Franchisor owns the brand
§ Capital investment by franchises an imp source of
§ Could fail
growth finance
, Horizontal integration- combining firms that are at the same stage of the production process in the same industry–
Advantages:
§ Reduce competition as competitor is removed - increases market share, firms power to influence markets, l/r
pricing power. Potential to secure revenue synergies
§ Firms grow quickly, which can give them a competitive edge over other firms in the market
§ Firms specialise and rationalise, reducing the areas of the businesses which are duplicated.(cost savings)
§ Grow in a market where it already has expertise, which is more likely to make the merger successful.
§ Monopsony power- buy their stock at a lower price, increasing efficiency.
§ Firms can increase output quickly, so they can take advantage of economies of scale. (lower LRAC)
§ The 2 firms have expertise in the same industry, so the merged firm can gain advantages, such as in marketing.
§ Wider range of products – diversification creates opportunities for economies of scope
§ Buying an existing and well-known brand = cheaper than organically growing = BTE higher 4 rivals higher l/r
monop profits.
Disadvantages:
§ Increase risk for the business as if that market fails, waste of investment
§ Risk of diseconomies of scale - clashes of management style and culture,
§ Mergers risk destroying shareholder value - synergies never materialize. mergers fail to achieve gains SV
§ Risk of attracting investigation from the competition authorities= lessening of competition in a market
§ Recued flexibility- more personnel -need for transparency, accountability slow down the rate of innovation
Conglomerate integration- combining firms which operate in completely different markets
§ Product extension mergers- firms making related products
§ Geographic extension merger- firms in same industry, different geographic markets
Advantages:
§ It is useful for firms where there may be no room for growth in the present market.
§ The range of products reduces the risk for firms and if a whole industry fails, they will still survive
§ It will make it easier for each individual part of the business to expand than if they were on their own as finance
can be easily obtained and managers can be transferred from company to company within the firm.
Disadvantages:
1. The problem with this is that firms are going into markets in which they have no expertise. It can often be
damaging for the business. D.E.O.S
Adv of joint venture:
§ Partners benefit from
expertise and resources
§ Partner may have
option to acquire in
future
§ Reduces risk of growth
Dis:
§ Conflicts in decision
making
§ Split profits
