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Growth and evolution 1.6 (Growth (Inorganic (external) (Mergers and…
Growth and evolution 1.6
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Diseconomies of scale
Those factors that increase unit costs as a firms scale of operation increases beyond a certain size. Related to management issues trying to lead organisations with thousands of employees
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Organisations
Small
Adv/Disadv
- Limited access to sources of finance
- Owners may have to carry a large burden due to failure
- Not diversified - greater risks
- unlikely to benefit from economies of scale
- Able to adapt fast to meet changing customer needs and wants
- Personal service to customers available
- Low overheads (wages) and lower costs due to diseconomies of scale
- Easier communication between workers and consumers or superiors
Large
Adv/Disadv
- Difficult to manage
- Slow decision making due to the structure of the business
- Potential cost increase due to large-scale production
(Basically whats written in economies of scale)
- Can afford to employ professional / specified managers
- Can set prices that other firms have to follow (monopoly)
- Cost reduction associated to bulk buying / large-scale production
- Likely to afford research into new product development
- Access to different sources of finance
- Can diversify in several markets, products = risks are spread
Growth
Inorganic (external)
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Mergers and acquisitions
- Merger = when two firms combine/merge to create one firm
- Acquisition= When over 50% of the shares in a company have been purchased by another company giving more control.
This will result in Synergy = 2+2=5 effect. You get more out of what you put in originally
Forward/Vertical: With a business in the same industry but a customer of the existing business. e.g. car manufacturer takes over all car show rooms.
Horizontal: With a firm in the same industry and stage of production. The resultant business is likely to be more powerful however, suffer from diseconomies of scale.
Lateral: With a business which is similar in a way but not in the same industry. e.g. Corona + Schweppes = Same product = a drink but different market = age
Backward vertical: With a business in the same industry but a supplier fo the existing business. e.g. a car manufacturer takes over a steel production company = control over quantity and quality of supplies.
Conglomerate: With a business in a different industry completely. Pure diversification - it has spread risks and invested in new features
Joint venture
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A completely new entity is created. With a new board of directors and executive team. The board of directors is founded by representatives of the founding organisations.
Strategic alliance
Agreement between 2+ parties to pursue objectives together whilst still remaining independent organisations
The companies involved provide resources (products, distribution channels, knowledge, expertise...). This will usually benefit all companies.
Useful when a company enters into a new market of which there is little knowledge. Entering with a local, well-known company helps. The lenth might be on the acheivement of the goal/projetc or open-ended.
Franchise
A business that uses the name, logo and trading system of an existing business
They allow large multi-national - Starbucks, McDonnalds - to expand more rapidly. Basically at though i were to open a shop and say im starbucks (obvs have contract with starbucks about it)
Organic (internal)
Refers to when a business invests in existing products or developing new products in order to expand the business.
This will be achieved through bank loans, sale revenue, shares etc.
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Limitations
Managers cannot cope with extra responsibilities and workloads = rapidly expanding workforce, problems of recruitment, training and lengthy communication channels
Experience diseconomies of scale = fall in profits, increase in overheads and persuade shareholders to sell shares...
Divorce of ownership and control = shareholders are interested in maximising profit whereas, managers also want profitability but also investments in new products and markets which clashes with the shareholders.
Long-term issue on the liquidity (short-term cash) and gearing ratios (long-term cash) of the business