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BUSINESS THEME 3 - Coggle Diagram
BUSINESS THEME 3
MERGERS/ TAKEOVERS
Takeovers - One company buys another (often unwanted) by purchasing more than 50% of its shares. (inorganic growth)
Why do firms merge/takeover:
- Strategic Fit - Enter new markets, products, or get new tech
- Economies of Scale - Bigger scale = lower costs per unit
- Synergies - Combining resources = more revenue or savings
- Eliminate Competition - Gain market share by removing rivals
- Shareholder Value - Better profits, stock prices, and dividends
Mergers - Two companies join to form a new business and both original companies no longer exist (inorganic growth)
Vertical integration: Forward vertical integration (Buys a business closer to the customer)
Backward vertical integration (Buys a business further up the supply chain)
- Pros: Cuts costs (no middleman)/ More control over supply chain/ improves product quality and brand control
- Cons: Higher management costs/ May lack knowledge of new area
Horizontal Integration: Merging with or taking over a competitor in the same industry
- Pros: fast market share growth/ reduces competition/ more industry knowledge
- Cons: culture clashes/ duplicate roles = waste
Financial risks: Overpaying for target company/ Integration is expensive and complex/ Culture clashes may hurt productivity/ Legal issues/ Taking on debt increases risk
Financial rewards: Bigger market share and sales/ Synergies = cost savings, higher profits/ Diversification reduces business risk/ New customers and market access/ Higher overall company value for shareholders
Problems for rapid growth:
- Cash flow strain - New investments cost money before profits increase
- Management overload - Managers face more pressure and complex decisions
- Quality control issues - Hard to maintain standards during fast change
- Customer service drops - Overwhelmed staff or systems
- Culture clashes - Different work cultures cause conflict
- Diseconomies of scale - Bigger isn’t always better
GROWTH
Reasons why business grow:
- Ambition - Owners/managers/shareholders aim to build large, successful firms (e.g. Amazon).
- Profit & Market Share - Greater size often leads to higher revenue and profit.
- Market Power - More control over suppliers and customers; potential monopoly power.
- Economies of Scale - Larger scale reduces average costs.
- Product Diversification - Reduces risk through a wider product range.
- Access to Finance - Bigger firms are seen as less risky, get better loan terms.
PESTLE analysis:
- Political - government stability/ tax regulations/ tax restrictions/ political ideologies/ fiscal policy (use of government spending and taxation)
- Economic - inflation/ exchange rates/ cost of living/ unemployment levels/ stage of business cycle and GDP growth
- Social - social mobility (progression to a higher class within society)/ education/ ethics and religion/ migration (movement of people between countries) health profile/ population growth and demographic
- Technological - research and development/ production and distribution/quality / online presence
- Legal - taxation/ employment/ health and safety/ compliance and red tape
- Environmental - changing infrastructure/ energy availability/ disposal of materials/ change in climate
Internal economies of scale: (inside firm)
- Financial - Lower interest rates due to lower perceived risk.
- Managerial - Specialist managers improve efficiency.
- Marketing - Spread advertising costs over more units.
- Purchasing - Bulk buying leads to discounts.
- Technical - Machinery used more efficiently at scale.
- Risk-bearing - Diversifying products spreads risk and reduces failure impact.
External economies of scale: (outside firm)
- Geographic Cluster - Nearby suppliers and support firms reduce costs (e.g. car industry).
- Transport Links - Better infrastructure reduces delivery and commuting costs.
- Skilled Labour - Access to a large, trained workforce lowers recruitment/training costs.
- Favourable Legislation - Government support reduces business costs.
Problems arising from growth:
- Diseconomies of Scale - Management becomes inefficient; costs rise.
- Internal Communication Issues - Miscommunication, errors, and poor morale.
- Overtrading - Expanding to fast strains resources and causes cash flow issues.
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BUSINESS OBJECTIVES
Hierarchy of objectives:
- Aim - Long term goal and overall vision of the business
- Mission statement: The businesses overall aim and core values to provide the business a sense of direction
- Corporate objectives: These are specified performance goals which may focus on achieving specified levels of market share, profit, sales growth or new product/market development
- Functional objectives: these are day to day goals derived from corporate objectives and carefully aligned across departments
Ansoff matrix (helps identify strategies for business growth)
- Market development - involves finding new market opportunities for existing products by selling to different customers abroad
- Market pentation - sells existing products into existing markets by using existing customers and driving out competition.
- Product development - involves selling new/improved products to existing consumers by redesigning packages or new versions.
- Diversification - involves targeting a whole new market with different products which is the most risky growth strategy
Porter's Generic Matrix: (help gain competitive advantage)
- Cost leadership - Aims to have the lowest operational costs to sell products at a lower cost then competitors while maintaining profits by tight cost control
- Differentiation - To stand out on quality, innovation, brand identity, or customer service to stand out from competitors
- Focus cost - operate at a low cost in a small market by understanding specific needs
- Focus differentiation - deliver unique products in a small market by developing deep customer loyalty
SWOT analysis:
- Strengths - loyal customer base/ effective leadership/ internal resources (e.g. skilled staff)/ assets such as capital or property/ USP
- Weakness - resources or capital limitations (labour or finance)/ lack of competitive advantage/ lack of USP/ poor online presence.
- Opportunities - developing markets/ few competitors/ changing legal or political environment that positively impacts business/ technological developments/ positive media coverage
- Threats - New or emerging competitors are gaining market share/ changing legal or political environment negatively impacting businesses/ r technological developments that threaten obsolescence of products/ negative press coverage
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