Assessing a change in scale

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What is the difference between growth + retrenchment?
Growth is increasing an organisation's operations, whereas, retrenchment is the cutting back an organisation's scale of operations (size).
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Difference between organic and external growth?
Organic (internal) is when a firm expands within its business (at a steady+closely managed way). External involves a firm integrating with another firm as a result of either a merger or takeover.
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Advantages + Disadvantages of organic growth
Less risk than external growth, can be financed through internal funds, allows them to grow at controlled rate. BUT, growth achieved may be dependant on market growth, slow growth, hard to manage franchises effectively (if used).
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Advantages + Disadvantages of external growth
Increase market share, eliminate competition, spreads risk by diversifying, acquire new skills. BUT, high cost involved, diseconomies of scale may occur, resistance from employees, incompatibility from management styles, problems integrating.
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Define economies of scale + diseconomies of scale
The advantages a business gains, usually in terms of reduced average unit costs of production, due to an increase in size. However, if they grow too large, it may suffer disadvantages that lead to a lowering of efficiency + higher unit costs.
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State + define the 3 types of economies of scale
TECHNICAL=lower unit costs because larger firms can use more efficient techniques of production +increase dimensions. PURCHASING=a reduction in unit costs through bulk buying. MANAGERIAL=larger firms can benefit from specialisation of labour.
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Define economies of scope + use an example
Cost advantages that result from providing a VARIETY of products rather than specialising in the production or delivery of a single product. McDonalds expanding its range of food products into salads+healthy food.
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Define the experience curve
The higher the cumulative volume of production, the lower the direct cost per unit produced; the more experienced a firm gets at making a product, the better, faster + cheaper it is likely to be at making it.
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Define synergy
The whole is greater than the sum of the part; 1+1=3. Can be seen when a team of people working together is able to outperform what even its best individual member can do.
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Define overtrading
Takes place when a business grows TOO QUICKLY without organising sufficient LT funds to support the expansion. This puts a strain on working capital.
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State the 5 phases + crises they can create in Grenier's Model of Growth
Shows that growth cannot continue without some experience of crises. 1) Creativity = Leadership crisis. 2) Direction = Autonomy crisis. 3) Delegation = Control crisis. 4) Coordination = Red Tape crisis. 5) Collaboration = Growth crisis.
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Criticisms of Grenier's Model of Growth?
Oversimplified way of explaining path to growth. Not EVERY business will suffer a crisis (Microsoft). Doesn't take pace of growth, especially in a dynamic external environment into consideration. Difficult model to translate to the real world.
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Define a merger + give an example
When two companies of relatively equal size combine to become a single business with the goal of producing a company that is worth more than the sum of its parts (synergy). Price Waterhouse + Coopers Lybrand merged in 1998.
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Define a takeover (acquisitions) + give an example
When one company purchases another, it can be hostile or friendly. In 2015 the oil gas company Royal Dutch Shell bought the British oil + gas BG group.
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Reasons why mergers + takeovers often fail
Price paid for takeover was too high + then mishandled. Lack of decisive change in the early stages. Poor communication. Cultural incompatibility between the two companies. Competitors take the opportunity to gain MS whilst takeover is integrating.
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Define joint ventures + give an example
Different from takeovers + mergers in that the risks + returns of the business formed are SHARED by the parties involved. Sony Erricson are still two SEPARATE companies but join together to develop a shared one as well.
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Define corporate venturing + give an example
Large company takes an equity stake in a smaller company. Supports the smaller company by helping it develop products that will general income or cost savings for BOTH parties. Unilever Ventures invested in SNOG + Brainjuicer.
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Advantages + Disadvantages of Joint Ventures
Benefit from each others expertise + resources. Shared control + risk. Benefit from synergies. But, need to share revenues + profits. Risk of clash of organisational culture. Objectives of each JV partner may conflict. Normally 1 party benefits more.
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Define franchising + give an example
Method of organic growth where the franchisor, gives another business, the franchisee, permission to trade using their name + selling their goods or services. McDonalds, Starbucks etc.
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Advantages + Disadvantages of franchising
Franchisor gains regular reward + achieves economies of scale quicker. Also keeps control over the quality of product, also the marketing + distribution. BUT, risk due to disclosure of confidential info. Brand name may be spoiled by an franchisee.
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Define vertical integration + give an example
The coming together of firms in the SAME INDUSTRY but at DIFFERENT STAGES of the production process. Tesco purchased wholesaler Booker giving them control of the UK's largest food wholesaler (competitive advantage over other supermarkets).
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Advantages + Disadvantages of vertical integration
Risk bearing + financial economies of scale can occur. Not subject to losing control of supply. Maybe some overlap of technology + expertise. BUT, loses core competence. Leaves businesses' + customers with less choice.
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Define horizontal integration + give an example
Occurs when two business in the SAME INDUSTRY merge. Google hired some HTC employees to develop pixel smartphones + receive a non-exclusive license of HTC's intellectual property.
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Advantages + Disadvantages of horizontal integration
Exploit internal economies of scale. Cost savings from synergies. Reduces competition. Diversification (more opportunities for economies of scope). BUT, difficult aligning cultures. Integrating their systems is time consuming + expensive.
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Define conglomerate integration + give an example
Occurs when business in UNRELATED INDUSTRIES join together. Virgin started off as a record label company but now has its own airline, rail travel, holidays, leisure clubs, financial services etc.
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Advantages + Disadvantages of conglomerate integration
Allows a business to diversify across a no. of diff industries (spreading risk). BUT, lack of management expertise in new fields. Possible dilution of brand image. Lose focus of core competence. Difficult to share organisational culture.
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Other cards in this set

Card 2

Front

Difference between organic and external growth?

Back

Organic (internal) is when a firm expands within its business (at a steady+closely managed way). External involves a firm integrating with another firm as a result of either a merger or takeover.

Card 3

Front

Advantages + Disadvantages of organic growth

Back

Preview of the front of card 3

Card 4

Front

Advantages + Disadvantages of external growth

Back

Preview of the front of card 4

Card 5

Front

Define economies of scale + diseconomies of scale

Back

Preview of the front of card 5
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