Unit 9

• organic growth


  when a business expands by expanding its operations
• external growth


  growing by joining with other businesses
• integration


  growing by takeover or merger
• merger


  when one firm buys a controlling interest in another firm
• chain of production


  how a product gets from the first production to the consumer
• horizontal integration


  when a firm joins with another at the same stage in production
• forwards vertical integration


  when a firm joins with one closer to the consumer
• backwards vertical integration


  when a firm joins with one further away from the consumer
• conglomerate integration

  when a firm joins with another that is completely unrelated
• synergy


  when you put two businesses together and combined they perform better than they did as two separate firms put together (2 + 2 = 5)
• franchising


  where a business sells the rights to use its name and sell its products to other businesses for an intial fee and a percentage turnover
• franchisor


  firm offering a franchise
• franchisee


  the person buying a franchise
• retrenchment


  when a business reduces the scale of its operation often returning to markets where it has key competitive advantage
• economies of scale


  a fall in unit costs that occur due to the increasing size of the business and its operations
• technical economies


  modern equipment, mass production techniques, and computer systems to monitor production
• managerial economies


  highly skilled staff, division of labour allows staff to improve their skills in their particular field and training is more widely available
• purchasing economies


  large firms can buy in bulk, as the firm has more power with suppliers
• marketing economies


  large firms can advertise and research more
• diseconomies of scale


  the cost of running a large firm causes unit costs to rise
• coordination diseconomies 


  the organisation becomes more complex, spans of control widens and managers are less focused on objectives
• communication diseconomies


  messages are distorted as the hierarchy expands: employees are likely to be less motivated and therefore less efficient
• motivation diseconomies


  staff become harder to motivate as they feel less engaged in a larger firm, this costs money
• economies of scope


  the cost savings gained when a firm operates in several markets with several products
• overtrading


  this happens when a firm tries to expand its production rapidly through the use of short term finance, it results in liquidity problems
• (joint) venture


  where two firms work together on a particular project without integrating
• why do businesses grow or retrench

  to increase its reputation

  make bigger profits to satisfy shareholders

  to become more efficient and risk-averse

  businesses will retrench in order to survive when the external environment becomes more difficult
• horizontal integration advantages


  loss of competition/gain of market share

  ability to expand into new area of world with expertise
• lateral integration advantages


  gain expertise in areas of the production process

  spreads risk whilst integrating with a firm with which there are similarities and therefore some knowledge and understanding
• forwards vertical integration advantages

  ensures the firm will always have a customer/profit potential through controlling customer behaviour , pricing and marketing
• backwards vertical integration advantages

  ensures the firm has some control over supply, potential to make more profit without raising price to consumer
• conglomerate integration advantages


  risk spreading

  ability to move into new markets with expertise
• horizontal integration disadvantages


  loss of drive for efficiency through loss of competitors
• lateral integration disadvantages


  lack of knowledge of new markets/different product means more potential for culture clash
• forwards vertical integration disadvantages

  lack of knowledge of next stage in the production process
• backwards vertical integration disadvantages

  lack of knowledge of previous stage in production process
• conglomerate integration disadvantages


  lack of understanding of markets
• how do firms manage to overcome the problems associated with growth

  the problems associated with growth include:

  communication problems

  control

  coordination

  motivational issues
• what is the likely impact of growth/retrenchment on finance

  capital is needed to fund growth but it also may be needed to make redundancies to fund retrenchment, during growth effective cash flow management may become more difficult but is vital to success
• what is the likely impact of growth/retrenchment on HR

  retrenchment usually includes rationalization - slimming down the hierarchy, which means losing staff, during growth there may be an extra burden on staff. there may also be implications for training and relocation.