3.9.1 Assessing a change in scale

• Retrenchment = when a business decided to significantly cut or scale back its activities, and use their resources more effectively/carefully.
• Factors that cause retrenchment?

  • Uncompetitive cost structure
  • Inadequate returns on investment
  • Poor competitive position
  • Financial distress
  • Market Decline
  • Failed takeovers
  • Economic downturn
  • Change of ownership
• Methods of retrenchment?

  -Reduce output and capacity

  -Product and market withdrawal

  -Downsizing/ rationalisation

  -Disposal of business units

  -De-mergers
• Internal (organic) growth = this involves expansion from within a business, for example by expanding the product ranges

  • It builds on the firms' own capabilities and resources.
• Types of organic growth?

  • Developing new product ranges
  • Launching existing products directly into new international markets (exporting)
  • Opening new business locations
  • Investing in additional production capacity or new tech to increase output and sales volume
• Advantages of organic growth?

  • Less risk than external growth
  • Financed through internal funds (retained profits)
  • Builds on firms strengths
  • Business grows at a more sensible rate
• Disadvantages of organic growth?

  • Business growth dependent on the growth of the overall market
  • Hard to build market share if already market leader
  • Slow growth - shareholders prefer rapid growth
  • Franchises can be hard to manage effectively
• External Growth = this involves expansion from outside the business mostly through mergers and takeovers.

  • For positive synergy to occur, the result should mean higher revenue or profits than the two individual businesses achieved.
• Barriers to growth?

  • Economies of scale
  • Economies of scope
  • The experience curve
  • Synergy
  • Overtrading
• Economies of scope = this occurs when it is cheaper to produce a range of products rather than specialise in an handful of products

  • Brand extensions to widen the brand appeal
• The Experience Curve = a curve showing the theory that the more experienced the firm is at making a product, the better, faster and cheaper it is able to make it.

  
• Synergy = a key concept associated with external growth. It happens when the value of two business brought together is higher than the sum of the value of the two individual businesses.
• Cost Synergy is where cost savings are achieved as a result of external growth - example of economies of scale
• Revenue Synergy is where additional revenues are achieved as a result of external growth.
• Cost Synergies?

  • Eliminating duplicate functions e.g. combining two accounting departments
  • Securing better deals from suppliers
  • Higher productivity and efficiency from shared assets
• Revenue Synergies?

  • Marketing and selling complementary products
  • Cross selling into a new customer base
  • Sharing distribution channels
  • Access to new markets
  • Reduced competition
• Overtrading = occurs when a firm expands too quickly without having the financial resources to support such a quick expansion which can lead to business failure.
• Symptoms of overtrading?

  • High rev growth but low gross and operating profit margins
  • Persistent usage of overdrafts
  • High Increases in payable and receivable days ratios
  • High Increase in current ratio
  • Very low inventory turnover ratio
  • Low levels of capacity utilisation
• Greiner's Model of Growth = suggests and attempts to predict that there are six phases and five crises that firms may experience as they grow.

  
• Overcoming crisis of leadership?


  Crisis caused by informal communication starting too fail and firm getting too big for leaders to get involved.

  How to solve = Direction
• Overcoming crisis of autonomy?


  Crisis caused by firm having functional management and the leader is struggling to let go.

  How to solve = Delegation
• How to overcome Crisis of Control?


  Crisis caused by having more formal management structure in place (departments) and new layers of hierarchy are needed to keep control.

  How to solve = Coordinaiton
• How to overcome Crisis of Red Tape?


  Crisis caused by a dangerous growth in organisational bureaucracy hence slowing decision making thus missing external changes in market.

  How to overcome = Collaboration
• How to overcome Crisis of Growth?


  Crisis caused by growth slowing down due to firm running out of ideas hence alliances are sought.

  How to solve = Alliances
• Evaluative points of Greiner's growth model?

  1. Growth is a difficult thing to achieve
  2. Growth poses many management challenges
  3. Organisational structure has to evolve
  4. Firms that don't adjust will experience lower growth
• Disadvantages of Greiner's Growth Model?

  • Simplistic
  • Not every firm will suffer crises as it grows
  • Model doesn't account for pace of growth
• Constraints on growth?

  • Resistance to change by employees and unions
  • The cost of implementation
  • Availability of finance
  • Time period required
  • Effect upon the brand image and marketing
  • Types of organisational culture
• Cost of implementing growth?

  • Short term owners (shareholders) may not see the need for change which can undermine dividends
  • Fixed costs such as salaries will increase
  • Variable costs in terms of increase in payments to award performance
  • Sunk costs in terms of reorganising employees and training
• Implication of a changed organisational structure?

  -Changed management responsibilities

  -Greater workloads/higher stress

  -New teams and colleagues

  -Different reporting structures
• Implication of New leadership or ownership?


  -Different leadership style

  -Uncertainty

  -New priorities

  -Threat to prevailing corporate culture

  -Previous projects often abandoned

  -New sense of urgency
• Implications of fewer people?

  -Loss of morale and increase de-motivation

  -Bad news for external stakeholders e.g. local community and suppliers
• Backward Vertical Integration = involves acquiring a firm operating earlier in the supply chain e.g. retailer buys a wholesaler.

  e.g. IKEA buying forests in Romania
• Conglomerate Integration = Involves the combination of firms that are involved in unrelated business activities.

  e.g. Dragon's Den, dragons investing in entrepreneurs
• Forward vertical integration = involves acquiring a firm further up in the supply chain e.g. car manufacturer buys a car parts distributer.

  Bookers took over £40m worth of Londis and Budgens stores
• Horizontal Integration = firms in same industry which operate at same stage of production process are combined.

  e.g. Marriot bought Starwood to become largest hotel chain
• Merger = combination of two previously separate firms which is achieved by forming a completely new firm.
• Takeover (Acquisition) = involves one business acquiring control of another business. Most common form of external growth.
• Reasons for takeovers?

  • increase market share
  • acquire new skills
  • access economies of scale
  • improve distribution
  • spread risks
• Disadvantages of takeovers?

  • High risk
  • high cost
  • problems of valuation