alevel business 3.9

• Define Growth


  when there is an increase in the size of an organisation's operations
• Growth occurs in terms of ... x3

  Physical assets (i.e. purchasing new premises)

  Number of employees

  Increasing product range
• Reasons for growth X2

  Enter into new markets - spread risk

  Gain economies of scale and reduce costs
• Define Retrenchment


  when there is an reduction in the size of an organisation's operations
• Reasons for retrenchment x2

  Focus on core competences - reduces loses or sell off less profitable parts of the business

  Increase efficiency
• Types of growth x2

  Organic growth

  External growth
• Define organic growth


  when an organisation increases their sales through expanding the scope of their internal operations
• Organic growth examples include x2


  Expanding the current asset base (buying new factories or premises from where to operate)

  Increasing the product range
• Organic growth is funded through x3

  Retained profit

  new share issue

  Loan capital
• Define external growth


  when an organisation increases their sales through integrating with other businesses
• External growth examples x2

  Mergers

  takeovers
• External growth funded through


  External sources of finance
• Organic growth pros x2

  abality to maintain culture , management style , brand image and USP

  Potentially less risk then external growth
• Organic growth cons x2

  Can be slower then external growth

  Risk of missing out on opportunities in fast growing market
• Organic growth most appropriate when x2

  Business has USP and strong brand image

  Business has a unique culture
• External growth pro x2

  Gain synergies and economies of scale

  Reduce level of competition
• External growth cons x3

  •Difficulties of merging two companies - cultures and systems

  •Impact on motivation - job losses, reorganisation of work and uncertainty

  •Buying another organisation's liabilities
• External growth most appropriate when x2


  •Business a strong management team able to integrate cultures

  •Significant economies of scale and scope are achievable
• Define Economies of scale (EoS)

  The benefits to a business, in the form of lower average unit costs, from increasing the size of operation
• Type of economy: Purchasing

  Bigger business (powerful)> supplier = neogatiate discounts/ longer periods of trade credit/reduced average cost/flexible design specification/delivery arrangments
• Type of economy: technical

  Bigger organsiation = more advanced/sophisticated technology they are able to afford.

  = aid in + productivity and - average costs
• Type of economy: managerial

  Bigger organisation = pay specialist employees to furfil particular roles

  = - outsourcing costs/+ efficiency = -average costs
• Type of economy: Financial

  Large organisation = + likely able to negotiate favourable interest rates from lenders

  = - cost of borrowing money
• Define Diseconomies of scale

  When a business grows so large that the costs per unit increase. As output rises
• Types of diseconomy: Communication

  Bigger organisation = +difficult/cost to communicate with all people

  + time/effort to ensure everyone has understood communication = + communication costs
• Type of diseconomy: Coordination


  Large organisation = communication = more difficult/ensuring everyone is working towards the same goal

  Needs new managment structures/monitoring systems to execute plans
• Type of diseconomy: Motivation

  More diffucult communication/coordination =

  Organisation potentially more centralised

  Employees may feel demotivated as a cog in a machine or if they do not see there efforts contribute to the achievement of coporate objectives
• Define Economies of scope

  The benefits to a business that arise from producing a range of products
• Economies of scope occur because x2


  •The same production facilities can be used

  •The same staff can be utilised
• Economies of scope benefits x2


  •Improve brand image and awareness

  •Spreads risk across a range of markets
• The experience curve occurs when...

  An organisation experiences lower average costs as a result of producing a higher volume of output

  
• The experience occurs because x2

  •Organisations refine production processes over time so that they become more efficient

  •Worker skill level increases the more units of output that are produced
• The experience curve implication x2

  •Expertise can become a barrier to entry through lowering production costs

  •Gains are made when production increases and not over time - fast expansion is beneficial
• The experience curve evaluation points x2

  •Could increased size lead to diseconomies of scale and complacency?

  •Technological developments occur very quickly and it is arguable these lead to greater cost advantages
• Synergies occur as a result of

  external growth when the combined strengths of two organisations lead to compounded benefits for the new organisation
• Types of synergies x2

  Revenue synergies

  Cost synergies
• Revenue synergies e.g. x2

  Opening in new markets

  Using new distribution channels
• Cost synergies e.g. x2

  Economies of scale (purchasing managerial etc)

  Intergration of functional activities
• Synergies evaluation points x2

  •Often cost synergies involve reducing the size of the workforce. Valuable skills may be lost, and there could be an impact on motivation

  •Often an increase in the size of a company can lead to economies of scale - depends on where the economy is producing in relation to the MES
• Overtrading occurs when ...

  An organisation lacks the finances to fund their expansion