UNIT 1. Chapter 3. Size of business Flashcards Preview

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1

Def. External Growth

Business expansion achieved by means of merging with or taking over another business, from either the same or a different industry. Often referred as 'integration'.

2

What are the 4 types of integration? (names)

• Horizontal integration
• Vertical integration - forward
• Vertical integration - backward
• Conglomerate integration

3

What are the 4 types of integration? ( Name and explain)

• Horizontal integration: integration with firms in the same industry and at same stage of production
• Vertical integration: integration with firms in the same industry but at a different stage of production
+ Forward: Integration with a business of the same industry for the consumers of the industry.
+ Backward: Integration with a business of the same industry for the suppliers of the industry.
• Conglomerate integration: Integration with a business in a different industry.

4

Horizontal integration: Advantages (5) . Disadvantages (5). Impact on stakeholders (2).

Advantages:
•Reduce competition - increase in market share
•Possible economies of scale
•New ideas
•Increased power over suppliers
•Scope of rationalising production e.g. concentrating all output on one site as opposed to two
Disadvantages:
•Rationalisation may bring bad publicity
•May lead to monopoly investigation if the combined business exceeds certain market share limits
•Integration is expensive
•Communication problems
•Diseconomies of scale
Impact on stakeholders:
•Consumers will have less choice
•Employees may lose job security due to rationalisation

5

Vertical integration - forward : Advantages (2). Disadvantages (2). Impact on stakeholders (3).

Advantages:
•Business has control over the promotion and pricing of its own products
•Secures a secure outlet for a firm’s products - may now exclude competitors’ products
Disadvantages:
•Consumers may suspect uncompetitive activity and react negatively
•Lack of experience in this sector of the business - a successful manufacturer may not make a good retailer.
Impact on stakeholders:
•Employees may have greater job security because business has secure outlets
•More varied career opportunities
•Consumers may resent lack of competition

6

Vertical integration - backward: Advantages (4). Disadvantages (2). Impact on stakeholders (2).

Advantages:
•Gives more control over quality, price and delivery times of suppliers
•Encourages joint research and development into improved quality of supplies of components
•May be able to control supplies of materials to competitors
•Reduced costs, therefore gain of competition
Disadvantages:
•May lack experience in managing suppliers, which may lead to inefficiency.
•Supplying business may complacent due to having a guaranteed customer.
Impact on stakeholders.
•Possibility of greater career opportunities for workers
•Consumers may obtain improved quality and more innovative products

7

Conglomerate integration: Advantages (3). Disadvantages (3). Impact on stakeholders(2).

Advantages:
•Spread risks across other markets
•May take the business into a faster growing market
•Take advantage of existing expertise, knowledge and resources in a company.
Disadvantages:
•Lack of management experience in the acquired-business sector
•May be a lack of focus and direction
•Expensive
Impact on stakeholders:
•Greater career opportunities for employees
•More job security because risks are spread

8

Def. Merger

An agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business.

9

Def. Takeover

When a company buys over 50% of the shares of another company and becomes the controlling owner of it. It is often referred as an 'acquisition'.

10

Def. Synergy

Literal meaning is ' the whole is greater than the sum of parts'. So in integration, it is often assumed that the new, larger business will be more successful than the two, formerly separate businesses were.

11

Why would integrated businesses be more effective and efficient than the two separate companies? (3)

• Sharing of research facilities and more ideas
• Economies of scale
• Save costs on marketing and distribution by using the same sales outlets.

12

Why wouldn't integrated businesses be more effective and efficient than the two separate companies? (3)

• Diseconomies of scale
• If the firms have different markets, there may be little mutual benefit from sharing research facilities and marketing and distribution systems.
• Contrasting management culture.

13

Def. Joint ventures

Two or more businesses agree to work closely together on a particular project and create a separate business division to do so.

14

Importance of joint ventures (6)

•Costs and risks of new business venture are shared
•Sharing of expertise of the business which could fit together
•Exploiting each other’s markets
•However, there may be a culture clash (different style of management that don’t blend)
•Errors and mistakes might lead to one blaming the other
•A business failure of one of the partners might put the whole project at risk

15

Def. Strategic Alliances

Agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives.

16

Importance of strategic alliances (3)

These alliances can be made with stakeholders like:
•Universities: To allow new training specialist courses for employees (off the job training)
•Supplier: To design and produce components and materials for new range of products which may reduce total development time and average costs.
•Competitor: To reduce risk of entering a market that neither firms operate in.

17

Problems resulting from rapid growth (4)

• Financial: Expensive external growth may lead to negative cash flow and increase in long term borrowing.
• Managerial: Lack of coordination between the divisions of an expanding business.
• Marketing: The original marketing strategy may no longer be appropriate for an organisation with a wider range of products.
• Loss of control by original owners due to switching to plc legal structure.