Unit 1, Section 5: Growth and Evolution

acquisition

A method of external growth that involves one company buying a majority stake in another company with the agreement and approval of the target company's Board of Directors.

Backward vertical integration

A method of external growth that involves a company buying another company that is further away from the consumer in the chain of production.

conglomerate

This form of external growth occurs when two or more businesses in unrelated industries integrate through a merger, acquisition, or takeover.

Demerger

This occurs when a company sells off a part of its business, thereby separating into two or more separate entities. This often happens due to conflicts and inefficiencies of two or more firms previously in a merger agreement, such as culture clashes.

diseconomies of scale

Growth that is excessive results in inefficiencies and higher average costs of production, perhaps due to problems such as miscommunication, misunderstandings, and poor management of resources.

economies of scale

These are cost-saving benefits enjoyed by a business as it increases the size of its operations, i.e. lower average costs (the cost per unit).

External economies of scale

Category of economies of scale that occurs when a firm’s average cost of production falls as the industry grows, i.e., all firms in the industry benefit.

External diseconomies of scale

This occurs when an individual firm has higher cost per unit of output due to factors beyond its control as the industry as a whole grows.

External growth

Also known as inorganic growth, this takes place when an organization requires the support of a partner organizations for its growth.

Financial economies of scale

Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages as they represent lower risk.

Forward vertical integration

This external growth method occurs when one company buys another business that is closer to the consumer in the chain of production.

Franchise

This growth strategy involves the right to trade using another company's products, brand name and corporate logo.

Franchising

A growth method that involves two parties, with the franchisor giving the licensing rights to a franchisee to sell goods and services using the franchisor's brands and products.

Horizontal Integration

This external growth strategy occurs when a merger, acquisition, or takeover takes place between two or more companies operating within the same industry (thereby reducing competition).

Internal diseconomies of scale

Higher unit costs of production that occur due to internal problems of mismanagement as a business organization grows.

Internal economies of scale

Category of economies of scale that occurs for and within a particular organization (rather than the industry in which it operates) as it grows in size.

Internal growth

Also known as organic growth, this takes place when an organization expands without the help of an external partner firm.

joint venture

An external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time.

Lateral integration

An external growth method that involves two or more firms in a merger, acquisition, or takeover that have similar operations but do not directly compete with each other.

Managerial economies of scale

Larger businesses can afford to hire specialist functional managers, thus improving the organization's efficiency and productivity.

Marketing economies of scale

Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.

merger

This form of external growth involves two or more companies agreeing to form a single, larger company thereby benefiting from operating on a larger scale.

Optimal output level

The level of output where the average cost of production is at its lowest value, so at this level of output, profit is maximized.

Purchasing economies of scale

Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).

Risk-bearing economies of scale

Large businesses can bear greater risks than smaller ones due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.

specialization economies of scale

Larger firms can afford to hire and train specialist workers, thus helping to boost output, productivity, and efficiency (thereby cutting average costs of production).

stategic alliances

These are formed when two or more organizations join together to benefit from external growth without having to set up a new separate legal entity.

Synergy

Often referred to as "1 + 1 = 3", this is a key benefit of growth which occurs when the whole is greater than the sum of the individual parts. A larger company, with synergy, through a merger, acquisition, or takeover creates greater levels of output and improved efficiency.

takeover

Also referred to as hostile takeover) occurs when a company buys a controlling interest in another firm without the prior agreement or approval of the target company's Board of Directors.

target company

The business that is the focus of being bought out by the purchasing company in an acquisition or takeover.

Technical economies of scale

Cost savings by greater use of large-scale mechanical processes and specialist machinery, e.g., mass production techniques.

Vertical Integration

When an acquisition or takeover occurs between two companies operating in different industries.