3.9.1 - assessing change in scale

what are the growth objectives

• Maximising the amount of profit

• Maximising shareholder wealth - increase in share price

• Growth in the size of the business

• Spreading risk by diversification

• Increasing market share in particular sector or product

• Focusing on core capabilities - growing internally using what the business is already good at

what are reasons for growth

• Increase profits and shareholder returns

• Gain market share and market power

• Benefit from economies of scale

• Reduce risk through diversification

• Survive competition in saturated or global markets

• Exploit new opportunities (new products or markets)

what are the reasons for retrenchment

• Cut costs and improve efficiency

• Focus on core activities

• Respond to falling demand

• Improve cash flow

• Avoid diseconomies of scale

• Prepare for sale or restructuring

what are the two types of growth

organic and inorganic

explain organic growth

• Most common

• Business grows from its own core business

• Growth tends to be slower but less risky - less cultural problems

• A USP needs to be developed

• Can work well for speciality products

• Emphasis on strong growth rather than fast growth

• Management tools and performance indicators need to be adapted to growth in business

explain inorganic growth

• Normally achieved alongside organic growth

• A business will 'acquire' another business - either through take-over or merger

• Growth is quicker but riskier

• Less effort

• Relied on small, local acquisitions which complement the businesses core business

• Used to complement organic growth

• Organisational structure has to cope with a number of acquisition

• Businesses need a sound financial base to grow externally

• Allow businesses an immediate change in size, strategy of industry

evaluation for growth

Risk of culture clashes and failure to achieve expected synergy.

examples of retrenchment strategies

• Staff reductions

• Recruitment freezes

• Closing divisions or factories

• Targeted cost-cutting

what are the methods of retrenchment

1. recruitment freeze

2. delayering

3. closing division or factory

4. compulsory redundancies

advantages of recruitment freeze

• Less threatening

• Protects morale

• Seen as fair

disadvantages of recruitment freeze

• No opportunity to restructure

• Skilled workers may leave and need replacing later

advantage of delayering

• Minimal impact on production

• Empowers remaining staff

disadvantage of delayering

• Increased workload for managers

• Loss of future management talent

• Fewer promotion opportunities

advantages of closing a division or factory

• Immediate reduction in fixed costs

• Higher capacity utilisation elsewhere

Why does closing a factory increase capacity utilisation elsewhere?

Step 1: Before closure

• The business has too much capacity for current demand

• Output is spread across too many factories

• Each factory may be operating below full capacity

Step 2: One factory is closed

• Total capacity is reduced

• Demand stays the same

• Production is moved to the remaining factory

Step 3: Why this is an advantage

• Fixed costs (rent, machinery, managers) are spread over more output

• Unit costs fall

• Less waste and idle machinery

• Operations become more efficient

disadvantages of closing a division or factory

• Difficult to reverse

• Loss of experienced staff

advantages of compulsory redundancies

• Allows reshaping of organisation

• Average workforce quality may rise

disadvantages of compulsory redundancies

• Fairness concerns

• Low morale and job insecurity

examples of economies of scale and how they work

Growth can reduce unit costs through:

• Technical economies – advanced machinery

• Purchasing economies – bulk buying

• Managerial economies – specialist managers

why do technical economies of scale reduce unit cost

Large firms can afford expensive, high-tech machinery

• These machines:

  • Produce more output per hour

  • Are often more energy-efficient

  • Reduce waste and errors

why do managerial economies of scale reduce unit cost

Large firms can employ specialist managers (e.g. HR, finance, marketing)

• Specialists are:

  • More skilled and experienced

  • Better at decision-making

  • More efficient than general managers

• Better management leads to:

  • Lower waste

  • Better staff productivity

  • More effective use of resources

what is economies of scope

• Lower average costs from producing multiple products

• Risk spread across product portfolio

• Shared resources (e.g. marketing, R&D)

examples of economies of scope

Dyson expanding into multiple appliance categories

• hoovers

• fans

• hair dryers

• hair stylers

when do diseconomies of scale occur

• Occur when growth leads to:

  • Poor communication

  • Loss of control

  • Demotivated workforce

• Result in higher unit costs

what is synergy

When two businesses join together and the combined business performs better than the two businesses would separately.

how does synergy occur

merger, takeover

why does synergy occur

• Reduce costs

• Increase revenue

• Improve efficiency

• Strengthen competitive advantage

why might synergy fail

• Culture clashes between workforces

• Poor communication

• Resistance from employees

• Integration costs higher than expected

• Management overstretched

what is overtrading

Occurs when a business grows faster than its finances allow

what are the causes of overtrading

• Accepting more orders than can be fulfilled

• Poor credit control

what does overtrading lead to

• Cash flow problems

• Liquidity crises

impact of growth on HR

• Job security concerns

• Selective recruitment to maintain culture

• Shift towards self-managed teams

• Changes to compensation policies

• Increased training needs

• More complex information sharing due to hierarchy

impact of retrenchment on HR

• Job insecurity and low morale

• Selective redundancies or retraining

• Role enlargement

• Budget pressure on pay and bonuses

• Need for retraining

• Simpler communication structures

impact of growth on operations

• Process changes may disrupt the experience curve

• Increased use of technology

• High capital investment requirements

• Shift from labour-intensive to capital-intensive production

impact of retrenchment on operations

• Reduced stock levels

• Less investment in technology

• Low capacity utilisation

• Falling morale

• Risk of losing experienced staff

impact of growth on marketing

• More complex strategies

• Increased specialisation

• Higher spending on market research

• Greater use of varied promotional methods

impact of retrenchment on marketing

• Increased workloads

• Loss of specialist skills

• Reduced marketing effectiveness

impact of growth on finance

• Need for additional capital

• Cash flow management becomes critical

• Monitoring liquidity ratios

• Increased tax complexity

• Shareholder expectations

• Tighter financial controls and budgeting

impact of finance on retrenchment

• Sale of fixed and current assets

• Debt renegotiation

• Improved debtor control

what are mergers

• Two or more businesses agree to join together

• Operate under one board of directors

• Usually between firms of similar size

• Share ownership and control

what are mergers motivated by

• Synergy

• Increased market share

• Cost reduction

advantages of mergers

• Reduced competition

• Potential economies of scale

• Synergy through shared resources

disadvantages of mergers

• Culture clashes

• Slow decision-making

• Expected synergy may not occur

what are takeovers

• One business buys a controlling shareholding in another

• The acquiring firm gains managerial control

difference between friendly and hostile takeovers

• Friendly – agreed by the target firm’s board

• Hostile – resisted by the target firm’s board

advantages of takeovers

• Rapid growth

• Immediate access to new markets or assets

• Removal of competitors

disadvantages of takeovers

• Expensive

• Resistance from employees and management

• High integration risk

what are joint ventures

Two or more businesses set up a separate business/project

what are joint ventures used for

• Entering foreign markets

• Large-scale projects

example of joint ventures

spotify and hulu for bundled streaming

advantages of joint ventures

• Shared costs and risk

• Access to local knowledge

• Lower financial exposure

disadvantages of joint ventures

• Conflicting objectives

• Profit sharing

• Loss of control

advantages of franchising

• Rapid growth with limited capital

• Lower risk for franchisor

• Motivated franchisees

disadvantages of franchising

• Less control over quality

• Risk to brand reputation

• Franchise disputes

what is horizontal integration

• Merger or takeover of a business at the same stage of production

• Usually a direct competitor

advantages of horizontal integration

• Increased market share

• Reduced competition

• Greater economies of scale

disadvantages of horizontal integration

• May attract competition authority scrutiny

• Diseconomies of scale risk

what is vertical integration

Growth by merging with or taking over a business at a different stage of the supply chain.

what is backward vertical integration

Taking over a supplier

advantage of backward vertical integration

• Greater control over quality

• Reduced supplier costs

• Improved reliability of inputs

disadvantage of backward vertical integration

• High cost

• Loss of supplier flexibility

what is forward vertical integration

Taking over a distributor or retailer

advantages of forward vertical integration

• Greater control over distribution

• Improved customer experience

• Higher profit margins

disadvantages of forward vertical integration

• High fixed costs

• Less flexibility if demand falls

one reason a business may experience diseconomies of scale as it grows

One reason is communication problems. As a business grows, it becomes harder to coordinate workers and managers, which can lead to mistakes and inefficiencies. This increases average costs and reduces productivity.