Theme 3

What are the reasons for planned growth?

• To increase profits

• To achieve economies of scale

• Increase market share

• Increase profitability

• Increased market power over customers and suppliers

What are the 2 types of economies of scale?

• Internal - economies within a business such as managerial, purchasing and technical economies

• External - economies that occur in the industry e.g. improved infrastructure

What are some problems linked to growth?

• Diseconomies of scale (average costs rising)

• Overtrading

Why do diseconomies of scale occur?

• Poor communication

• Poor employee motivation (alienation)

• Poor management 

Organic growth

When a firm grows from within, using its own resources

Inorganic growth

When a firm grows from merging or acquiring another company

Advantages for organic growth

• More control

• Minimises risk

• Gives staff opportunities to advance = better motivation

Disadvantages for organic growth

• Slow growth

• Limited by internal resources

• Harder to respond to competition

What is a merger?

When 2 firms of a similar size agree to join forces permanently creating a new company

What is a takeover?

One firm buys the majority of shares in another

What is vertical integration?

When one firm takes over/merges with another in a stage of production in the same industry

What is horizontal integration?

When a firm buys out another in the same industry (e.g. a competitor)

What is conglomerate integration?

When one firm buys out another with no clear connection to industry

Why do businesses remain to stay small?

• Product differentiation or USPs

• Flexibility

• Maintain customer service level

Forward vertical integration

Buying out a customer

Backward vertical integration

Buying out a supplier

Mission statement

Brief statement that summaries the aims, purpose and core values of a business

Ansoff’s Matrix

A tool used to help a business decide how to grow. The 4 strategies are:

1. Market penetration

2. Market development

3. Product development

4. Diversification

Market penetration

An existing product within a market

• Help to improve economies of scale

• Strengthens existing

• Limited ceiling for sales

Product development

New product in your existing market

• Meets evolving customer needs

• Expands product portfolio

• Product may fail

Market development

New market using an existing product

• Increases economies of scale

• Boosts revenue and brand image

• Market may reject the product

Diversification

New product in a new market

• New revenue streams

• Potential synergies - links to industries

• High risks

• High costs

Distinctive capabilities

Businesses can gain competitive advantage by 3 ways:

1. Architecture - strong relationships and networks of trust

2. Reputation - strong brand images build over time through quality and customer loyalty

3. Innovation - developing new ideas to gain an advantage

Porter’s 5 forces

Help businesses evaluate the attractiveness and potential profitability of an industry

1. Industry rivals

2. Threat of new entrants

3. Buying power

4. Supplier power

5. Threat of substitutes

Threat of new entrants

Measures the ease of how easily new competitors can enter the market and disrupt existing businesses - depends on the barriers of entry

Threat of substitutes

The risk of customers switching to alternative products or services that meet the same need - not in direct competition but serve the same customer needs

Buyer power

Influence customers have over prices and business decisions based on demand

Supplier power

Control suppliers have over pricing, quality and availability of key resources - businesses can consider backwards vertical integration

Industry rivals

The level of competition among existing markets in the industry