Business - Exam revision level 2 NCEA

What are the benefits and drawbacks of CSR?

Reduce costs (sometimes), better reputation, meets putake, attracts better staff (retain staff and increase moral), good public relations, builds customer loyalty

May lose competitive advantage, costly, can have trouble with economic sustainability

What will happen if staff are satisfied?

Deliver a better quality of service to customers, make less mistakes and errors (ensuring quality of product), be more proactive, build better relationships with clients, be more likely to share innovative ideas.

What will happen if Staff are unsatisfied?

Won't have the benefits of satisfied staff, may lose competitive advantage and market share.

What are the major threats to staff satisfaction?

Loss of Key personnel and ineffective leadership

What is ineffective leadership and what are some traits of ineffective leaders?

When supervisors, managers, and/or owners fail to fulfil their responsibilities correctly, ineffective leaders may be complacent about the products and competition of new organisations (not looking for new opportunities). They may fail to provide vision and direction for the business, with little attempt to link the annual objective to the strategies and targets. As a result, staff motivation may be poor.

What might ineffective leaders do?

Fail to delegate, not share responsibilities or control for any decisions with staff, ignore suggestions for innovation from staff so systems, policies and procedures are not updated or improved.

What are internal controls?

the policies, procedures and physical safeguards which help to protect firms from errors, fraud and theft.

What are some aspects of internal controls and how would they work?

Authorisation of activities - such as refunds, purchases, use of assets and access to information. Staff may be given delegated authority to make refunds or purchase items up to a certain amount. But anything more expensive would have to be signed off by another employee or manager. (to ensure they do not give huge fake refunds for fake purchases.

Adequate documentation - using pre-numbered order forms and invoices to provide a paper trail for checking so only real orders get paied. Only authorised people can access documents making it harder to make "fakes".

Segregation of duties - the accounting info is separate from the record-keeping tasks. e.g. people order stock are not in charge of payments for orders.

Independent checking - having an external organisation check the financial data, including records and payments made e.g. an auditor.

What are some ways to implement internal controls?

Physical safeguards, user ID and passwords to access computer systems, using purchase-order systems which record who has ordered, completing regular stock takes, making sure that monthly bank statements are consistent - ensure balance each month matches the business records.

What are fraud and error?

Fraud - when and employee is decietful to gain personal benefit e.g. foging signatures on cheques etc.

Error - when an employee makes a mistake during their assigned duties e.g. giving incorrect change etc.

What are solutions to reduce fraud and error and potential drawbacks of each?

Introducing a quality assurance department - responsible for improving and monitoring the provision of goods or services to customers and ordering payments for stocks. But it might be expensive and time-consuming to set up and staff would need to be trained.

Implementing new rules and procedures which clearly outline expectations and guidelines for providing goods and services and ordering and purchasing stock. As long as staff follow procedures it is fairly easy to set up. However, by itself, it will not prevent all fraud.

Create accountability with managers held responsible for authorising actions of staff. This makes communications, enforcement of standards, and monitoring performance easier for the firm, which means fewer opportunities to commit fraud. However, staff/managers may not have sufficient skills as the organisation may be flat. It could also take time.

What is the definition of organisational structure?

The way jobs, responsibilities and power within a business are organised - including the levels of management and divisions of responsibilities within an organisation. The structure is often presented in an organisational chart.

What is a tall org structure and the advantages and disadvantages?

Many layers of hierarchy, small span of control and long chain of command.

Advantages

Smaller teams so communication between teams is quicker and feedback should be more effective.

Rapid decision-making, don't need to consult employees - usually, managers tell employees what to do.

Smaller teams are easier to control. Managers are closely involved in subordinates' work.

More opportunities for promotions as there are more levels of hierarchy.

Disadvantages

Possible delays in decision-making because of the amount of decisions that need to be made by central groups at the top.

Supervisors are too closely involved in subordinates' work so they may suffer greater pressure and stress as they cannot Delegate tasks.

Too many layers of management leading to inflexibility because the organisation becomes bureaucratic (many roles and regulations)

Excessive distance between the top and bottom of the firm may demotivate staff.

What is a flat org structure and the advantages and disadvantages?

Fewer levels of hierarchy but managers have a wider span of control so decision-making power is delegated to staff.

Advantages

Communication between levels should be quicker and more accurate and managers can communicate with many people. Each message has fewer levels to pass through

Staff are given greater discretion and a less closely supervised. They tend to have higher morale and are empowered which increases motivation and productivity.

Delegation is used - responsibility is passed down the hierarchy. Manages gives subordinates authority to make decisions on their behalf.

Disadvantages

Managers can't tightly control subordinates which is unsuitable for unskilled workers.

Grated chance of mistakes if workers with autonomy are not sufficiently competent.

Higher likelihood of conflicting opinions increases with the number of people involved in decision making, which may mean decisions take a long time to be made.

May be duplication of functions as there is no overview of what everyone is doing.

What would cause a change in the org structure?

Growth of the business - a larger business might need a taller org structure.

Style of leadership - more democratic style may need less layers/less control

Market conditions/customer needs - an economic recession may lead to delayering.

Adopting new technology - may require more flexibility and less staff, flattening the organisation.

What is centralised decision making and the advantages?

Major decisions are made by one person or a few senior managers at the top of the hierarchy. Those at the top of the organisation keep the power.

Advantages

- Fixed rules and procedures in all areas of the firm should lead to rapid decision-making - there is little scope for discussion.

- The business has consistent policies throughout the organisation. This prevents and avoids confusion in the minds of consumers.

What is decentralised decision making and the advantages?

The authority to make decisions is shared out. for example power to make decisions might be delegated to regional managers or to junior employees or shared among staff.

Advantages

More local decisions can be made that reflect different conditions the person who makes the decision is likely to have local knowledge and are likely to have closer contact with customers.

More junior managers can develop which prepares them for more challenging roles.

What is a matrix structure and the advantages and disadvantages?

Matrix structure

There is flexibility in the organisation where staff work in departments as well as in team projects. The teams have people from different departments temporarily working together on tasks, led by a team manager or project manager.

Advantages

A Crossover of ideas between specialists and different departments can lead to superior products services and Improvements.

Motivational people have an opportunity to make a difference, contribute and get noticed, which improves skill levels and may lead to good career opportunities.

Motivational as the ability to work on different projects adds interest and variety to the work.

A project team can be created quickly to respond to changing markets and technology.

Disadvantages

Can be difficult to control as project team members get more freedom from their normal boss.

Conflict of interest for workers who report to the project manager and to the normal department manager - loyalties and priorities of work may become difficult.

Normal work may be boring compared to project work so quality may suffer.

Tends to work better and flat organisational structure because team members are usually highly skilled and needless hands-on management.

What is a shamrock structure and the advantages and disadvantages?

Shamrock structure

A core of full-time managers and workers, supported by a group of flexible part-time and temporary workers, and a group of outsourced workers (contractors).

Core workers are essential to the organisation's operations, survival and growth.

Part-time workers are paid by the hour normally, and temporary workers are only hired for specific periods of time for specific needs. These enable the business to keep its HR costs low and gives flexibility to apply staff when and where needed.

Contractors are used when expertise for specific tasks is needed and are purchased from other firms. For example, advertising agencies might be hired to provide advertising services.

Advantages

Core members tend to be highly motivated due to good pay and job security which can lead to better productivity.

Flexibility to respond to the market and changes in the external environment.

Contractors specialise and are likely to provide a higher quality of output than the business could.

Disadvantages

Part-time workers in temporary staff have less job security and may be less motivated or have lower morale.

Contractors are harder to control than staff and this can lead to issues with quality. a contractor may not have the same loyalty or focus as employees.

A contractor may not prioritise the business's work which could lead to delays affecting customers.

What are policies and procedures?

-Policies: Principles or guidelines that state the rules and expectations of how a business expects to conduct its operations. (What to do)

-Procedures: The ways or methods the business uses to follow the rules and expectations when conducting its operations.(How to do it)

What are the advantages and disadvantages of policies and procedures?

Advantages: Provide guidelines and directions, they are something tangible to refer to if there is an issue, they highlight responsibility, they provide accountability, they (should) align with the business values and vision, they provide consistency, they provide boundaries.

Disadvantages: They are time-consuming to create, having to communicate them to staff can be difficult and time-consuming, often ignored, particularly if they are long and staff find them hard to understand, removes flexibility and reduces creativity in the workplace, may restrict innovation, employees may feel they don't have personal freedom, assumes there is only one right way of doing things.

What are the consequences of not having policies and procedures?

Mistakes can occur, lack of accountability, misunderstandings can cause conflict, in some cases measuring performance may be limited, no clear procedures for dealign with issues in the business, the quality of product or service could become compromised.

What are internal controls and examples?

Procedures or systems designed to maximise efficiency and prevent errors and fraud from occurring.

Types of internal controls: Accounting, cash management, performance appraisal.

What are some internal controls that can reduce theft and fraud?

- Separation of duties to ensure fake suppliers/invoices are not used to support payment to an employee. The person receiving the invoices is seperate from the person making the payments.

- Authorisation of payments by a manager rather than a junior employee having control of payments from the business back accounts.

- Checking business bank accounts against accounting records to ensure payments were authorised.

- Anonymous staff reporting on colleagues where behaviour is concerning.

- Careful checking of personal circumstances at the time of recruitment (avoid someone with a gambling habit for example.)

What are some poor employee output examples and the costs of these actions?

Poor output examples

- Low productivity/poor effort/low levels of motivation

- Poor punctuality

- Rudeness to customers or poor levels of customer service

- Being openly critical of the business

- Theft

- Taking extended breaks

- Being negligent in their duties

Costs

- Bad reputation

- Reduced profitability

- Legal action

- Wasted time and resources investigating and dealing with issues

What are statements or reports?

A formal record of the financial activities of a business, person or other entity. They should show financial transactions that have happened as opposed to forecast documents that predict what might happen.

They should be structures using a convention format, easy to understand and produces at the required time (daily, weekly, monthly etc)

How do financial statements help?

Help internal and external stakeholders to make decisions. Internal stakeholders (managers for example) use financial accounts, reports and budgets to manage the business and make strategical decisions. External stakeholders (e.g. shareholders, owners etc) use them to evaluate whether the firm is able to pay suppliers, dividends or repay loans.

What is an income statement and what is the main purpose?

A statement that shows the sales revenue (and other sources of income), expenses (costs), and overall profit or loss for a period of time.

Main purpose

- Show users the revenue, expenses and profit for a period.

- Show investors whether the business is making enough profit for them to keep investing.

- Show the owners and managers whether they are making enough profit, either to give back to shareholders or to help expand the business.

- Show banks whether the business could pay interest on a loan and is likely to pay back the loan.

- To see if the business has made a profit or a loss.

What is a balance sheet and what is the main purpose?

statement showing the assets (things the business owns), liabilities (what the business owes) and equity (how much is funded by the owner) of the business. Also used to see if the business is solvent (whether the business can pay back its obligations in the short and long term.)

Main purposes

- shows the bank or investors whether the business can take on more debt.

- if it has a strong balance sheet (a lot more assets than liabilities) then investors will be more likely to invest and banks more likely to lend.

- would show the banks the business had enough security for a loan.

What is a cash flow forecast and a cash flow statement? and the main purpose of forecasts?

Cash flow forecast is a document predicting how much cash a business expects to have coming and going during a period of time.

Cash flow statement is a record ot actual cash movements showing where cash came and went for the bsuiness during a period of time.

Main purpose or forecasts

- knowing how much cash they have coming in allows for better planning.

- if they invest in new assets they know whether to pay cash or take out a loan.

- seasonal businesses such as retailers know they will have a lot of cash in season (e.g. Christmas) but may lack cash in the off season.

What is a budget? and what is the purpose of having on as well as the advantages and disadvantages of a budget.

Budget it a prediction. Usually compared to actual figures to try see whether the business spent more or less than forecast. Or made more or fewer sales than forecast. The difference between actual and budgeted figures is called variance.

Purpose

- evaluating success: enable the actual sales, expenses and profit to be measured against the budget.

- Motivating individuals to achieve performance goals/levels agreed and set e.g. if the budget is achieved they get a bonus.

Advantages

- budgets help control expenses. Meaning people won't spend on unnecessary costs which helps the business make profit.

- budgeting forces managers to plan accurately and review their income expenditure. This way they can correct things they are dong badly and promote and produce more of the products and services that are doing well.

Disadvantages

- Lack of flexibility. budgets can be restricitve. Fixed budgets stop firms responding to changing market conditions.

- Budgeting is time consuming.

What are sales (revenue) reports?

Sales reports usually compare actual sales with budgeted or forecast sales each month or quarterly—any difference is called the variance. Sales are broken down by area, region, store, department, or product category. Managers use these reports to help understand what is selling well and where.

They affect different departments.

What are cost (expenditure, expense) reports?

Cost reports usually compare actual costs with budgeted or forecast costs - any difference is called the variance. They show the cost to make or buy each item that is sold. Managers use these reports to help understand where they need to improve on costs - maybe new suppliers or materials will have cheaper costs leading to more profit.

What is variance analysis and the main purpose? As well as how to correct negative variance.

Comparing the budgeted and actual figures and investigating the reason for the differences.

Main purpose

- enables firms to quickly take action and fix any problems or take advantage of any unexpected growth in sales.

- understanding the reasons to help them produce more accurate budgets in future which helps to analyse team and individual performance better.

Correcting negative variance

- Can make more accurate budgets by looking at past sales and costs. Then actual results will be close to the budgets which makes it easier to get a loan or attract investors.

- If costs are higher then budgeted then the business can reduce costs in the area showing high costs. This can be done by finding a cheaper supplier. Reducing costs enables the business to achieve budgeted profit.

- If sales are lower the business could increase advertising for the product that shows lower sales. This would increase the sales of individual products and boost overall sales which helps achieve budgeted profit.

What is production? and what are the types of production?

Supplying and making a product or service to satisfy consumer needs and wants. It is also the outputs of the business.

Job production

Batch production

Flow production

What is job production?

Producing an individual product from start to finish, one-off and specially designed for customers for example a wedding dress.

- Job production requires specialised staff who concentrate on the project

- The outcome is usually high quality because the staff are highly motivated as each job is unique.

- Smaller businesses usually use job production (labour intensive) as they don't yet have finds to expand and purchase more advanced technology.

What are the advantages and disadvantages of job production?

Advantages

- Motivating for workers as they produce the whole product and can take pride in it.

- Workers tend to receive higher pay for their specialised skills.

- Quality of production and product is higher because of the highly skilled labour used.

- Customers are more willing to pay a premium price.

- Uniqueness of the product can be a USP which is used in marketing, or to enhance the brand image.

- Normally offers flexibility and choice to the customers.

Disadvantages

- Labour intensive and therefore expensive method of production as the unit costs are higher.

- The production process is time consuming as customers have specific requests.

- It is difficult to speed up the production precess as the quality to decline.

- Long working-capital cycle which negatively impacts cash flow. Meaning that whilst the product is being produced staff wages and operations costs still have to be paid but because the production time is long it means the customer may not pay the business for a long time or until the product is received.

- Few economies of scale.

What is batch production?

Producing a limited number of identical products in one patch or group. For example school uniform. Used when groups of items are made at the same time and move from one stage to the next together in the production precess.

What are the advantages and disadvantages of batch production?

Advantages

- Specialisation in the production process is likely to lead to a higher productivity.

- Variety of products so workers can get variety as well as benefiting the customers.

- Machinery can be adapted relatively easily to enable a batch of different products to be produced.

- economies of scale are possible which lowers unit costs.

Disadvantages

- a certain amount of inflexibility as once the batch has started it is hard to stop.

- Jobs may get boring for staff leading to lower motivation and lower productivity.

- Larger storage costs of semi-finished goods.

What is flow production?

Producing items in a continual moving process. Different items are continuously and progressively carried out in a sequence. For example newspaper printing or beer production. Mass production of standardised products. Specialist equipment and workers are used at each workstation to carry out functions essential to the overall production process. Likely the production method used at Chelsea Sugar Factory.

What are the advantages and disadvantages of flow production?

Advantages

- Can be made 24/7 because of machinery.

- Capital intensive so low labour costs. relatively unskilled workers are easier to employ and cost less.

- Production is made on a miss scale so high volume output = low unit costs.

- Production are of standardised quality.

- Workers specialise and become experts in their area of the production process.

Disadvantages

- Expensive to set up so high risk. Cost of equipment is likely to be high.

- Work is likely to be dull and boring leading to low motivation.

- Inflexible. Hard to alter design or specifications.

- Assembly line so every part is dependent on the other. Delays in the arrival or raw materials or breakdowns anywhere on the assembly line will cause delays or the whole line to stop.

What is lean production?

An approach to production that aims to minimise waste whilst maintaining a high quality. It sues as few resources as possible e.g. space, material, stock, time and labour. Duplication is minimised, workers are less crowded and workers are encourages to think of ways to improve the productivity.

What are the benefit of lean production?

- Fewer resources used and the unit costs is reduced leading to higher profits.

- Fewer stocks of raw materials and finished goods so there is less likelihood of stock being damaged, stolen or lost which also increases profit.

- The less processes that are duplicated the more efficient the operations, reducing costs.

- If workers are encouraged to think of ways to improve productivity they will feel that they made a contribution rather than it being forced on them which increases motivation and means greater productivity and better use of resources.

- Less crowded work areas meaning less likelihood of damage to people, equipment or stocks.

What is J.I.T production

Producing what is needed when needed and nothing more. Avoids delays in production processes. need to establish a good relationship with suppliers for the strategy to work.

What is Kaizen? and the advantages and disadvantages.

A system of production where all workers contribute to the improvement of the business. This philosophy acknowledges that workers may know more than management about fixing problems or streamlining processes. This requires a management culture that involves staff and listens to their views.

Advantages

- A series of small improvements is more cost-effective than one big improvement.

- Involving all staff is empowering and motivational.

- Involving all staff is more likely to produce better ideas.

- It involves teamwork which is motivational.

Disadvantages

- Some staff are not competent or willing enough to participate.

- Some managers would feel threatened and need training or replacing.

- Some changes cannot be introduced gradually.

What is productivity?

The ratio of outputs to inputs during production. The output (production) is measured against the inputs (usually labour) used to create it. As employees become more efficient, the amount of output per employee will rise and therefore the cost of production for each product will fall.

How do you increase productivity?

it involves getting more output with a given level of input. (working smarter not harder)

- using more technologically advances equipment.

- Improving the training of staff the raise the skill levels. Staff with higher and more flexible skills should be more productive.

- Motivating workers. Increasing pay, improved facilities, more flexible hours, more involvement with decision-making (more responsibilities and benefits.)

- more efficient management. good managers will ensure that business has the correct materials, machines are running smoothly and staff are motivated.

- More organised work conditions. More efficient work shifts, better flow of materials and components on a production line, a better placement of products, better business location.

- Specialisation. increases efficiency and therefore productivity, because workers become better at what they do.

What is the importance of productivity?

- Increase in productivity means the output per employee will rise.

- Businesses could charge lower prices which would increase sales and profits.

- The business could gain a greater market share, which could increase its profile and brand image, which in turn can lead to increased sales and profits.

- Alternatively the business can charge the same prices, which with decreased average costs will give the business a greater profit. Providing they sell the same quantity.

What are some qualities of good leaders?

- see the big picture, set the vision and inspire others to share their view.

- calm under pressure and make clear decisions

- can easily spot problems and see potential solutions

- believe in their own abilities and have a good idea of their own strengths and weaknesses

- normally excellent communicators.

What are the types of leadership/management styles and how many are used by leaders?

Leadership styles

- Autocratic

- Paternalistic

- Democratic

- Laissez faire

Managers and leaders may use more than one of these leadership styles depending on their personality, the situation, the maturity of employees and the type of business they are leading or managing.

What is autocratic leadership and what are the advantages and disadvantages?

Am autocratic or authoritarian leader is one who sets objectives, allocates tasks and insists on obedience. The leader typically makes choices based on their own ideas and judgements, rarely accepting advice from followers. The leader can be viewed as bossy, controlling and dictatorial. The style might be appropriate when the leader is the most knowledgeable member of the group.

Advantages

- very clear what the management wants. Makes it easy to implement policies through the business. Everyone knows what is expected.

- The decisions can be implemented quickly as there is no consultation.

- Good in times of crisis or in certain organisations such as the army.

- Can be good with young and inexperienced staff.

Disadvantages

- Employees can become very dissatisfied.

- Can result in low motivation and little cohesion.

- Leads to low staff moral and problems such as absences and high staff turnover.

- Limits creativity and possible input into new processes and products from staff.

What is paternalistic leadership and what are the advantages and disadvantages?

The authority figure acts as a parent, expecting loyalty, trust and obedience from employees. The leader is usually a kind authority figure and treats workers like members of the family, is gentle with them but takes decisions which they believe is in the employees best interests. The leader is condescending towards employees. Motivation is based on potential punishment and rewards there is very little teamwork or communication.

Advantages

- Workers feel cared for and will know what to do. Removes uncertainty.

- Young or inexperienced staff will have the confidence to go back and ask for more instructions. There is less likelihood of mistakes.

Disadvantages

- Some workers will be dissatisfied as they might feel they have to agree with the leader, leading to lack of motivation and productivity.

- Limits creativity and possible input into new processes and products.

What is democratic leadership and what are the advantages and disadvantages?

The leader encourages participation in decision-making, so group members make more important contributions and group moral improves. The leader uses good communication skills and group members become engaged in the process. Leaders can be persuasive - helping to get team members on board with a decision that has been made. They can also be participative - allowing group members input into the final decision. This works best where group members are skilled adn experienced.

Advantages

- Employees will feel empowered resulting in greater job satisfaction meaning they are going to be more productive and motivated.

- The business is more likely to receive creative ideas and input to problems as they are asking more opinions. This encouragement can lead to creative solutions, improved products and processes, greater sales, reduced costs and more profit.

Disadvantages

- Consulting with staff can be time consuming which is not good in crisis.

- There are some areas of the business that are sensitive - staff should not necessarily be able to see/impact these.

- The leader can appear uncertain if they are consulting all the time and this can lead to a lack of confidence and trust.

What is laissez faire leadership and what are the advantages and disadvantages?

The leader lets individuals make major decisions and focuses on setting broad objectives and supervising loosely. Employees carry out activities freely with loose guidelines, using tools and resources provided by the leader. Normally a relaxed atmosphere and very little guidance from the leader. Group members are expected to solve the problems alone.

Advantages

- Can be effective when group members are highly skilled, motivated and capable of working on their own. The leader remains open and available to the group for consultation and feedback.

- Confidence shown in staff can be empowering and very motivational for them to have autonomy to make their own decisions.

- Reduces time as the manager is not consulting with staff.

Disadvantages

- Some employees will not be able to cope with the lack of structure and feedback which will lead to uncertainty and lack of job satisfaction.

- Some situations will need the leader's input and without clear direction mistakes can be made.

- Poor productivity as there is little incentive to work hard.

What are some of the factors that effect leadership styles?

- The 'default' leadership style of the leader.

- Company culture - normal behaviour of the firm may cause the leadership style to change.

- Maturity of followers - less mature staff require more hands on support (autocratic), more mature staff require less hands on support (democratic)

- The business situation - in times of crisis the leader might need to have more tight control.

- The more critical the issue the less likely the leader is to delegate.

What are the effects of good leaders?

- Staff will know where the business is going leading to a greater sense of security and satisfaction.

- Happy employees give better customer service and focus on making quality products. Leading to more satisfied customers, better interactions and a business with more customer loyalty.

- Inspire investors to invest more through an inspiring vision and clear communication.

What are key personnel? and the effects of losing key personnel?

Key personnel are individuals that have specialised skills and/or knowledge. When these personnel are lost, and there is no suitable replacement, the business will struggle to continue operating effectively.

What is internal growth and the benefits and drawbacks of it?

The growth within an organisation by using internal resources. It is sometimes called organic growth. Some exaples of organic growth include, buying new equipment to increase productivity, hiring more staff, selling to more markets, expanding product range, upgrading to a larger premises or opening a new business location.

Benefits

- less risk than external growth

- can be financed through internal funds (retained profits)

- builds on a businesses strengths (brands, customers etc)

- allows the business to grow at a more sensible rate so that management and systems can expand as the business grows without too much stress.

Drawbacks

- growth achieve may be dependent on the growth of the overall market, so it is hard to grow in a bad market.

- hard to build market share if the business is already a leader.

- growth is slow but shareholders may prefer a more rapid growth.

- franchises (if used as a growth method) can be hard to manage effectively. Meaning a decrease in quality which leads to a decrease in brand reputation.

What is external growth and what are the 3 different ways a business may experience external growth?

External growth is a way a business can grow which could be by choice or because a business may not be able to grow internally. Due to lack of finances, insufficient skills and expertise etc. External growth occurs when a business merges or acquires another business. Mergers are when two businesses mutually agree to join together. A business is acquired or taken over when another business purchases a controlling stake of that businesses. If the businesses management is not willing for this to happen it is often called a hostile takeover.

The three types of external growth are:

- Horizontal integration - when one firm merges with or takes over another in the same industry at the same stage of production.

- Vertical integration - when one business merges or takes over another in the same industry but at a different stage in production.

- Diversification - when one firm merges or takes over another in a different industry.

What are the advantages and disadvantages or external growth?

Advantages

- faster speed of access to new products or market areas

- increased market share or market power

- access economies of scale

- better distribution channels or control of suppliers

- acquire intangible assets (brands, patents, trademarks)

- overcome barriers to enter new target markets

- other businesses may bring staff with new skills

Disadvantages

- debt - huge financial costs are involved in funding takeovers, usually involving loan finance.

- share price - if shared are sold to raise finance to fund the takeover, the share prices will fall.

- Clash of cultures - incompatibility between leadership styles and norms of behaviour be staff may lead to failed external growth.

- Job losses - may lead to loss of human capital.

- Conflict of objectives may make it more difficult to run combined business (connected with clash of cultures)