1.5 Growth and Evolution - Luka

Expansion

Two consecutive quarters of positive growth

Recession

Two consecutive quarters of negative growth

Economies of scale (EOS)

When a business benefits from a lower average cost (per unit) because it’s increasing in size.

Diseconomies of scale (DOS)

When a business doesn’t benefit from a lower average cost (per unit) because it’s increasing in size.

Internal EOS

• Purchasing: For example, buying in bulk, or getting promotions for buying in large quantities.

• Promotional: Spreading the fixed cost of an ad into more units make the average cost of marketing per unit lower.

• Risk-bearing: Diversify product portfolio (produce more things in order to have a plan b, c, etc.). Spread risk of failure.

• Managerial: Hiring really experienced and efficient managers lowers AC.

• Technical: Use machinery at a higher level of capacity due to the increased output, spreading the cost of the machinery over more output.

• Financial: Large firms receive lower interest rates on loans than smaller firms as they are less risky. Cheaper loans lower AC.

Internal Growth

Organisation expands without the help of an external partner firm (using their own resources)

Retained profits

Profits being reinvested in the organisation

3 types of external growth

• Vertical integration

• Horizontal integration (merge/takeover of a firm in the same industry)

• Conglomerate integration (merge/takeover of firms in an entire different industry)

Take-overs are also known as

Acquisitions

Take-overs

One company buys a controlling interest in another company

Merger

Two companies agree to form one larger company to benefit them on a bigger operating scale

Joint Ventures

Two firms, setting up a third firm together.

Strategic Alliance

When firms work together for mutual benefit. A new business is NOT created.

Franchise

A business using the name, logo and trading systems of an existing successful business

Royalties

Percentage payments that franchisee makes to the franchisor

4 parts of the Ansoff Matrix (explain what they mean)

• Market Production

• Market Development

• Product Development

• Diversification

Related Diversification

When a company creates a product that relates to its initial brand

Unrelated Diversification

When a company creates a product that does not relate to its initial brand

STEEPLE

Social, Technological, Economic, Environmental, Political, Legal, Ethical

Direct Taxes

Income tax comes directly out of a salary

Consumer Price index

A representation of a market basket to show the average change in price of consumer goods and services.

Indirect Taxes

Sales tax (VAT, Moms)

Subsidies

Payments to firms by government to help reduce selling price

Tariffs

Taxes on imports

External economies of scale

• Geographic cluster: As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more businesses.

• Transport links: Improved transportation develop around growing industries to get people to work & improve transport logistics, lowering AC.

• Legislations: Governments might support certain industries to achieve their objectives.

Diseconomies of scale

• Management: Managers work more in their self interest than that of the firm (become obstructive)

• Communication: When a firm’s organizational structure becomes more complex with multiple layers of management, challenging communication.

• Geographical: When a firm has multiple geographical locations, it can lead to logistical and communication challenges

• Cultural: When a firm expands to a foreign market, in which workers have different work or productivity norms, leading to production disruption.

External growth

Businesses grow by dealing with other external organizations

Hostile takeover

Undesired/force dacquisition of a publicly held company (through shares)

Integration

Growth of a company through mergers and acquisitions expressed via sectors of the industry