BUSINESS & MANAGEMENT

BUSINESS & MANAGEMENT Unit 1.7 Growth & Evolution

KEY TOPICS Standard Level • Economics and diseconomies of scale • The relative merits of small and large businesses • Internal growth strategies • External growth strategies: joint ventures, strategic alliances, mergers and takeovers • Franchising as a growth strategy • The Ansoff matrix Higher Level Extension • Porter’s generic strategies

Growth and Evolution Growth is a strategic objective of most businesses

Ways to measure growth of a business • Sales turnover (revenue from sales) • Market share • Capital employed – total assets minus liabilities • Number of employees • Profits

Reasons for Growth • Economies of Scale – lowering average cost of production • Market Share • Survival • Spread risks

Internal Economies of Scale • Technical economies – large businesses can have sophisticated technology to lower the average costs that a small firm might not be able to afford. • Financial economies – large firms pay less interest because the borrow more and are less risky • Managerial economies – Large firms can specialize their managers better and be more effective. 1+1=3

Internal Economies of Scale (Cont’d). • Specialization economics – extremely specialized workers are more effective 1+1=3 • Marketing Economies – large firms sell to less people because they sell in bulk (less administration costs) Marketing campaigns can be done on larger scales (ex. global marketing economies)

Internal Economies of Scale (Cont’d). • Monophony Economies – Strong buying power. Small firms may also take advantage of this. • Risk-bearing economies – Diversification into different businesses allows companies to survive if one of their divisions is unsuccessful or is in a short tem unfavorable situation.

External economies of scale External economies of scale are ones that arise from outside the business.

Examples of factors that may create external economies of scale • Technological progress – increased speed of information • Improved transportation and communication networks – convince to retail, easy movement and increased communication are better in large economies. • Better educated and trained labor – through government support some economies have a more skilled set of workers. • Regional specialization– Reduces average costs by having specialized workers who can produce superior products.

Diseconomies of scale Diseconomies of scale is when a business becomes too large and their unit costs start to rise again. (usually caused by managerial problems)

Examples of internal diseconomies of scale • Coordination and communication can be low because of a firm being too large • Poorer working relationships employees and senior management can become detached because of size. • In large workforces workers can become inefficient because of over specialization. • Bureaucracy can make extra paper work and decisions can be harder to make. • Complacency is when a business does not try new things.

Examples of external diseconomies of scale • To many businesses in an area can result in higher rents and more traffic congestion. • Many businesses in the same area can result in less supply of labor.

Different ways to deal with diseconomy • Outsourcing – sending jobs outside of the company • Performance-related payment – paying someone for the work they get done • Motivational strategies – training in teamwork and empowerment Ex. Weekend retreats.

Size of an organization is usually measured compared to competitors • Market share • Total revenue • Size of workforce • Profit • Capital employed • Market value (balance sheet valuation or stock market valuation)

Organic Growth Organic growth happens when a business grows internally using it’s own resources.

Benefits of Organic Growth • Better control and coordination – maintain control • Relatively inexpensive – usually less need to borrow • Maintains corporate culture

Disadvantages of Organic Growth • Bureaucracy can be a problem • Overtrading – may take on too many people or orders • Restructuring the company costs money • Ownership of the company may be lessened

External Growth External growth happens when a business grows by joining with other businesses

Benefits of external growth • Faster growth • Easy way to take out competition • Take over market share • New ideas • Risk can be reduced

Joint Venture A joint venture is when two or more businesses decided to split the costs of a project (they work together to form one business).

Benefits of a joint venture • Larger market share • Synergy – firms can learn from each other and also share customers • Financial risk is spread • Entry to foreign markets • Competitive advantage over rivals for both businesses • Learning from other firms about local ways of doing things • They tend to be very friendly

Disadvantages of joint ventures There can be drawbacks from overdependence on partners and culture clashes between the businesses.

Strategic alliances Like joint ventures except businesses remain as separate entities.

Stages to forming a strategic alliance • Feasibility study • Partnership assessment – in terms of money and manpower • Contract negotiation • Implementation

Reasons for a strategic alliance • Share expertise and financial support • Add brand awareness • Economies of scale • Increased purchasing and marketing economics • Convenience for customers

Mergers and takeovers • Two or more companies join to become one company. • They benefit from economies of scale and larger market share.

Merger When two companies agree to come together.

Takeover • A takeover happens when one business buys enough shares of another business to take control. • Usually has to offer above market price for the shares

Takeover (Cont’d) • The business doing a hostile take over is known as a black knight. • Some businesses will look for a more friendly company known as a white knight. • Ultimately shareholders will sell to the business that offers the best price.

Reasons why businesses become takeover targets(Page 125) • Growth potential but no money for internal growth. • They are seen as a rival that can grow • Well known brand that is financial trouble • Vulnerable • The purchaser is acting as a white knight

Four types of integration for a merger or acquisition(Page 125) • Vertical– When a business takes over a business in a different stage of production to lower costs. Ex. Wall Street Journal buys a paper production plant in south America.

Four types of integration for a merger or acquisition(Page 125) • Horizontal– When firms combine in the same industry. Ex. A newspaper buys a T.V. station

Four types of integration for a merger or acquisition(Page 125) • Lateral combining two firms who are in the same market but do not directly compete. Ex. Outback stake house buys Mr. Lees Peking duck restaurant buys dumpling stall

Four types of integration for a merger or acquisition(Page 125) • Conglomerate mergers and takeovers when a business wants to diversify they will buy a business in a completely different industry. Ex. McDonalds buys Ford or 168 Hotel Group buys Cherry Automobile

Benefits of a merger or takeover • Greater market share • Economies of scale • Synergy – access to each others expertise and technology. • Survival • Diversification

Disadvantages of a merger or takeover • Loss of control • Culture Clash • Conflict between the two firms especially in a hostile takeover. • Layoffs (redundancies) • Diseconomies of Scale • Regulatory problems (government might block a monopoly)

Mergers and Takeovers Mergers and takeovers are common today because of globalization and deregulation.

Mergers and takeovers are successful if: • Level of planning is high • Win support of the stakeholders • Skill of senior managers • Conflicts and disagreements are dealt with • The government does not get involved

Demerger Demerger happens when a business splits into two or more A company might do this because: • Offload unprofitable businesses • Avoid diseconomies of scale • Raise cash • Help mangers focus

Management buy-out • The senior managers of a firm may buy enough shares to control the company themselves rather than be bought out by a takeover firm. • They may need to borrow money or go to a venture capitalist to help them with the takeover.

Alternative to Takeover Rather than be a takeover target, some businesses will sell part of there brand.

Franchise • Franchise is when a person buys the right to use the name and products of a famous business. • They pay a royalty payment to the business. Ex. Subway, cold stone, Burger king, The Body Shop

Benefits of growth for the franchisor • Rapid growth without paying for the outlets. (better than organic growth) • National/international recognition • Economies of scale • Not having to worry about paying staff during expansion • Receive a percentage of profits • Franchisees have more incentives to secede rather than managers. • Local franchisees are more aware of local market conditions.

Advantages for the franchisee • Low risk because bus. model is tested • Low start up cost (no market research) • Franchisor will help bus. to succeed • Receive advertising from parent company

Problems for the franchisor • Difficult to control the franchisee. (quality can be lack affecting the parent company) • Growth is not as fast as with a merger or takeover

Disadvantages for a franchisee • Expensive to open the outlet • Pay a large amount of revenue to the parent company • Very little flexibility

The Ansoff Matrix(Page 131)

Market penetration • Safest growth strategy (little market research) • Existing products in existing markets • More advertising, offering better prices • Aimed at getting more customers getting existing customers to do buy more often Drawback is competitors will react

Product development • Medium risk used to sell new product to an existing market. • Less risk when using a brand name

BUSINESS & MANAGEMENT