Businese 370

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University of Wisconsin, Madison *

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408-001

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Business

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Feb 20, 2024

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Businese 370 define retrenchment retrenchment is a strategy used by a business to reduce its overall size or diversity of operations. usually with the aim of becoming more financially stable. it is likely to involve job losses and reductions in output and capacity. some areas of the business may be sold off or demerged define takeover (acquisition) where one business acquires control of the assets of another business either by a formal offer that is accepted (a friendly takeover) or by the purchase of a controlling interest of shares (a hostile takeover) define mergers mergers are when two or more businesses join together by mutual consent why is growth an important objective? increased profit - leads to an increase in share price and greater returns to shareholders which leads to positive media attention and greater security for the CEO and board members survival - can benefit from economies of scale through growth. small businesses may face high costs and a lack of competitiveness. can easily be taken over reduce risk - diversification increase market share - more dominant position in the market, giving it greater power over suppliers and perhaps also prices why would a business pursue a strategy of retrenchment? changes in the market - change in taste and fashion, technological development or the arrival of new, more competitive businesses failed takeover - not rare. business may demerge part of all of the business taken over economic downturn - sometimes an economic downturn leads to a business retrenching in order to better cope with the changed economic environment what are the differences between organic/internal growth and external growth? organic - selling more or new products/services, targeting a wider or new market. often financed by retained profit. slower and less risky. external - achieved through takeovers or mergers. growth by acquisition. quicker but more risky what are economies of scale the proportionate saving in costs as a result of an increase in the size of an operating unit

if a business can increase putout from existing plant and equipment without further investment in FC, the unit cost of production declines as the FC are spread over much more units of output what are economies of scope the proportionate saving gained by producing two or more distinct products, when the cost of doing so is less than that of producing each separately may result from the joint use of production facilities, joint marketing and administration, a particular product producing a by-project (eg. bread producing sandwiches) what are diseconomies of scale? refer to a situation where economies of scale no longer occur and unit costs begin to increase rather than decrease. what are financial economies of scale? financial institutions see bigger businesses as a safer bet because of their greater assets, and as a result are more willing to lend and often at lower interest rates what are technical economies of scale? larger businesses are more able to invest in technology as they have the finance to do so and can use technology more efficiently and productively producing a greater return on investment. what are purchasing economies of scale? greater power that can be exerted by large businesses over suppliers what are managerial economies of scale? when a business grows there is greater scope to employ specialists in all parts of the business why may diseconomies of scale occur? poor communication - greater complexity requiring more people, layers, divisions which may slow decision making - less responsive and flexible. especially bad in a market of fast changing tastes lack of control and coordination - harder to monitor and coordination between departments and divisions may be increasingly difficult. alienation of the workforce - may be caused by job losses as a result of greater investment in technology or by poor communication and workers feeling they are no longer valued. they become less engaged and motivated leading to lower productivity and increasing unit costs. what is the experience curve developed by the Boston Consulting Group. the idea that the more often a task is performed, the lower the cost of performing it. This implies that as the business gets bigger, it should gain a competitive cost advantage. what is overtrading? a problem of growth. may occur when a business grows too quickly. cash often has to leave the business quicker than cash comes in order to cover everyday costs but also the cost of expansion - can lead to liquidity problems what is synergy?

the idea that the value and performance of two businesses combined will be greater than the sum of the two other parts. the cost savings will result from the combination should lead to greater profit what is grieners model of growth describe describes different phases of a business's growth and provides a framework to help understand different organisational structures and coordination methods.

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