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GLOSSARY
Acquisition
A method of external growth that involves one company buying a majority stake in another company with the agreement and approval of the target company’s Board of Directors.
Backwards vertical integration
A method of external growth that involves a company buying another company that is further away from the consumer in the chain of production.
Conglomerate
This form of external growth occurs when two or more businesses in unrelated industries integrate through a merger, acquisition, or takeover.
Demerger
This occurs when a company sells off a part of its business, thereby separating into two or more separate entities. This often happens due to conflicts and inefficiencies of two or more firms previously in a merger agreement, such as culture clashes.
Diseconomies of scale
Growth that is excessive results in inefficiencies and higher average costs of production, perhaps due to problems such as miscommunication, misunderstandings, and poor management of resources.
Economies of scale
These are cost-saving benefits enjoyed by a business as it increases the size of its operations, i.e. lower average costs (the cost per unit).
External economies of scale
Category of economies of scale that occurs when a firm’s average cost of production falls as the industry grows, i.e., all firms in the industry benefit.
External diseconomies of scale
This occurs when an individual firm has higher cost per unit of output due to factors beyond its control as the industry as a whole grows.
External growth
Also known as inorganic growth, this takes place when an organization requires the support of a partner organizations for its growth.
Financial economies of scale
Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages as they represent lower risk.
Forward vertical integration
This external growth method occurs when one company buys another business that is closer to the consumer in the chain of production.
Franchise
This growth strategy involves the right to trade using another company’s products, brand name and corporate logo.
Franchising
A growth method that involves two parties, with the franchisor giving the licensing rights to a franchisee to sell goods and services using the franchisor’s brands and products.
Horizontal integration
This external growth strategy occurs when a merger, acquisition, or takeover takes place between two or more companies operating within the same industry (thereby reducing competition).
Internal diseconomies of scale
Higher unit costs of production that occur due to internal problems of mismanagement as a business organization grows.
Internal economies of scale
Category of economies of scale that occurs for and within a particular organization (rather than the industry in which it operates) as it grows in size.
Internal growth
Also known as organic growth, this takes place when an organization expands without the help of an external partner firm.
Joint venture
An external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time.
Lateral integration
An external growth method that involves two or more firms in a merger, acquisition, or takeover that have similar operations but do not directly compete with each other.
Managerial economies of scale
Larger businesses can afford to hire specialist functional managers, thus improving the organization’s efficiency and productivity.
Marketing economies of scale
Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.
Merger
This form of external growth involves two or more companies agreeing to form a single, larger company thereby benefiting from operating on a larger scale.
Optimal output level
The level of output where the average cost of production is at its lowest value, so at this level of output, profit is maximized.
Purchasing economies of scale
Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).
Risk bearing economies of scale
Large businesses can bear greater risks than smaller ones due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.
Specialization economies of scale
Larger firms can afford to hire and train specialist workers, thus helping to boost output, productivity, and efficiency (thereby cutting average costs of production).
Strategic alliances
These are formed when two or more organizations join together to benefit from external growth without having to set up a new separate legal entity.
Synergy
Often referred to as “1 + 1 = 3”, this is a key benefit of growth which occurs when the whole is greater than the sum of the individual parts. A larger company, with synergy, through a merger, acquisition, or takeover creates greater levels of output and improved efficiency.
Takeover
Also referred to as hostile takeover) occurs when a company buys a controlling interest in another firm without the prior agreement or approval of the target company’s Board of Directors.
Target company
The business that is the focus of being bought out by the purchasing company in an acquisition or takeover.
Technical economies of scale
Cost savings by greater use of large-scale mechanical processes and specialist machinery, e.g., mass production techniques.
Vertical integration
When an acquisition or takeover occurs between two companies operating in different industries.
EXAM PRACTICE
Activit 1.6B Starbucks Growth .pdf
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