Key term | Definition |
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. |
IB Docs (2) Team
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