1. Describe two major ways in which a company can grow.Give examples to illustrate the two ways of growing. A business can develop by organic growth or inorganic growth a. Organic Growth: Organic growth in business refers to a company expanding its business through the use of its own resources and assets. Growing organically means a company expands without the use of mergers and acquisitions or other takeovers. An emphasis on organic growth is valued by many executives and investors since it shows a long-term, solid commitment to building the business. Organic growth can also be negative, meaning the company's business is actually contracting. Investors look at organic growth numbers to see if a company is increasing sales and revenues and if those increases are sustainable over the long term. Significance Organic growth shows how well management of a company is utilizing internal resources to increase sales and output. Mergers, acquisitions and takeovers can provide an artificial boost to a company's sales and revenue figures; this can cloud the picture of how the company is managing its resources. By focusing on the organic growth of the company, executives and investors can see exactly how the company is meeting its goals through its own internal means. Workforce Issues Many executives prefer to grow their companies organically due to the complexity and organizational issues that result from mergers and acquisitions. One major issue is the effect of merging two company's workforces, which can often result in culture clashes and morale issues. Employees can resist changes in the chain of command or workflow procedures, and high turnover can result. Organic growth allows the company to avoid these workforce issues entirely. Strategic Concerns Organic growth allows company executives to set and achieve corporate goals in whichever manner they choose. Combining two companies often comes with the burden of sharing management responsibilities with executives from both firms; this can have an impact on the entire strategic outlook of the new company. A merger pursued as a way to achieve specific goals can wind up changing those goals completely. Executives stay in complete control of the company, when it is growing organically, and can steer the business in a specific direction to achieve their objectives. investors will strip out all non-organic growth from a company's financials. showing the true growth potential of the core company. A good HR department is critical to the success of a growing company. Good PR strategies also allow for revenue growth to keep those properly staffed departments busy. 1. Without cash coming into a business. Significance to Investors Investors love organic growth. headcount. social media and traditional PR avenues . and quality. the less work an analyst has to do to get to this core figure. When looking at a company's financials. companies utilize mergers and takeovers to acquire a fully developed business unit and avoid reinventing the wheel. The less a company relies on mergers and acquisitions. Often. suppliers and vendors. Growing revenue allows for the effective functioning of the other three pillars. personnel hired and trained and sales conduits established. Equipment must be acquired. sharing the risk between the core company and the new addition. employees cannot be hired and advertising budgets become strapped. Disadvantages Growing a company organically takes an enormous commitment of resources and time. 3. as opposed to a company that acquires a new unit. 2. Bad PR can be more damaging to a company than good PR can be effective. For customer service. PR Public relations and advertising allow companies to get the word out about their products and services. Quality is more important than quantity for company headcount. Word of mouth. sales and marketing and production departments to function efficiently. Organic growth also puts all of the business risk squarely on the core company. not only because it shows management's effective use of resources and commitment to the business. it is impossible to pay employees. Without dollars flowing in. companies can afford to hire more employees. Revenue growth eventually leads to profit growth. it is important to note if sales and revenue figures have been inflated due to recent acquisitions. which is the end goal of organic growth strategies. Good PR drives traffic to company websites and gets perspective customers attention. Headcount is critical for any growing business. as employees are the biggest asset of any corporation. Revenue Revenue is the lifeblood of any business. Headcount As revenue grows. Businesses that are growing organically seek to grow revenue volume in the most efficient manner possible. Organic growth strategies are built on four main pillars: revenue. PR. but also because it makes analyzing the company a lot easier. Often. they must be properly staffed. rather than an increase in the companies own business activity. 4. New EU legislation also provides an opportunity for Davis Service Group. If Sunlight joined another firm hiring sheets to hotels and hospitals in the UK. went out of business in 2009. In many industries. Quality control and customer service are critical to gaining a sufficient sales volume to grow a company. For example. Horizontal integration refers to a situation where two firms at the same stage of production join. b. . Firms that choose to grow inorganically can gain access to new markets and fresh ideas that become available through successful mergers and acquisitions. public corporations use organic growth strategies. Popular Companies Using Organic Growth Strategies Many well-known. Best Buy. Quality To successfully grow any enterprise.all must be used and monitored to ensure positive word-of-mouth advertising and branding. this would be an example of horizontal integration. Outback Steakhouse and Tiffany and Company are just a few major brand names that grow every year through organic growth strategies. Organic growth relies on repeat business from satisfied customers. Best Buy's main competitor. such as technology. Merger Two firms join by agreement. growth is often accelerated through increased innovation. and one way for firms to compete is to align themselves with those companies that are developing the innovative technology. Outback Steakhouse is the best known steakhouse chain in the United States. 1. the need for protective uniforms for industrial workers provides plenty of new contract work for textile services. Inorganic growth is seen often as a faster way for a company to grow when compared with organic growth. Mergers make it possible to share the resources of the two organizations and focus on the best activities of each a. Inorganic Growth A growth in the operations of a business that arises from mergers or takeovers. Customers will rarely buy a product a second time if the first experience isn't top notch. there needs to be a quality product. Tiffany and Company is the standard in diamonds and jewelry. Circuit City. The Sunlight business was partially vertically integrated by including the cleaning and delivery processes in its service. it joins with a distribution company to economise on its transport costs. There are different types of Takeovers as below: a. This shows backward vertical integration where Sunlight benefits from controlling the supply of the sheets it uses. This ensures quality control and on-time delivery.b. This enables the company with the larger number of shares to have control over the other business and select which activities to keep. Takeover One company buys at least 51% of the shares of another company. 2. If the board feels that accepting the offer serves . Friendly takeovers Before a bidder makes an offer for another company. This could benefit Sunlight by showing its environmental responsibility. Sunlight could join with a company that makes hotel sheets. it usually first informs the company's board of directors. The advantage of vertical integration is that it gives the business greater control over the supply chain of its product or service. A business could also consider forward vertical integration. For example. Vertical Integration joins businesses at different stages of production. For example. This point is not relevant to the UK concept of takeovers. Hostile takeovers A hostile takeover allows a suitor to take over a target company's management unwilling to agree to a merger or takeover. then the board is usually of the same mind or sufficiently under the orders of the equity shareholders to cooperate with the bidder. usually a simple majority. A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price. If the shareholders agree to sell the company. and so takes a greater risk. It can find out exactly what it is taking on before it makes a commitment. In all of these ways. it recommends the offer be accepted by the shareholders. A hostile takeover can be conducted in several ways. but the bidder continues to pursue it. known as a creeping tender offer. Also. Another method involves quietly purchasing enough stock on the open market. A takeover is considered "hostile" if the target company's board rejects the offer. to replace the management with a new one which will approve the takeover. Reverse takeovers . to effect a change in management. private acquisitions are usually friendly. But a hostile bidder knows only publiclyavailable information about the target. or the bidder makes the offer without informing the target company's board beforehand. the bidder can conduct extensive due diligence into the affairs of the target company. which always involve the acquisition of a public company.shareholders better than rejecting it. c. banks are less willing to back hostile bids with the loans that are usually needed to finance the takeover. In a private company. management resists the acquisition but it is carried out anyway. because the shareholders and the board are usually the same people or closely connected with one another. whereby it tries to persuade enough shareholders. If the board of the target cooperates. some investors may proceed with hostile takeovers because they are aware of mismanagement by the board and are trying to force the issue into public and potentially legal scrutiny. b. However. The main consequence of a bid being considered hostile is practical rather than legal. An acquiring company can also engage in a proxy fight. Tender offers in the United States are regulated by the Williams Act. Backflip takeovers A backflip takeover is any sort of takeover in which the acquiring company turns itself into a subsidiary of the purchased company. With a new superior management team. board or voting control.g. a reverse take-over is an acquisition or acquisitions in a twelve month period which for an AIM company would: y exceed 100% in any of the class tests. private company. This is usually done at the instigation of the larger. which would likely result in a price rise and a profit for the corporate raider and the other shareholders. depart substantially from the investing strategy stated in its admission document or. This type of a takeover rarely occurs. Pros and Cons of takeover Pros: y Increase in sales/revenues (e. the stock is a much more attractive investment. d. or y result in a fundamental change in its business. the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO. or y in the case of an investing company. under AIM rules. depart substantially from the investing strategy stated in its pre-admission announcement or. Procter & Gamble takeover of Gillette) y Venture into new businesses and markets y Profitability of target company y Increase market share y Decrease competition (from the perspective of the acquiring company) y Reduction of overcapacity in the industry y Enlarge brand portfolio (e. L'Oral's takeover of Bodyshop) y Increase in economies of scale y Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping responsibilities can be eliminated.A reverse takeover is a type of takeover where a private company acquires a public company. decreasing operating costs) Cons: . where no admission document was produced on admission. depart substantially from the investing strategy.g. An individual or organization-sometimes known as corporate raider-can purchase a large fraction of the company's stock and in doing so get enough votes to replace the board of directors and the CEO. However. Takeovers also tend to substitute debt for equity. often paid in excess for the acquisition. rather than merging with it. but can lead to catastrophic failure if circumstances do not go favorably. Reduced competition and choice for consumers in oligopoly markets. Berendsen was an ideal acquisition because. closing down some locations where Berendsen had two outlets operating in the same area o strengthen the management of the two companies o save fixed costs. In a sense. Businesses grow when they have the resources to expand and opportunities exist for growth. although this is good for the companies involved in the takeover) Likelihood of job cuts. 2. The monetary cost to the company. by cutting out the central headquarters of the company. This put Berendsen in a stronger position to improve its sales and profits. This can create substantial negative externalities for governments. Lack of motivation for employees in the company being bought up. employees. gave Davis Service Group the control to put the best systems in place at Berendsen. Berendsen's acquisition is like Horizontal integration as Sunlight and Berendsen are specialist companies at the same stage of production. Sweden. it was the market leader in providing textile services in its geographical area like Denmark. 3. What aspects of European Union markets have particularly encouraged: o horizontal growth of the Davis Service Group? o organic as opposed to inorganic growth? . Cultural integration/conflict with new management Hidden liabilities of target entity.y y y y y y y y Goodwill. It was possible to pool the knowledge and expertise of the two companies so that both benefited. government tax policy of allowing for deduction of interest expenses but not of dividends. (Bad for consumers. like Sunlight. It was able to: o reduce operating costs. Austria. Taking over Berendsen. for example. Acquisition is a type of Inorganic growth. High leverage will lead to high profits if circumstances go well. It can punish more conservative or prudent management that don't allow their companies to leverage themselves into a high risk position. Explain how the acquisition of Berendsen provided such a good opportunity for the Davis Service Group. Poland and Germany. has essentially provided a substantial subsidy to takeovers. the Netherlands. Norway. suppliers and other stakeholders. British firms locating factories and offices in the EU are able to benefit from a skilled labour force. means people can travel to and across Europe more easily. It is a huge potential market. . are experiencing growth in key sectors such as manufacturing so more uniforms are needed. The factors that might have been barriers to international growth were easy to overcome in this acquisition: o Language: Berendsen s business operates across several European countries and uses English as a common language. high-speed trains and cheaper air links. the Channel Tunnel. which joined the EU in 2003. If the company were to expand into new areas of the globe. Most businesses in these countries had previously been government-owned. Within Europe. This makes it easy to trade within this market place. For example. This means it is much easier to do business in the EU. o Cultural differences: buying patterns and the culture in the areas where Berendsen operates are similar to the UK. New EU legislation also provides an opportunity for Davis Service Group. as well as in other areas of the rapidly developing EU market. Organic growth . most member countries use a common currency the Euro. for example.Berendsen's acquisition is like Horizontal integration as Sunlight and Berendsen are specialist companies at the same stage of production. Davis group can go to developing region like Eastern Europe and South East Asia. They had poor equipment and/or had no need to rent out textiles. As part of the Group.building on existing resources . Trade within this area has risen by 30% since 1992. these companies have increased their customers in existing locations. Much of the growth of Sunlight and Berendsen involves organic growth. o Currency: the countries in which Berensden operates already used the Euro or had currencies linked to the Euro. The development of fast transport links. It was possible to pool the knowledge and expertise of the two companies so that both benefited. For example. Large global companies are opening up new sites and they require textile services from Sunlight and Berendsen. there are few companies suitable to take over. Organic growth is when a company increases the turnover of the existing business. Countries like Poland. in many Eastern European countries that were part of the former Soviet Union. The Internet and email enable companies to communicate instantly. The EU currently has 27 member countries. the policy would remain one of recruiting the appropriate native speakers. With this staffing policy the company has to search widely in the UK to get replacements. Any business in the European Union has over 500 million customers Goods and services can flow freely in the single European market. Trade and living standards in the EU are growing fast. Encouraging Factor i.is sometimes the only way to grow. where would you recommend and why? What factors might encourage or discourage this choice? If the company were to expand into new markets. the need for protective uniforms for industrial workers provides plenty of new contract work for textile services. 4. but the lack of focus can make managing the diverse businesses more difficult. Using examples from the case study and other sources. In fact. one company owns a controlling stake in a number of smaller companies. which conduct business separately. Through the internal market. (in-predictable) iii. A conglomerate creates an internal capital market if the external one is not developed enough. A downturn suffered by one subsidiary. Disadvantages 1. seemingly unrelated businesses. can be counterbalanced by stability. ii. 3. the loss might be offset by a good year in its insurance business. Discourage Factors :i. There are very important opportunities that can be exploited. 2.for example. 1. Such a structure allows for diversification of business risks. if Berkshire Hathaway's construction materials business has a bad year. for instance. By participating in a number of unrelated businesses. NAFTA can play a major role in encouraging factor. iv. Established US local player ii. or even expansion. In other words. the parent corporation is able to reduce costs by using fewer resources. The largest conglomerates diversify business risk by participating in a number of different markets. Threat of local players (un-organized) iv.Davis Group can get the advantage of European Union and can tap the Eastern Europe markets. consumer perception. Conglomerate is a corporation consisting of several companies in different businesses. Financial Conglomerates have very different compliance requirements from insurance or reinsurance solo entities or groups. the risks inherent in operating in a single market are mitigated. A conglomerate can show earnings growth. This advantage is enhanced by the fact that the business cycle affects industries in different ways. different parts of conglomerate allocate capital more effectively. 2. Davis can establish itself as there are very few player in this industry in South East Asia. to increase shareholder value. in another division. Lucrative U. South East Asia is most emerging markets of the world. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions. These are the two philosophies guiding many conglomerates: 1. although some conglomerates elect to participate in a single industry . GE. iii.S markets. mining. 2. Diversification results in a reduction of investment risk. and Berkshire Hathaway have delivered high earnings growth for a time. In a conglomerate. but the subsidiaries' management reports to senior management at the parent company. Entry barriers because of government policies. Advantages 1. by acquiring companies whose shares are more discounted than its own. Synergies are illusory. . explain what a conglomerate is and why it chooses to be one. Teledyne. The extra layers of management increase costs. It can also be called as a corporation that is made up of a number of different. By diversifying business interests. Culture clashes can destroy value. Objectives of businesses vary from one to another.000 in sales in the next half year of trading. by the end y of the year. Lack of focus. This can motivate the employees. T. e. 5. or when a new firm enters the market or at a time of crisis. It also enables the business to measure the progress towards to its stated aims. 10.Time specific they have a time limit of when the objective should be achieved. investors and regulators to analyze. y Sales growth where the business tries to make as many sales as possible. 7. y Profit maximization try to make the most profit possible most like to be the aim of the owners and shareholders. a hotel might have an objective of filling 60% of its beds a night during October.Realistic the objective should be challenging. A business may find that some of their objectives conflict with one and other: . y A . Large businesses can also benefit from economies of scale.g. y R .3. 2. and makes it easier for management to hide things. The complexity of a conglomerate's accounts make them harder for managers. y Profit satisficing try to make enough profit to keep the owners comfortable probably the aim of smaller businesses whose owners do not want to work longer hours. rather than separately for each business. The most effective business objectives meet the following criteria: y S Specific objectives are aimed at what the business does. e. 4. 6. Inertia prevents development of innovation.g. Plans can then be made to achieve these targets. Business Objectives Objectives give the business a clearly defined target.Agreed . an objective specific to that business. probably for small business just starting out. Give 3 different objectives that businesses may have. 3. calculate the productivity of Davis employees.by all those concerned in trying to achieve the objective. This may be because the managers believe that the survival of the business depends on being large. Productivity can be calculated as the amount that each employee generates. The whole is often worth less than the sum of its parts. The main objectives that a business might have are: y Survival a short term objective.g.Measurable the business can put a value to the objective. many numbers are disclosed grouped. Accounting disclosure is less useful information. Conglomerates can trade at a discount to the overall individual value of their businesses because investors can achieve diversification on their own simply by purchasing multiple stocks. Using the figures in the third paragraph. e. but it should also be able to be achieved by the resources available. and inability to manage unrelated businesses equally well. y M . 5. by cutting prices) will reduce short-term profit. y y Technology might change product designs. y Health care and education establishments their objectives are to provide a service most private schools for instance have charitable status. Businesses grow both Organically and Inorganically. Some organizations have alternative objectives. Using the case study and any other knowledge and sources. explain why this is so.g. 4.g. This service will need to meet the needs of the less well off in society or help improve the ability of the economy to function: e. there can also be negatives. y Public sector organizations that monitor or control private sector activities have objectives that are to ensure that the business they are monitoring comply with the laws laid down. A merger is when 2 firms join together amicably. 7. Their aim is the enhancement of their pupils through education. Although there are a number of positives to joining together. The EU is an attractive proposition for the Davis Group.y y y Growth versus profit: for example. Short-term versus long-term: for example. Changing Objectives A business may change its objectives over time due to the following reasons: y A business may achieve an objective and will need to move onto another one (e. Alternative Aims and Objectives Not all businesses seek profit or growth. a business may decide to accept lower cash flows in the short-term whilst it invests heavily in new products or plant and equipment. y Public sector corporations are run to not only generate a profit but provide a service to the public. Using the Ansoff matrix and the case study. Using the case study. Make a list of both positive and negative effects of a possible merger. y Charities and voluntary organizations their aims and objectives are led by the beliefs they stand for. with the launch of new products from competitors. The Ansoff matrix is often used to make decisions. achieving higher sales in the short term (e. so sales and production targets might need to change. . Examples of other objectives: y Ethical and socially responsible objectives organizations like the Co-op or the Body Shop have objectives which are based on their beliefs on how one should treat the environment and people who are less fortunate. outline the potential options available to the Davis group. 6. cheap and accessible transport service. explain briefly what Organic and Inorganic growth are.g. Large investors in the Stock Exchange are often accused of looking too much at short-term objectives and company performance rather than investing in a business for the long-term. survival in the first year may lead to an objective of increasing profit in the second year). The competitive environment might change. management can begin to list the pros and cons of the potential deal. whether it is initiating the offer or another company is looking to merge with it. merging with another company may become the only way to not only save the company but free up some much needed cash and credit. Will a merger accomplish what each company desires? Once the goals of both companies are understood. y Goals To be able to understand the pros and cons of a potential merger. re-trained or referred to another company. The stakeholder's concerns must be addressed because once the deal is finalized. y Benefits of Synergies y Getting Assets at competitive rates y More market share y R&D of other taken over company/merged Company y Removal of a competitor from the competition Cons With the fear of terrorism ever present each country is exercising caution when it comes to foreign ownership of a business within its country. Merging and acquiring a business is also known as a "take over. While a potential merger might be a good strategic fit or allow a company to expand into new markets. the UK foreign ownership trend but not for long. y Expansion . Pros Mergers and acquisitions have a profitable side that can create quite enormous profit for a company and expose the business to a myriad of financial resources. For some international companies obtaining loans and credit is slowing down. is slowing the merging of businesses down. Mergers and acquisitions is here to stay. Whenever a business is faced with the prospects of a merger. all of the pros and cons must be considered. Certain countries are forbidden to purchase land or purchase any type of business in the UK. The trend of mergers and acquisitions is cyclical and with the banks and other lending institutions refusing to extend credit or make loans. The European Community Merger Regulation oversees the transaction of all mergers and acquisitions. the first thing that must be understood is the goals of each company. the disruption in business or the difficulties of integration might outweigh whatever synergies are gained. all company debt and stakeholder's issues are inherited by the new ownership. In the United Kingdom the steps that are taken to purchase a business or merge with one are monitored and must be adhere too. Through out the UK there is a growing sentiment over allowing too much foreign ownership within the country and company mergers.Mergers and acquisitions mean the process of one business purchasing another business and blending the two together. is part of the allure of mergers and acquisitions." There are the pros and cons when it comes to the business of mergers and acquisitions. for various reasons. There has also been a surge in businesses within the United Kingdom merging with one another and in some cases hostile take overs. The proper documentation must be presented as well as the reason for the merger or business purchase. Employees of the company being the one that is merged into. must be fairly compensated or secured a position within the blended company. The organization investigates thoroughly the business dealings between the parties involved in either the merger or business acquisition. Acquiring a business for the purpose of creating a conglomerate or a quick sale and turning a profit. For a company that is on the verge of bankruptcy or in financial trouble from other reasons. 12. give reasons and examples why acquisitions may have occurred. By vertically integrating a company. They don't have to worry about sourcing raw materials or parts because they own the company that supplies them. the Gearing ratio is always considered by the various financial institutions. Why might the Gearing ratio be a make or break calculation for a business wanting to borrow money. For example. business disruption can occur. and even corporate cultures. Takeovers occur when a company buys at least 51% of the shares of another company. Businesses often acquire other businesses for strategic reasons. Due to the differences in systems. This can take the form of erratic inventory levels. if a bank has operations in the Midwest but wants to expand into the seemingly lucrative Florida market. late shipments. The Davis Service Group has adopted a decentralized approach to running the group. the company can control both their upstream and their downstream. companies can have a difficult time getting the two companies to work together. y Vertical Integration Vertical integration is another potential benefit of mergers between suppliers and producers. Each situation will be unique but a systematic. margins and profits. systems. By understanding the goals of each organization. 8. 11. processes. All the Pros and Cons Evaluating all the pros and cons of a potential merger are important for the success of the endeavor. management will have an easier time understanding whether they should complete the deal.Expanding the business is often one of the driving forces behind mergers. Using the case study and any other sources. Using the case study and any other examples explain the differences between Horizontal and Vertical Integration. the easiest thing to do is to identify a small regional bank operating in Florida and propose a merger. y Business Disruption As a result of the difficulties in merging operations. thorough approach should be used whenever a company is considering an offer. Using the internet and any other media resources investigate whether there have been any high profile takeovers tat have taken place in the last year. and employees. y Business Integration On the flip side of gaining market share and improved margins is the huge con of actually integrating the two companies. and missed deadlines. This merger could provide an instant market presence and an instant customer base to the Midwestern bank. 9. 10. The Florida bank could benefit because it would get access to the large Midwestern bank's efficient operating processes and cheaper capital. These disruptions can ultimately affect the company's revenues. When companies want to raise finance. Why is this essential to its success? . The store manager is responsible to a regional manager . It is believed that strong leadership is often best given from above. Empowerment can increase motivation and therefore mean that staff output increases. Whereas a decision made by a department manager may benefit their department.In a centralized organization head office(or a few senior managers) will retain the major responsibilities and powers. but disadvantage other departments. The use of standardized procedures can results in cost savings. Certain organizations implement vertical decentralization which means that they have handed the power to make certain decisions. A good example of this is the implementation of new technology across the whole business. . Decisions can be made to benefit the organizations as a whole. down the hierarchy of their organization. Vertical decentralization increases the input. An example of a decentralized structure is Tesco the supermarket chain. Decision making is a form of empowerment. This knowledge skills and experience may enable them to make more effective decisions than senior managers. people at the bottom of the organization chart have in decision making. Conversely decentralized organizations will spread responsibility for specific decisions across various outlets and lower level managers. The organization can benefit from the decision making of experienced senior managers. People lower down the chain have a greater understanding of the environment they work in and the people (customers and colleagues) that they interact with. Advantages of Decentralized Structure For Organizations Senior managers have time to concentrate on the most important decisions (as the other decisions can be undertaken by other people down the organization structure. Whilst tasks such as recruitment may be decentralized as units away from head office may have staffing needs specific only to them. Horizontal decentralization spreads responsibility across the organization. This implementation will be the sole responsibility of technology specialists Advantages of Centralized Structure For Organizations Senior managers enjoy greater control over the organization. Empowerment will enable departments and their employees to respond faster to changes and new challenges. Empowerment makes it easier for people to accept and make a success of more responsibility. Each store of Tesco has a store manager who can make certain decisions concerning their store. In uncertain times the organization will need strong leadership and pull in the same direction. including branches or units located away from head office/head quarters. Organizations may also decide that a combination of centralization and decentralization is more effective. For example functions such as accounting and purchasing may be centralized to save costs. Whereas it may take senior managers longer to appreciate that business needs have changed.