1.5 - Growth and Evolution

Question 1

Acquisition

Answer 1

A method of external growth that involves one company buying a controlling interest (majority stake) in another company, with the agreement and approval of the target company’s board of directors

Question 2

Average cost

Answer 2

The cost per unit of output.
Calculated by the equation AC = TC / Q (total costs divided by the quantity of output)

Question 3

Backward vertical integration

Answer 3

Occurs when a business amalgamates with a firm operating in an earlier stage of production, such as a car manufacturer taking over a supplier of tyres or other components

Question 4

Conglomerates

Answer 4

Businesses that provide a diversified range of products and operate in a range of different industries

Question 5

Demerger

Answer 5

Occurs when a company sells off a part of its business thereby separating into two or more businesses. It usually happens due to conflicts, inefficiencies and incompatibilities following an earlier merger of two or more companies.

Question 6

Diseconomies of scale

Answer 6

Are the cost disadvantages of growth. Average costs are likely to eventually rise as a firm grows due to a lack of control, coordination and communication

Question 7

Economies of scale

Answer 7

Refer to a lower average of costs of production as a firm operates on a larger scale due to gains in productive efficiency, such as easier and cheaper access to source of finance.

Question 8

External diseconomies of scale

Answer 8

Occur due to factors beyond its control which cause average costs of production to increase as an industry grows

Question 9

External economies of scale

Answer 9

Occur when an organisation’s average cost falls as the industry grows. Hence, all firms in the industry benefit

Question 10

External growth (or inorganic growth)

Answer 10

Occurs when a business grows and evolves by collaborating with, buying up or merging with other organisations.

Question 11

Financial economies of scale

Answer 11

Are cost savings made by large firms as banks and other lenders charge lower interest (for overdrafts, loans and mortgages) because larger businesses represent lower risk.

Question 12

Forward vertical integration

Answer 12

Is a growth strategy that occurs with the amalgamation of a firm operating at a later stage in the production process, such as a book publisher acquiring book retailers

Question 13

Franchising

Answer 13

Refers to an agreement between a franchisor selling its rights to other businesses (franchisees) to allow them to sell products under its corporate name in return for a fee and regular royalty payments

Question 14

Horizontal integration

Answer 14

Is an external growth strategy that occurs when a business amalgamates with a firm operating in the same stage of production

Question 15

Internal diseconomies of scale

Answer 15

occur due to internal problems of mismanagement, causing average costs of production to increase as a firm grows.

Question 16

Internal economies of scale

Answer 16

occur within a particular organisation (rather than the industry as a whole) as it grows in size

Question 17

Internal growth (also known as organic growth)

Answer 17

occurs when a business grows using its own capabilities and resources to increase the scale of its operations and sales revenue.

Question 18

Joint venture (JV)

Answer 18

is a growth strategy that combines the contributions and responsibilities of two or more different organisations in a shared project by creating a separate legal enterprise

Question 19

Lateral integration

Answer 19

Refers to external growth of firms that have similar operations but do not directly compete with each other, such as PepsiCo acquiring Quakers Oats company.

Question 20

Marketing economies of scale

Answer 20

Occur when larger businesses can afford to hire specialist managers, thereby improving the organisation’s overall efficiency and productivity.

Question 21

Merger

Answer 21

A form of external growth whereby two (or more) firms agree to form a new organisation, thereby losing their original identities as a new legal entity

Question 22

Optimal level of output

Answer 22

The most efficient scale of operation for a business. This occurs at the level of output where the average cost of production is minimised

Question 23

The purchaser

Answer 23

Refers to the acquiring company in acquisition or the buyer of another company in a takeover

Question 24

Purchasing economies of scale

Answer 24

occur when larger organisations can gain huge cost savings per unit by purchasing vast quantities of stocks/ bulk buying (raw materials, components, semi-finished goods and/or finished goods)

Question 25

Risk bearing economies of scale

Answer 25

Occur when large firms can bear greater risks than smaller ones due to having a greater product portfolio

Question 26

Specialisation economies of scale

Answer 26

occur when larger firms can afford to hire and train specialist workers, thus helping to boost their level of output, productivity and efficiency

Question 27

strategic alliances

Answer 27

Are formed when two or more organisations join together to benefit from external growth, without having to set up a new separate legal entity.

Question 28

Synergy

Answer 28

A benefit of growth, which occurs when the whole is greater than the sum of individual parts when two or more business operations are combined. Synergy creates greater output and improved efficiency.

Question 29

A takeover (often referred to as hostile)

Answer 29

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

Question 30

Target company

Answer 30

Refers to the organisation that is purchased by another in an acquisition or takeover deal

Question 31

Technical economies of scale

Answer 31

Are cost savings by greater use of large-scale mechanical processes and specialist machinery such as mass production techniques which help to cut average costs of production.

Question 32

Vertical integration

Answer 32

Takes place between businesses that are at different stages of production