1.5 Growth and Evolution

Question 1

Acquisition

Answer 1

An acquisition is 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

Average cost refers to the cost per unit of output.

Question 3

Backward vertical integration

Answer 3

Backward vertical integration 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

Conglomerates are businesses that provide a diversified range
of products and operate in a range of different industries

Question 5

Demerger

Answer 5

A demerger 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

Diseconomies of scale 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

Economies of scale refer to lower average 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

External diseconomies of scale 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

External economies of scale occur when an organization’s
average cost falls as the industry grows. Hence, all firms in the
industry benefit.

Question 10

External growth / Inorganic growth

Answer 10

External growth (or inorganic growth) occurs when a business
grows and evolves by collaborating with, buying up or merging
with other organizations.

Question 11

Financial economies of scale

Answer 11

Financial economies of scale are cost savings made by large
firms as banks and other lenders charge lower interest (for
overdraſts, loans and mortgages) because larger businesses
represent lower risk.

Question 12

Forward vertical integration

Answer 12

Forward vertical integration 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

Franchising 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

Horizontal integration 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

Internal diseconomies of scale 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

Internal economies of scale occur within a particular
organization (rather than the industry as a whole) as it grows in size.

Question 17

Internal growth / Organic growth

Answer 17

Internal growth (also known as organic growth) 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

Answer 18

A joint venture is a growth strategy that combines the
contributions and responsibilities of two or more different
organizations in a shared project by creating a separate legal
enterprise.

Question 19

Lateral integration

Answer 19

Lateral integration 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

Marketing economies of scale occur when larger businesses
can afford to hire specialist managers, thereby improving the
organization’s overall efficiency and productivity.

Question 21

Merger

Answer 21

A merger is a form of external growth whereby two (or more)
firms agree to form a new organization, thereby losing their
original identities.

Question 22

Optimal level of output

Answer 22

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

Question 23

Purchaser

Answer 23

The purchaser refers to the acquiring company in an acquisition
or the buyer of another company in a takeover.

Question 24

Purchasing economies of scale

Answer 24

Purchasing economies of scale occur when larger organizations
can gain huge cost savings per unit by purchasing vast quantities
of stocks (raw materials, components, semi-finished goods and/
or finished goods).

Question 25

Risk bearing economies of scale

Answer 25

Risk bearing economies of scale occur when large firms can
bear greater risks than smaller ones due to having a greater
product portfolio.

Question 26

Specialization economies of scale

Answer 26

Specialization economies of scale 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

Strategic alliances are formed when two or more organizations
join together to benefit from external growth, without having to
set up a new separate legal entity.

Question 28

Synergy

Answer 28

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

Question 29

Takeover (hostile takeover)

Answer 29

A 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.

Question 30

Target company

Answer 30

The target company refers to the organization that is purchased
by another in an acquisition or takeover deal.

Question 31

Technical economies of scale

Answer 31

Technical economies of scale 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

Vertical integration takes place between businesses that are at
different stages of production.