1.6 Growth and Evolution

Question 1

Ways of measuring the size of the business

Answer 1

1. Total sales/sales turnover
2. Number of employees
3. Market capitalisation: Value of the company in the stock exchange

Question 2

5 main reasons for growth

Answer 2

Economies of scale: Larger firms can produce at a lower cost per unit
Diversification: larger firms can afford to sell more products into different markets
Financial support: larger firms are less likely to fail (bankrupt) they can borrow more to avoid cash flow, investors are more likely to invest
Personal vanity: power & status
Dominate the market (reduces opposition)

Question 3

Two types of growth

Answer 3

Internal (organic) growth

External growth

Question 4

Internal (organic) growth

Answer 4

An increase in the resources - capital and labour
+ inexpensive
- takes a long time for the business to grow

Question 5

3 main methods of Internal Growth

Answer 5

Sell more existing products in existing markets
Selling current products in new markets
Producing new products (diversification/line extension)

Question 6

External Growth

Answer 6

M&A: Mergers (without controlling interest) + acquisition (with controlling interest)

Question 7

4 types of integration

Answer 7

Horizontal integration: two competitors join together (same stage in the production process)
Forward vertical integration: when a firm takes over a customer eg farmer buying a restaurant
Backward vertical integration: backwards in the production process
Conglomerate: when firms that have nothing in common join together (reduces the risk of expansion because it leads to diversification)

Question 8

Problems mergers and acquisitions

Answer 8

Less than half of mergers and acquisitions are successful because of corporate culture and management styles - bad feelings

Question 9

Merge

Answer 9

When the owners of each business becomes the owner of the new business

Question 10

Acquisition

Answer 10

When a company buys over 50% of the shares of another company

Question 11

Difference merger and acquisition

Answer 11

You don’t need to have the controlling interest of the company when you have a merger + takeover is more hostile

Question 12

Scale of operations

Answer 12

Maximum output that can be achieved using all the available resources. To change the scale of operations all resources must be changed.

Question 13

2 possibilities to change scale of operations

Answer 13

change all inputs - (can only be done in the long-term) or change output (change one input - the variable input)
Changes in the scale of operations are changes in output but not all changes in operations are changes in output.

Question 14

Inputs scale of operations

Answer 14

Variable or fixed -> in the short-term all inputs are fixed and in the long-term all inputs are variable

Question 15

Economies of Scale

Answer 15

Reductions in cost per unit as the business gets bigger
Internal: Achieved by the increase in the business’s scale of operations
External: Achieved as the industry grows

Question 16

6 types of internal economies of scale

Answer 16

Financial
Marketing
Technical
Managerial
Risk-bearing
Purchasing

Question 17

External Economies of Scale

Answer 17

Happen when a number of large firm are close to each other (location)
Supplier located in the area
Local workforce specialised in tasks needed by firms, reduces training costs
Receive support from the local/national government
Good reputation of the area

Question 18

Diseconomies of scale

Answer 18

Increase in cost of production per unit when the business gets too big
Why?:
Communication problems
Decision making process may be too long
Alienation (workers feel useless/insignificant)

Question 19

Optimum scale of operations

Answer 19

where cost per unit are minimised

Question 20

Advantages in being small

Answer 20

Can be managed and controlled by the owners -
can react quickly to change in customer needs -
can offer personal services to the customers -
lots of workers prefer to work in a more human business -
communication with customers and workers

Question 21

Other methods of expansion

Answer 21

Franchising
Off-shoring (MNC)
Joint ventures
Strategic Alliances

Question 22

Financial

Answer 22

Banks are more willing to lend to larger firms as the risk of default is lower and so they charge lower interest rates
‘Going public’ is very expensive, therefore larger firms pay proportionally less than smaller firms (cost per unit goes down)

Question 23

Marketing

Answer 23

Arise because the cost of advertising is pretty much a fixed cost, so larger firms tend to spend less per unit of output

Question 24

Technical

Answer 24

This occurs because larger firms can use production methods such as (eg. line production) that are more efficient and productive

Question 25

Managerial

Answer 25

When large firms can afford to hire specialist managers (instead of general managers) who have expert knowledge such as accountants or lawyers, they are more productive (managerial division of labour)

Question 26

Risk-bearing

Answer 26

Where the firm can afford to sell a range of products into many different markets. A decline in sales of one product will not significantly harm the firms cash flow.

Question 27

Purchasing (bulk-buying)

Answer 27

Large firms can buy in bulk, obtaining big discounts

Question 28

Small Firms

Answer 28

Small firms
Medium -> 51-250 workers -> 10-50M€ Sales-> 10-34M€ Capital employed
Small -> 11-50 workers -> 2-50 M€ Sales -> 2-10 M€ Capital employed
Micro -> -10 workers -> up to 2 M€ Sales -> less than 2 M€ Capital employed