1.6 Growth and evolution

Question 1

Economies of scale

Answer 1

Reductions in a firm’s unit costs of production that result from an increase in the scale of operations

Question 2

Scale of operation

Answer 2

The maximum output that can be achieved using the available inputs - this scale can only be increased in the long term by employing more of all inputs

Question 3

5 cost benefits from economies of scale

Answer 3

Purchasing economies

Technical economies

Financial economies

Marketing economies

Managerial economies

Question 4

Purchasing economies

Answer 4

Often known as but buying economies

Suppliers often offer substantial discounts for large orders

This is because it is cheaper for them to process and deliver one large order than several smaller ones

Question 5

Technical economies

Answer 5

Large firms are more likely to be able to justify the cost of flow production lines. If these are worked at a high capacity leave, then they offer lower unit costs than other production methods.

Question 6

Financial economies

Answer 6

Banks often show preference for lending to a big business with a proven track record and a diversified range of products

Interest rates charged to these firms are often lower than the rate charged to small, specially newly formed, businesses

Raising finance by ‘going public’ or by further public issues of shares for existing public limited companies is very expensive. Therefore, the average cost of raising the finance will be lower for larger firms selling many millions of dollars’ worth of shares

Question 7

Marketing economies

Answer 7

Costs can be spread over a higher level of sales for a big firm and this offers a substantial economy of scale

Question 8

Managerial economies

Answer 8

As a firm expands, it should be able to afford to attract specialist functional managers who should operate more efficiently than general managers, helping to reduce average costs

Question 9

Diseconomies of scale

Answer 9

Factors that cause average costs of production to rise when the scale of operation is increased

Question 10

3 main causes of diseconomies of scale

Answer 10

Communication problems

Alienation of the workforce

Poor coordination and slow decision making

Question 11

What shape does an economies of scale graph make?

Answer 11

A U shape

Question 12

Why are small firms important?

Answer 12

Many jobs are created

Often run by dynamic entrepreneurs

Create competition for larger business, prevents larger business from exploiting customers

Often supply specialist goods and services

All big businesses were small at one point

Question 13

Advantages of small businesses

Answer 13

Can be managed and controlled by the owner

Often able to adapt quickly to meet changing customer needs

Offer personal service to customers

Find it easier to know each worker

Staff prefer to worker for a smaller business

Average costs can be low due to no diseconomies of scale

Easier communication with workers and customers

Question 14

Advantages of large businesses

Answer 14

Can afford to employ specialist managers

Benefit from cost reductions from large scale production

Can set prices that other businesses have to follow

May be diversified in several markets and products, risks are spread

More likely to be able to afford research and development into new products and processes

Question 15

Disadvantage of small businesses

Answer 15

Limited access to sources of finance

Owner carries a large burden of responsibility

May not be diversified

Can’t benefit from economies of scale

Question 16

Disadvantage of large businesses

Answer 16

Difficult to manage especially if it is geographically spread

May have potential cost increases associated with large scale production

May suffer from slow decision making and commutation

Question 17

What does the scale of operation (size of business) depend on?

Answer 17

Owner’s objectives

Capital available

Size of the market the firm operates in

Number of competitors

Scope for economies of scale

Question 18

Internal growth

Answer 18

Expansion of a business by means of opening new branches, shops or factories

Question 19

External growth

Answer 19

Business expansion achieved by means of merging with or taking over another business from either the same or different industry

Question 20

Why do businesses seek to grow?

Answer 20

Increased profits

Increased market share

Increased economies of scale

Increased power and status of the owners and directors

Reduced risk of being a takeover target

Question 21

Merger

Answer 21

An agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business

Question 22

Takeover

Answer 22

When a company buys over 50% of the shares of another company and becomes the controlling owner - often referred to as ‘acquisition’

Question 23

Horizontal integration

Answer 23

Integration with a firm in the same industry and at the same stage of production

Question 24

Forward vertical integration

Answer 24

Integration with a business in the same industry but a customer of the existing business

Question 25

Backward vertical integration

Answer 25

Integration with a business in the same industry but a supplier of the existing business

Question 26

Conglomerate integration

Answer 26

Merger with or takeover of a business in a different industry

Question 27

Advantages horizontal integration

Answer 27

Eliminates one competitor

Possible economies of scale

Increased poser over suppliers

Question 28

Disadvantages of horizontal integration

Answer 28

Rationalisation may bring bad publicity

May lead to monopoly investigation if it is too big

Question 29

Effect of horizontal integration on stakeholders

Answer 29

Consumers have less choice

Workers may lose job security as a result of rationalisation

Question 30

Advantages of forward vertical integration

Answer 30

Business is able to control the promotion and pricing of its own products

Secures an outlet for the firm’s products

Question 31

Disadvantage of forward vertical integration

Answer 31

consumers may suspect uncompetitive activity and react negatively

Lack of experience in this sect or the industry

Question 32

Impact of forward vertical integration on stakeholders

Answer 32

Workers may have greater job security because the business has secure outlets

There may be more varied career opportunities

Consumers may resent lack of competition in the retail outlet because of the withdrawal of competitor products

Question 33

Advantages of backward vertical integration

Answer 33

Gives control over the quality, price and delivery times of supplies

Encourages joint research and development into improved quality of supplies of components

Business may control supplies of materials to competitors

Question 34

Disadvantages of backward vertical integration

Answer 34

May lack experience of managing a supplying company

Supplying business may become complacent having a guaranteed customer

Question 35

Impact of backward vertical integration on stakeholders

Answer 35

Possibility of greater career opportunities for workers

Consumers may obtain improved quality and more innovative products

Control over supplies to competitors may limit competition and chose for consumers

Question 36

Advantages of conglomerate integration

Answer 36

Diversifies the business away from its original industry and markets

This should spread risk and may take the business into a faster growing market

Question 37

Disadvantages of conglomerate integration

Answer 37

Lack of management experience in the acquired business sector

There could be a lack of clear focus and direction now that the business is spread across more than one industry

Question 38

Impact of conglomerate integration on stakeholder

Answer 38

Greater career opportunities for workers

More job security because risks are spread across more than one industry

Question 39

Joint venture

Answer 39

Two or more businesses agree to work closely together on a particular project and create a separate business division to do so

Question 40

Reasons for joint ventures

Answer 40

Costs and risks are shared

Different companies may have different strengths and experiences

They might have their major markets in different countries, exploit these with the new product more effectively

Question 41

Risk of joint ventures

Answer 41

Errors might lead to one company blaming the other

Styles of management might be different that they don’t work well together

One partner failing would put the whole project at risk

Question 42

Strategic alliances

Answer 42

Agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives

Question 43

Franchise

Answer 43

A business that uses the name, logo and trading systems of an existing successful business

Question 44

Advantages of franchises

Answer 44

Grow cheaply and quickly

Less manpower to directly manage

Income from franchise fee, royalties, and supply purchases

Question 45

Disadvantages of franchises

Answer 45

Not easy to revoke

Less control over quality or performance of franchise

Conflict in profit vs. volume

Question 46

Franchisee benefits

Answer 46

Known brand results in strong start-up sales

Support from franchisor

Easy financing options

Lower cost of supplies because of economies of scale (though sometimes the franchisor charges high for supplies)

Question 47

Franchisee downsides

Answer 47

Little freedom/flexibility in running

Franchise/start up fee may be too costly

Bad management in headquarters affects all branches

Still not guaranteed success

Question 48

Globalisation

Answer 48

The growing integration of countries through increased freedom of global movement of goods, capital and people

Question 49

Free trade

Answer 49

No restrictions of trade barriers exist that might prevent or limit trade between countries

Question 50

Protectionism

Answer 50

Using barriers to free trade, such as tariffs and quotas, to protect a country’s own domestic industries

Question 51

Multinational company or business

Answer 51

Business organisation that has its headquarters in one country, but with operating branches, factories and assembly plants in other countries

Question 52

Advantages of being multinational

Answer 52

Closer to main markets - lower transport costs for the finished goods, better market information about consumer

Lower costs of production

Avoid import restrictions by producing in the local country

Access to local natural resources

Question 53

Issues with being multinational

Answer 53

Culture, language and legal differences

Need to train local employees - expensive

Poor communication with headquarters

Question 54

Benefits of multinational operation to host country

Answer 54

Will bring in foreign currency

Employment opportunities will be created

Local firms are likely to benefit from supplying services and components to the new factory, additional jobs

Tax revenues

Economy will grow

Local firms will have to up their quality and productivity to international standards

Question 55

Drawbacks of multinational operation to host country

Answer 55

Exploitation of the local workforce

Pollution from plants might be higher than allowed in other countries

Local firms might run out of business

Imposing their culture on the country

Profits sent back to the company’s country

Depletion of the limited natural resources