1.6 Growth and Evolution

Question 1

Economies of scale

Answer 1

Decrease in a firm’s unit (average) costs of production as the scale of operation increases

Question 2

Diseconomies of scale

Answer 2

Increase in a firm’s unit (average) costs of production as the scale of operation increases

Question 3

When diseconomies of scale may occur

Answer 3

1. Communication problems (more difficult to coordinate and make thought out decisions as a large firm divided into departments)
2. Increase the size of the workforce causing alienation (difficult to motivate workers)
3. increasing fixed costs (eg. rent, wages)

Question 4

Purchasing economies

Answer 4

Bulk buying reduces unit costs as they are offered discounts (since it is easier and cheaper for suppliers to process + deliver 1 large order than several smaller ones)

Question 5

Technical economies

Answer 5

Investing in expensive machinery will be profitable once they produce a certain level of output, granting them lower unit costs (production process is more automated and efficient)

Question 6

Financial economies

Answer 6

Borrowing large amounts of money can reduce unit costs as they are able to negotiate lower interest rates with banks (since banks prefer lending to large firms with a track record who are less risky)

Question 7

Marketing economies

Answer 7

Large marketing campaigns can reduce unit costs as the high costs can be spread over a higher level of sales for a big firm

Question 8

Managerial economies

Answer 8

Large firms can afford to attract specialized managers who operate more efficiently than general managers, therefore, reducing unit costs

Question 9

Internal growth

Answer 9

The organic growth of a business using its own capabilities and resources to increase its scale of operations with less risk (selling new products, finding new markets, increasing production + sales)

Question 10

External growth

Answer 10

The inorganic growth of a business by means of merging, collaborating or taking over another business

Question 11

Merger

Answer 11

External growth strategy where two firms agree to combine and form a new organization, thereby losing their original entities

Question 12

Acquisition/ takeover

Answer 12

External growth strategy where a company buys over 50% of the shares of another company and becomes the controlling owner

Question 13

Joint venture

Answer 13

External growth strategy where two or more businesses agree to work closely together on a particular project by forming a separate legal entity

Question 14

Strategic alliance

Answer 14

External growth strategy where firms agree to work together and commit resources to achieve a common set of objectives, however, no new entity is created

Question 15

Franchise

Answer 15

External growth strategy where a franchisor gives the legal right to franchisees to sell products under its name, in return for a fee and regular royalty payments

Question 16

Horizontal integration

Answer 16

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

Question 17

Backward vertical integration

Answer 17

Integration with a business in the same industry at an earlier stage of production (a supplier of the existing business)

Question 18

Forward vertical integration

Answer 18

Integration with a business in the same industry but at a later stage of production (a customer of the existing business)

Question 19

Conglomerate

Answer 19

Integration of two businesses in unrelated industries to offer a diversified array of products

Question 20

Globalization

Answer 20

The growing integration and interdependence of countries in terms of the movement of goods, capital, and people

Question 21

Multinational corporations (MNC)

Answer 21

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

Question 22

Reasons for becoming a multinational

Answer 22

1. Closer to main markets
2. Lower costs of production
3. Avoid import restrictions
4. Access to local natural resources