1.6 Growth and evolution

Question 1

Economies of scale

Answer 1

Lower average costs of production as a firm operates on a larger scale due to gains in productive efficiency.

Question 2

Types of economies of scale:

Answer 2

• purchasing economies (bulk-buying economies)
• technical economies
• financial economies
• marketing economies
• managerial economies

Question 3

Purchasing economies (bulk-buying economies) (economies of scale)

Answer 3

Larger businesses can get discounts when purchasing their inputs through bulk buying as they have a higher bargaining power.

Question 4

Technical economies (economies of scale)

Answer 4

Increasing the size of the units of production decreases costs.

Question 5

Financial economies (economies of scale)

Answer 5

Larger firms have an advantage over small firms when it comes to raising finance.

Question 6

Marketing economies (economies of scale)

Answer 6

Larger firms can have bigger and effective marketing campaigns. They are able to spread their advertising budget over higher output.

Question 7

Managerial economies (economies of scale)

Answer 7

Managers can specialize in doing one particular job rather than attempting to do several different tasks at the same time – every manager can do better by focusing on an aspect of the business they know the most about/are the most interested in.

Question 8

Diseconomies of scale

Answer 8

As a business becomes larger, it becomes less efficient, leading to a higher average cost of production.

Question 9

Internal (organic) growth

Answer 9

Business grows using its own capabilities and resources to increase the scale of its operations and sales revenue.

Question 10

Organic growth is achieved by:‌

Answer 10

• changing price
• effective promotion
• producing improved or better products
• sell through a greater distribution network
• offer preferential credit
• increased capital expenditure
• improved training and development
• providing overall value for money

Question 11

External (inorganic) growth

Answer 11

Growth in an organisation’s operations arises from mergers or takeovers, rather than from an increase in the firm’s own business activity.

Question 12

Major types of external growth include:

Answer 12

• mergers and acquisitions (M&As)
• joint ventures
• strategic alliances
• franchising

Question 13

Integration

Answer 13

The joining of two firms.

Question 14

Merger

Answer 14

Two firms agree to become partners in a larger business.

Question 15

Acquisition

Answer 15

One firm buys another, either with its approval (voluntary takeover) or without its approval (hostile takeover).

Question 16

Reasons for mergers and acquisitions:

Answer 16

• greater market share
• reducing business risk
• better control of distribution channels

Question 17

Horizontal mergers (horizontal integration)

Answer 17

Firms in the same industry and in the same sector merge.

Question 18

Vertical mergers (vertical integration)

Answer 18

Firms in different sectors merge.
- vertical merge forward - when a firm merges with another further up the production chain
- vertical merge backward - when a firm merges with another further down the production chain

Question 19

Conglomerate mergers

Answer 19

Integration of firms in different business sectors with a range of activities.

Question 20

Joint venture

Answer 20

An agreement between two or more organisations to undertake a particular business activity for a limited period of time.

Question 21

Strategic alliances

Answer 21

Collaborative agreements between two or more firms to pursue a set of agreed goals and to commit resources to achieve these.

Question 22

Franchising

Answer 22

An agreement where a business (franchisor) sells rights to another business or individual (franchisee), allowing them to use the brand name, logo, trademark and products/services of the franchisor in return for a fixed fee and/or a percentage of the annual sales turnover (royalty).

Question 23

Globalization

Answer 23

The growing integration and interdependence of the world’s economies.

Question 24

The impact of globalisation on businesses

Answer 24

• increased level of competition
• meeting customer expectations becomes increasingly more demanding
• increased customer base
• greater choice of location
• external growth opportunities
• increased sources of finance

Question 25

Multinational Company (MNC)

Answer 25

An organization that operates in two or more countries, with its head office usually based in the home country.

Question 26

Why become a multinational company (MNC)?

Answer 26

• increased customer base
• cheaper production costs
• able to benefit form economies of scale
• avoiding any protectionist policies that the country might impose
• spreading risks

Question 27

Advantages of multinational companies on host countries:

Answer 27

• job creation
• tax payments
• technology transfer
• local population gains from a wider choice of goods and services at lower prices
• help build new infrastructure

Question 28

Disadvantages of multinational companies on host countries:

Answer 28

• natural resources are depleted
• profits are repatriated to the home country
• competitive pressures, domestic firms might be forced into reducing prices to remain competitive