1.6 Growth and Evolution

Question 1

Define economies of scale

Answer 1

When a firm’s average cost decreases as it increases its scale of production

Calculation = Total costs = Fixed costs + Variable costs

Question 2

Define diseconomies of scale

Answer 2

When a firm’s average cost increases as it increases its scale of production

Question 3

What are the benefits of a small organization?

Answer 3

• Can quickly adapt to changing consumer needs
• Personal service customs
• Can be more easily managed by the owner
• Easier communication with all stakeholders
• Quick decision-making

Question 4

What are the benefits of large organizations?

Answer 4

• Able to raise more capital quickly
• Can afford research and development into new products
• Can employ specialized workers in each department
• Cheaper costs from large-scale production
• Products can be spread across many different markets

Question 5

Define internal growth

Answer 5

Expansion of a business using own capabilities and resources

Question 6

Define external growth

Answer 6

Expansion through merging or acquiring other businesses

Question 7

Define a Multinational company (MNC)

Answer 7

A company that operates in 2 or more countries, however, have their headquarters in the established country

Question 8

Define Globalization

Answer 8

The growing integration and interdependence of the world’s economies

Question 9

Impact of multinational companies on host countries

Answer 9

Pros

• Investment in local economy
• Job creation
• MNC buys local resources
• Tax revenue for government
• Training local staff

cons

• Poor publicity (e.g. labour conditions, sweatshops, pollution)
• Closure of local business who can’t compete
• Reduction in local culture
• Depletion of natural resources

Question 10

Reason for growth of a multinational company

Answer 10

Close to international markets

Lower cost of production

Avoid import restrictions

Question 11

The impact of globalization on businesses

Answer 11

• More market development - more markets and customers
• Cheaper imported resource costs
• Higher mobility of labor
• Economies of scale and growth

Question 12

What is acquisition

Answer 12

Bigger company buys smaller company to remain one company

Question 13

What is horizontal integration

Answer 13

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

Question 14

What is verticle backward integration

Answer 14

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

Integration with a supplier

Question 15

What is verticle forwards integration

Answer 15

Integration with a customer

Question 16

What is conglomerate integration

Answer 16

Integration with firm in a different industry

Question 17

What is a strategic alliance

Answer 17

Agreement between two firms to commit resources to a mutually beneficial project

Question 18

What is a Joint venture

Answer 18

Two business undertake a business project and set up a new business with a new legal identity

Question 19

What is a franchise

Answer 19

A person/business (franchisee) buys a license to trade using the name of a brand

Question 20

What are the pros of franchising

Answer 20

Franchisee - benefits from franchisor -brand image, training, supply chain etc

Franchisor - quick way to expand

Question 21

What are the cons of franchising

Answer 21

Franchisee - must pay part of the profit

Franchisor - needs to ensure quality is maintained in each franchise

Question 22

What are the 5 economies of scale?

Answer 22

Purchasing

Financial

Managerial

Marketing

Technical

Question 23

What are the 3 diseconomies of scale?

Answer 23

Communications problems

the poor condition and working conditions

Staff morale