1.7 Expanding a Business

Question 1

What is meant by the term “external growth”?

Answer 1

Also known as integration which occurs when a business gets bigger by working with or buying other businesses.

Question 2

What is meant by the term “internal growth”?

Answer 2

Also known as organic growth which occurs when a business gets bigger by selling more of its products.

Question 3

What is meant by the term “net worth”?

Answer 3

The value of a business.

Question 4

What is the formula for net worth?

Answer 4

total value of the business’ assets - what it owes.

Question 5

What is meant by the term “franchise”?

Answer 5

When a franchisor sells the right to its products to a franchisee.

Question 6

What is meant by the term “franchisee”?

Answer 6

A person who buys a franchise in return for a fee or percentage of turnover.

Question 7

What is meant by the term “franchisor”?

Answer 7

Usually sells a franchise in return for a fee and a percentage of turnover.

Question 8

What are 3 advantages to franchising?

Answer 8

• business can expand rapidly as it does not need to raise finance to expand. It’s all up to the franchisee.
• provides franchisor with finance.
• franchisees are more effective and hardworking than employees as they are managing their own businesses.

Question 9

What are 3 disadvantages to franchising?

Answer 9

• franchises can make errors which can damage the business’ reputation and brand name.
• most profits got to franchisee rather than franchisor.
• less independence in decision making.

Question 10

What is meant by the term “e-commerce”?

Answer 10

The act of buying or selling a product using an electronic system such as the internet.

Question 11

What is meant by the term “outsourcing”?

Answer 11

When a business uses another business to produce for it.

Question 12

What are 3 disadvantages of e-commerce?

Answer 12

• retailer can suffer from falling sales in their shop.
• difficult and expensive to distribute goods to customers.
• some customers prefer to see the product or try on clothing before buying.

Question 13

What is meant by the term “merger”?

Answer 13

When two or more businesses join together to form a new business.
E.g. Carphone Warehouse and Dixons merged to form Dixons Carphone plc.

Question 14

What is meant by the term “takeover”?

Answer 14

When one business buys control of another business.

Question 15

What is meant by the term “average unit cost”?

Answer 15

The cost of producing a single unit of production.

Question 16

What is meant by the term “diseconomies of scale”?

Answer 16

When the cost per unit increases as a business expands.

Question 17

What is meant by the term “economies of scale”?

Answer 17

When business’ unit costs of production fall as it output rises and business expands.

Question 18

What are the advantages of growth?

Answer 18

• economies of scale.
• advertising and publicity.
• attracting the best employees.
• access to more retailers/outlets.
• less vulnerable to takeover.

Question 19

What are the disadvantages of growth?

Answer 19

> diseconomies of scale.
> failure to meet customer's needs.
> slower decision making.
> communication more difficult.
> employees may become demotivated.
> increased costs.

Question 20

What is the formula for average unit cost?

Answer 20

total costs / number of units of output produced.

Question 21

What are the different ways of expanding a business?

Answer 21

• internal growth.
• external growth.
• franchise.
• outsourcing.
• e-commerce.
• merger.
• takeover.

Question 22

What are the internal ways of expanding a business?

Answer 22

> franchising.
> introducing new product range.
> e-commerce.
> opening new stores.
> outsourcing.

Question 23

What are the external ways of expanding a business?

Answer 23

• merger.
• takeover.

Question 24

What are the advantages of e-commerce?

Answer 24

• it can access a larger market and the business can trade 24/7.
• it can complement physical stores.

Question 25

What are the types of integration?

Answer 25

• horizontal.
• vertical.
• conglomerate/diversification.

Question 26

What is meant by the term “horizontal integration”?

Answer 26

When a business joins a business at the same stage of the production process.

Question 27

What is meant by the term “vertical integration”?

Answer 27

When a business joins with its suppliers (backwards vertical) or its distributors (forward vertical).

Question 28

What is meant by the term “conglomerate/diversification integration”?

Answer 28

When a business joins a business in a different market.

Question 29

What are the ways to measure the size of a business?

Answer 29

• quantity of sales.
• value of sales.
• value of the business.
• number of employees.