2.1 Business Growth and competitive advantage

Question 1

Define economies of scale

Answer 1

Reduction of average costs as output and scale of production increases

Question 2

Define internal economies and scale and what are the main types (RFMTMP)

Answer 2

Benefit an individual business
- Risk bearing
- Financial
- Marketing
- Technical
- Managerial
- Purchasing or bulk buying

Question 3

Define external economies of scale and state a benefit

Answer 3

Reduce production costs for all businesses in the industry
Increased international competitiveness for an industry

Question 4

What is the name of a business with the largest market share?

Answer 4

Market leader

Question 5

What is the difference between monopoly power and monopsony power?

Answer 5

Monopoly is power over consumers whereas monopsony is power over suppliers such as workers

Question 6

What are the main effects of increased market share?

Answer 6

Increased profit, market power and turnover

Question 7

Define competitive advantage and name the two main ways to develop it

Answer 7

Any feature of a business that enables it to compete efficiently e.g. quality, service, innovation, brand loyalty
Product differentiation and branding

Question 8

How do businesses operate in a static market compared to a dynamic one?

Answer 8

In static markets, businesses work to increase market share or diversify products
In dynamic markets, businesses innovate to become dynamically efficient

Question 9

What is the minimum efficiency scale?

Answer 9

The lowest point on the LRAC curve where average costs are minimised and productive efficiency is reached

Question 10

What are the main aspects of diseconomies of scale?

Answer 10

• Less effective communication as the business grows, information is slow to travel and can be lost over time
• With more employees, a less tight-knit community is formed so employees may feel demotivated
• Harder to adapt to changing markets and demands

Question 11

What is organic and inorganic growth?

Answer 11

• Organic: a business grows through expansion and increased market share
• Inorganic: Takeover or merger

Question 12

What is the difference between a merger and a takeover?

Answer 12

In a merger, two or more firms form a single business with the same shareholders and management and firms may retain their separate identities Whereas, when a takeover occurs one company buys another company or secures over 50% of their shares

Question 13

What are the benefits of inorganic growth?

Answer 13

• Increased efficiency and market share/ power
• Rationalisation: the business can reduce overhead costs by sharing facilities
• Economies of scale
• Synergy: Combined knowledge and skill sets are more efficient together than separately
• Diversification

Question 14

Define horizontal and vertical integration

Answer 14

• Horizontal: Two businesses in the same industry and point in the production process merge
• Vertical: Two businesses in the same industry but at different stages of the production process merge

Question 15

What is the difference between forward and backwards vertical integration?

Answer 15

Forward integration can be a manufacturer moving into distribution: closer to consumers. Whereas, backward integration is moving further away from consumers e.g. Greggs owns their factories so they distribute and manufacture them

Question 16

Define conglomerate integration and name a benefit

Answer 16

Two businesses in different industries merge
- Diversification and spread of risk

Question 17

Define product and process innovation and state a benefit and drawbacks of innovation

Answer 17

• Product innovation: New or improved product or service is created
• ## Process innovation: The Production process is changed e.g. improving distribution channels

Question 18

Why might a business seek to increase its market power?

Answer 18

To gain the ability to set their prices and profit maximise

Question 19

Why is there an incentive for the state to fund R&D

Answer 19

R&D and innovation increase a country’s international competitiveness. More successful businesses increase GDP

Question 20

What are the product life cycle stages and their impact on cash flow and marketing?

Answer 20

• Development: high investments and no sales means cash flow is negative
• Introduction: Low initial sales do not outweigh the costs of launches and promotion so cash flow is negative
• Growth: Cash flow becomes positive as sales increase
• Maturity: Cash flow is maximised as sales reach peak levels, EoS is reached
• Decline: Sales and costs(promotion) are low so cash flow may still be positive