2.1 Business Growth and Competitive Advantage

Question 1

What are the main objectives of growth?

Answer 1

Increased sales, turnover and profit

Question 2

Give examples of how some stakeholders have differing objectives

Answer 2

Shareholders - High profits and dividends
Employees - Maintain their job, promotion options
Customers - Low price and quality

Question 3

What is an economy of scale

Answer 3

Reduction in the average costs of production due to an increase in output. May be internal or external.

Question 4

If average costs reduce, what 2 choices do a business have over price?

Answer 4

• Keep price the same, higher margin, more profit

- Lower the price, gain a competitive advantage

Question 5

What are internal economies of scale and give all 6 six examples

Answer 5

Economies of scale that affect that specific business. Make them more competitive usually.

• Technical - Use of specialist equipment/machinery. More efficient.
• Marketing economies - As output grows, fixed costs of advertising are spread out over a larger target market.
• Managerial - Specialist managers, more efficient.
• Financial - More likely to secure loans due to their size
• Risk bearing - Spread their risk over more markets
• Purchasing - bulk buying, lower costs.

Question 6

What are external economies of scale

Answer 6

Reduce production costs for all businesses in the industry

Question 7

How does an economy of scale help increase standards of living

Answer 7

Economies of scale lead to falling costs/prices
Products are more affordable
More purchasing power
Higher standards of living

Question 8

Give 2 examples of external economies of scale

Answer 8

An improved labour force, better local suppliers and improved skills will cut costs for nearby businesses.

Colleges and universities may develop tech that cut costs for the whole industry.

Question 9

What are monopoly and monopsony power

Answer 9

Monopoly - The business with the most market share (over 25%) will have this power and with it, can influence price and output.

Monopsony - Businesses which buy a lot of supplies (supermarkets) will have this power and with it, can influence the price they pay to their suppliers. (bulk buying)

Question 10

What is the minimum efficient scale?

Answer 10

The lowest level of output at which costs are being minimised. Up to it, economies of scale are achieved, after it, diseconomies of scale happen

Question 11

Why do businesses want to achieve the minimum efficient scale?

Answer 11

Gain competitive advantage, increase profits.

Question 12

What could happen if output continues to grow for too long

Answer 12

The business experiences diseconomies of scale

Question 13

What are diseconomies of scale

Answer 13

When economies of scale are no longer in effect and the average cost starts to increase

Question 14

What are the 5 possible diseconomies of scale

Answer 14

• Communication becomes ineffective
• Management of the organisation becomes difficult
• Skill shortage can come from expansion - not enough workers. Training will be needed - expensive
• Technology may reduce MES
• Hard to adapt to changing markets

Question 15

What is corporate culture

Answer 15

The set of important assumptions that are shared by people working in a particular business which influences the way the business is run

Question 16

Give 3 characteristics of a strong culture and 3 of a weak

Answer 16

Strong - Motivated, loyal staff. Respect between hierarchies, productivity is likely to be high (think of Google)

Weak - High employee absenteeism. ‘Us and them’ mentality. Poor quality work (think of the smokehouse)

Question 17

What is the difference between inorganic and organic growth?

Answer 17

Organic means growth within the business - expansion

Inorganic mean growth outside the business - mergers or takeovers

Question 18

What’s the difference between takeovers and mergers

Answer 18

A takeover occurs when a firm bids for another and secures over 50% of shares and swallows up the other (aka. an acquisition)
A merger occurs when 2 or more firms join together to make one business. they may however keep their own identities

Question 19

What benefits can inorganic growth bring (5)

Answer 19

Greater efficiency 
Market power
Economies of scale
Rationalisation 
Risk spreading

Question 20

How can inorganic growth increase market power

Answer 20

Reduces competition (buying them outright)
Access to patents, assets and brands
Cover new market segments

Question 21

What’s a synergy

Answer 21

When 2 or more businesses are combined and increase efficiency, therefore grow faster and make more profit together.

Question 22

How are synergies more efficient

Answer 22

Complementary strengths

Diversification

Question 23

What are horizontal and vertical integration

Answer 23

Horizontal is acquiring a business that is in the same industry (production line) as you, e.g. Morrison’s and Safeway’s

Vertical is acquiring a business that is in a different industry (production line) to you, e.g. Walkers and a potato farmer (backwards) or walkers and a supermarket (forwards)

Question 24

What’s conglomerate integration

Answer 24

When 2 businesses that are completely different join together, e.g. WHSmiths and Kellogg’s

Question 25

What is R&D

Answer 25

Research and development - refers to any activities that a firm undertakes to develop new products or improve old ones. Gains a competitive advantage

Question 26

Give an example of how R&D has been used to create a new business that rivals old fashioned ones

Answer 26

Uber
They’ve taken the old style of taxis and made it more modern with the use of smartphones to hail cabs.it has given them market power.

Question 27

What do the ERDF do

Answer 27

European Regional Development Fund
Help to fund new innovations across the UK by providing money to people with ideas but not enough money as it helps the country become more competitive

Question 28

Explain the process of the product life cycle and what affect this has on cash flow and the marketing mix

Answer 28

Development - Low cash, high debts - Low promotion to attract attention

Introduction - Low cash, sales don’t yet pay back the debt - Heavy promotion to create awareness.

Growth - Sales pick up, cash flow is positive - prices may rise, promotion lessens to create loyalty

Maturity - Cash flow is at it’s peak, economies of scale reduce average costs - promotion dies down.

Decline - Sales fall but cash flow is still positive - price is likely to fall to maintain sales until it reaches the end of its life

Question 29

What are extension strategies, give examples and say why these are used when they are

Answer 29

Ways to increase sales by re-launching the product, new image, new market or new promotion. The maturity stage is the most profitable so it makes most sense to extend its life here

Question 30

What is the digital economy

Answer 30

An economy built upon digital technologies

Question 31

What 4 elements can be identified in the digital economy

Answer 31

Infrastructure (software, networks)
e-business (digital networks)
e-commerce (buying and selling of products online)
Social media (for business)

Question 32

What are the positives of the digital economy

Answer 32

Easy access to markets
Opens channels of distribution
Driven economic growth and wealth
Structural change
More power to consumers (price comparison sites)

Question 33

What is micro-marketing

Answer 33

Businesses target small groups of people with personalised recommendations or promotions based on what you like

Question 34

Name 2 ways current businesses are trying to keep up to date with the digital age

Answer 34

Offering face-to-face product advice and customer service (a way to compete with online retailers)
Encouraging online ordering

Question 35

How does the digital economy impact markets and firms

Answer 35

• The structural change can mean that businesses can take advantage of online and undercut big businesses
• Firm creation and destruction has happened on a very large scale

Question 36

How do small firms compete

Answer 36

Product differentiation and USPs
Flexibility in responding to consumer needs
Customer service
Targeting niche markets
High quality relationships with suppliers (cheaper goods)