3.1 Business Growth

Question 1

4 reasons why businesses decide to stay small

Answer 1

1. product differentiation and usp
2. flexibility in meeting customer needs
3. deliver high standards of customer service
4. exploit opportunities for e-commerce

Question 2

why is product differentiation and usp a reason businesses stay small

Answer 2

• positioning as small can help differentiate
• expectation of a better product from a business that ‘cares’
• scope for adding value through specialist expertise

Question 3

why flexibility in meeting customer a reason for businesses stay small

Answer 3

• talk to customer daily
• small firms communicate in the customers’ language - more in tune with customer needs
• easier to get feedback

Question 4

why delivering high standards is a reason businesses stay small

Answer 4

• most operate in the ‘service’ sector so is a key advantage
• treat customer service as a priority

Question 5

why exploit opportunities for e-commerce

Answer 5

• obvious and common way for small firms to reach a broader customer base
• easier to target niche-markets domestically and overseas
• gain traction using social media

Question 6

what is horizontal integration

Answer 6

merging with a company in the same production stage

Question 7

what is backwards vertical integration

Answer 7

merging with a company in an earlier stage of production

Question 8

what is forwards vertical integration

Answer 8

merging with a company in a later stage of production

Question 9

what is conglomerate integration

Answer 9

merging with a company that is independent of what your producing

Question 10

name the two ways firms can grow

Answer 10

1. internal
2. external

Question 11

define internal growth

Answer 11

a firm expanding in its current market or finding new markets

Question 12

define external growth

Answer 12

integration with another firm

Question 13

6 reasons for firms to grow

Answer 13

1. increase market share
2. increase sales
3. exploit economies of scale
4. risk-bearing economies - if product diversity increases it can mean a firm is better able to withstand downturns in the economic cycle
5. benefit from greater profits
6. gain market power

Question 14

disadvantages of external growth

Answer 14

1. diseconomies of scale
2. inability to pay customers personal attention
3. companies may expand too fast - insufficient capital to cope with increased financial commitments (overtrading)
4. post-merger rationalisation - direct loss of jobs

Question 15

8 reasons why small firms struggle to grow

Answer 15

1. barriers to entry (legal, overt and sunk costs)
2. niche-market
3. lack of expertise
4. low optimum efficiency
5. avoid attention from potential buyers
6. lack of motivation
7. value placed on personal attention
8. contracting out - supply bigger companies

Question 16

what are legal barriers

Answer 16

can prevent firms from growing/entering an industry

Question 17

what are overt barriers

Answer 17

imposed by businesses currently operational in the industry (brand loyalty etc)

Question 18

why is sunk costs a barrier for small firms

Answer 18

costs which firms will not be able to recover on exit

Question 19

why are niche-markets a barrier for small business growth

Answer 19

• specialist or niche markets exist that large companies do not supply to
• do not support expansion (little scope for growth)

Question 20

why is a lack of expertise a barrier for small business growth

Answer 20

• lack knowledge on how to expand successfully
• lack access to the necessary funds to expand

Question 21

why is low optimum efficiency a barrier for small business growth

Answer 21

• minimum efficent scale of production is low in several industries
• once a firm has reached optimum efficiency any further increase could result in inefficiencies and increased costs

Question 22

why is avoiding attention from potential buyers a barrier for small business growth

Answer 22

if a firm grows too large then its increased profits may result in unwanted offers from larger firms to take them over

Question 23

why is a lack of motivation a barrier for small business growth

Answer 23

aren’t willing to take on the opportunity cost in terms of lost leisure from expansion