3.12 - Strategic methods

Question 1

Retrenchment

Answer 1

means the business will have to downsize in some areas

Question 2

Four ways retrenchment can be achieved?

Answer 2

Cutting jobs
Reducing output
Withdrawing from markets
Splitting the business up

Question 3

What are the different internal economies of scale?

Answer 3

Technical - related to production. Production methods for large volumes are often more efficent.
Managerial - large businesses can employ managers with specialist skills to manage specific departments. They oversee plans and strategies which can result in work being done more quickly and efficency.
Purchasing - purchasing economies of scale are to do with discounts. Big businesses can negotiate discounts when buying supplies in large quantities. They can get bigger discounts and longer credit periods than their smaller competitors.
Marketing - Marketing costs are usually fixed, so a business with a large output can spread the cost over more units. A large business can also afford more effective forms of advertising.

Question 4

Advantages of organic growth over external growth

Answer 4

• can maintain current management style, culture and ethics of the business
• less risk as it’s expanding what the business is good at and usually financed using profis
• it’s easy for the business to manage internal growth and control how much the business will grow
• less disruptive changes mean that workers efficiency, productivity, and morale remain high

Question 5

Disadvantages of organic growth compared to external growth

Answer 5

• it can take a long time to grow a business internally and it can take a while for the business to adapt to big changes in the market
• market size isn’t affected by organic growth. If the market isn’t growing, the business is restricted to increasing its market share or finding a new market to sell its products to
• business might miss out on opportunities for more ambitious growth if they only grow internally

Question 6

Reasons why business owners may choose to restrict growth or retrenchment for the following reasons;

Answer 6

• they may want to maintain the culture of a small business
• the business will become more complicated to manage as it gets bigger
• growth requires the business to secure additional financial resources, which can be complicated
• they may want to put too much strain on their cash flow position

Question 7

What is horizontal integration?

Answer 7

Happens when a firm combines with another firm in the same industry at the same stage of production process. It’s a very common type of takeover or merger.

Question 8

What is vertical intergration?

Answer 8

Occurs when a firm combines with another firm in the same industry but a differentt stage of the production process. E.g a retailer taking over a manufacturer or distributor

Question 9

What is forward vertical intergration?

Answer 9

Is when a business combines with another business that is further on in the production process. e.g a manufacturer mareging with the outlets and where its products are sold gives the manufacturer direct access to the reatil market and they can then control what is sold and exclude competitors products

Question 10

What is backward vertical integration?

Answer 10

Is when a business combines with another business at an earlier stage of the production process.