3.2

Question 1

What is business growth

Answer 1

Business growth is the point at which a business needs to expand and seeks options to generate more profits

Question 2

Objectives of growth

Answer 2

To achieve economies of scale

Increase market power over consumers or suppliers

Increase market share and brand recognition

Increased profitability

Question 3

What is the advantages of having EOS

Answer 3

• By having more funds to buy stock, so being able to get better deals by buying in bulk

• By having more power

• By having more funds to pay for specialist staff

• By having a better reputation so banks are more willing to lend

Question 4

How to calculate the total cost of production

Answer 4

VC x output + FC

Question 5

Problems arising from growth

Answer 5

diseconomies of scale
2.internal communication
3. overtrading

Question 6

What can overtrading cause

Answer 6

When a business accepts too many orders that they can cope with, may cause cash flow problems

Question 7

What can diseconomies of scale cause

Answer 7

As the business increases unit price increases
As it may cause a lack of motivation and lack of co ordination, also a lack of communication

Question 8

How can less effective communication effect a business

Answer 8

Means mistakes made
• Means more wastage
• Therefore higher average unit costs

Question 9

What is a merger

Answer 9

• A merger is a legal deal to bring two businesses together under one board of directors

two businesses have agreed to join forces to make a third company

Question 10

What is a take over

Answer 10

This is a legal deal where one larger business purchases a smaller one

Question 11

What are reasons for mergers and takeovers

Answer 11

Tactical:
Attempt to ensure increased market share
Access to technology, staff or intellectual property

Strategic:

Access to new markets
Improved distribution networks
Improved brand awareness

Question 12

What is a hostile and friendly takeover

Answer 12

Friendly is when a business may have cash flow problems and they may invite a big business for a takeover

Hostile is when a business takes over 51% of the business and forces a takeover

Question 13

What is horizontal integration

Answer 13

Business operating in the same sector (e.g tertiary) merge or takeover another business in the same sector

Question 14

What is vertical integration

Answer 14

Vertical integration is when one business in one sector takes over or mergers with a business in another sector or part of the supply chain

Question 15

What are risks of mergers and takeovers

Answer 15

Original purchase cost

• Cost of change into a new business

• Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.

• Cost if it all goes wrong

Question 16

What are problems with rapid growth

Answer 16

The businesses that have merged may outgrow their premises in the short- term. There may not be enough space for everyone to work efficiently.

• Morale may drop if staff cannot cope with the extra work so productivity can decrease.

• There may be a shortage of cash to meet expansion costs.

• Taking on more and more work to generate more income places additional pressure on the premises and staff.

• CMA investigating Vision Express and Tesco opticians

Question 17

Problem with mergers

Answer 17

Clash of cultures

• Possible communication problems

• Possible move away from core competencies of original business may cause issues of control

• Unreliable merger partners

• Diseconomies of scale

• Lack of understanding of local markets leading to wrong promotional message

• 75% of all mergers fail

Question 18

What is organic growth

Answer 18

Organic growth is the process of business growth which comes from within the business, as opposed to mergers and takeovers.

Question 19

What is inorganic growth

Answer 19

This means that a business has grown by buying its way into being larger, this may be through;
• A merger
• A takeover (also known as an
acquisition)
• A joint venture

Question 20

Methods of organic growth

Answer 20

New product launches

Opening new stores or branches

Expanding into foreign markets

Expansion of the workforce

Question 21

Advantages of organic growth

Answer 21

This avoids all the risks and pitfalls of merging with another business

• Cheaper than merging

• Retains the company culture

• Can be planned for unlike a takeover

• Higher production means EOS and lower average costs

• More influence comes with more market share, can start setting prices for the industry

Question 22

What is disadvantages of organic growth

Answer 22

This is a very high risk strategy, opening lots of stores and taking on thousands of new staff is very risky and capital intensive

• Long period between investment and return on investment

• Growth may be limited and is dependent on reliability of sales forecasts

• New markets and countries can be dangerous to enter into without buying a business already operating in that country

Question 23

How will a differentiation strategy work for a small business

Answer 23

Creates value; highlights quality or durability of the product

• Non-price competition; a differentiation strategy will focus on other ways of attracting customers such as taste and style

• Brand loyalty; a differentiation strategy can gain customer loyalty

• No perceived substitute; a differentiation strategy that focuses on quality and design may give the impression that there are no suitable substitutes in the market place

Question 24

What is USP

Answer 24

Unique selling point

It is a way of promoting the features of the product or service of the business; quality, customer service, delivery, price, technical features or functions e.g. a feature is the reliability of the product, the benefit to the customer is less breakdowns and repairs

Question 25

What are examples that small businesses have on big businesses

Answer 25

Flexibility in responding to customers needs

Customer service

E commerce