3.2

Question 1

Reasons why businesses grow?

Answer 1

-Desire to run a large business & grow it
-Desires for high level of marketshare & profit
-To benefit from economies of scale
-Easier access to finance

Question 2

Define Internal economies of scale?

Answer 2

Arise from the increased output of the business itself

Question 3

Define external economies of scale?

Answer 3

Increase in size of the industry that a firm operates in

Question 4

What is purchasing economies of scale?

Answer 4

Larger businesses are able to obtain lower prices from suppliers compared to smaller businesses.

Question 5

What is technical economies of scale?

Answer 5

Larger firms can invest heavily in automation in order to further improve efficiency and productivity.

Question 6

What is managerial economies of scale?

Answer 6

Larger firms can employ specialist managers which should enable the business to be more efficiently run.

Question 7

Problems arising from growth?

Answer 7

-Diseconomies of scale
-Internal communication barriers
-Overtrading

Question 8

Define diseconomies of scale

Answer 8

When a business expands beyond an optimum size and becomes less efficient.

Question 9

Define Over trading

Answer 9

When a business expands to quickly without having finical resources to support such a quick expansion

Question 10

How to manage risk of overtrading

Answer 10

-Leasing rather than buying equipment
-Obtaining better payment terms from suppliers
-Enforcing better payment terms with customers

Question 11

Define takeover

Answer 11

Involves one business acquiring control of another business

Question 12

Reasons for mergers & takeovers?

Answer 12

-Strategic fit
-Economies of scale
-Synergies eg increased revenue, cost savings and increased market share
-Elimination of competition

Question 13

Drawbacks of Takeovers

Answer 13

-High costs
-Upset customers/suppliers
-Problems of integration
-Resistance from employees

Question 14

Define horizontal integration

Answer 14

Buying a business at the same stage of production process

Question 15

Define vertical integration

Answer 15

Acquring a business at a different stage of production

Question 16

Benefits of vertical integration

Answer 16

-Reduces cost of production
-Makes firm more competitive
-Reduces risk
-Increased profits & brand visibility

Question 17

Benefits of horizontal integration

Answer 17

-Increased market share
-Economies of scale
-Reduced competition
-Gain knowledge & expertise

Question 18

Define merger

Answer 18

When two or more businesses combine to form a new company

Question 19

Problems caused by rapid growth?

Answer 19

-Strain on cash flow
-Increased management complexities
-Quality control issues
-Customer service issues
-Culture clash
-Diseconomies of scale

Question 20

Define organic growth

Answer 20

Expansion from within a business

Question 21

Define inorganic growth

Answer 21

Growth from outside the business e.g takeovers, mergers, joint ventures

Question 22

Advantages of organic growth

Answer 22

-Less risk
-Builds on a businesses strengths
-Allows growth at a sensible rate
-Avoids diseconomies of scale

Question 23

Disadvantages of organic growth

Answer 23

-Pace of growth may be slow & frustrating
-Access to finance limited
-Don’t benefit from economies of scale

Question 24

What are some reasons small firms exist?

Answer 24

-Offer more personalised products
-Unable to access finance for expansion
-Provide a product for a niche market
-Avoid diseconomies of scale
-Goal not profit maximisation but profit satisficing

Question 25

Reasons for staying small: Product differentiation & USP

Answer 25

-Can help differentiate against larger competitors
-More scope for adding value through specialist expertise

Question 26

Reasons for staying small: Flexibility in meeting customer needs

Answer 26

-Regular communication
-Gives customers the impression they care about wants and needs
-Easier to get customer feedback

Question 27

Reasons for staying small: High standards of customer service

Answer 27

-Key source of competitive advantage
-Customers treated as a priority in smaller businesses

Question 28

Reasons for staying small: Exploit opportunities for E-commerce

Answer 28

-Reach a broader customer base
-Target niche segments and over seas