3.2

Question 1

what are diseconomies of scale?

Answer 1

when a business increases output so much its average costs will begin to increase

Question 1

cons of rapid business growth

Diseconomies of scale

Answer 1

Occurs when a company grows too large, making it difficult to manage and control its operations

The cost per unit ends up increasing as a result of these inefficiencies

Question 2

cons of rapid business growth

overtrading

Answer 2

Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity).

This may cause cash flow problems or decreased customer satisfaction.

Question 3

cons of rapid business growth

Internal communication

Answer 3

Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination.

result in delays, errors, missed opportunities and impact on employee morale

Question 4

what is a merger?

Answer 4

occurs when two or more companies combine to form a new company

Question 5

what is a takeover?

Answer 5

one company purchases another company, often against its will
The acquiring company buys a controlling stake in the target company’s shares (>50%)

Question 6

reasons why companies may choose to pursue mergers and takeovers

Strategic fit

Answer 6

expand into new markets
diversify its product offerings
gain access to new technology

Question 7

reasons why companies may choose to pursue mergers and takeovers

Economies of scale

Answer 7

creates economies of scale by allowing companies to reduce costs and increase efficiency

Question 8

reasons why companies may choose to pursue mergers and takeovers

Elimination of competition

Answer 8

Takeovers are often used to eliminate competition and the acquiring company increases its market share.

Question 9

reasons why companies may choose to pursue mergers and takeovers

Shareholder value

Answer 9

By combining companies, shareholders can benefit from increased profits, dividends and stock prices

Question 10

advantages of vertical integration

Answer 10

• Reduces the cost of production as middleman profits eliminated
• Lower costs make the firm more competitive
• control over the supply chain reduces risk as access to raw materials is more certain
• The quality of raw materials can be controlled
• Forward integration adds additional profit as the profits from the next stage of production are assimilated
  Forward integration can increase brand visibility

Question 11

pros of vertical integration

Answer 11

Reduces the cost of production as middleman profits are eliminated

Lower costs make the firm more competitive

Greater control over the supply chain reduces risk as access to raw materials is more certain

The quality of raw materials can be controlled

Forward integration adds additional profit as the profits

from the next stage of production are assimilated

Forward integration can increase brand visibility

Question 12

cons of vertical integration

Answer 12

Diseconomies of scale occur as costs increase

There can be a culture clash between the two firms that have merged

Possibly little expertise in running the new firm results in inefficiencies

The price paid for the new firm may take a long time to recoup

Question 13

pros of horizontal integration

Answer 13

The rapid increase of market share

Reductions in the cost per unit due to economies of scale

Reduces competition

Existing knowledge of the industry means the merger is more likely to be successful

The firm may gain new knowledge or expertise

Question 14

cons of horizontal integration

Answer 14

Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Question 15

issues with rapid growth

Answer 15

Rapid business growth can put a strain on cash flow

The merger/takeover may require investment in new equipment or staff to support the growth which may cause financial strain if the revenue growth does not keep up with the expenses

Diseconomies of scale may increase the cost per unit and are commonly caused by cultural and communication diseconomies when two firms merge

Question 16

advantages of organic growth

Answer 16

The pace of growth is manageable

Avoids diseconomies of scale
The management knows & understands every part of the business

Question 17

disadvantages of organic growth

Answer 17

The pace of growth can be slow and frustrating
Not necessarily able to benefit from economies of scale
Access to finance may be limited

Question 18

what is ansoffs matrix?

Answer 18

a strategic planning tool that helps businesses identify potential organic growth opportunities by analysing their product and market strategies

Question 19

what are some pros of staying small for a business?

Answer 19

Lower Costs: Small businesses often have lower operating costs due to less overhead, fewer employees, and smaller facilities.

Flexibility: Smaller businesses can adapt more quickly to market changes or customer needs, making it easier to pivot strategies or introduce new products.

Close Customer Relationships: Small businesses often build stronger, more personal relationships with their customers, leading to higher customer loyalty and satisfaction.

Question 20

what are the cons of staying small for a business?

Answer 20

Employee Retention: Offering career growth and advancement opportunities can be more difficult in a small business, potentially leading to higher employee turnover.

Higher Risk: Small businesses may face higher risks due to limited diversification and dependency on a smaller customer base or fewer revenue streams.