3.2

Question 1

key reasons for growth

Answer 1

• Increasing profits
• Achieve economies of scale
• Increase market power
• Increase market share and brand recognition
• Grow business and shareholder value

Question 2

Increase market power

Answer 2

Larger firms may be able to exert greater bargaining power over suppliers and/or customers to gain a competitive advantage

Question 3

what is Economies of scale

Answer 3

Economies of scale arise when unit costs fall as output increases

Question 4

average cost per unit is calculated by

Answer 4

total production costs in period (£) / total output in period (units)

Question 5

internal economies of scale

Answer 5

when a company’s cost increases due to its growth, despite the company’s increasing its output

Question 6

external economies of scale

Answer 6

Occur within an industry
i.e. all competitors benefit

Question 7

internal economies of scale

Answer 7

• purchasing economies
• technical
• managerial
• marketing
• netowork
• financial

Question 8

what is a takeover/acquisition

Answer 8

involves one business acquiring control of another business

Question 9

possible reasons for takeovers

Answer 9

• Acquire new skills
• Access economies of scale
• Spread risks by diversifying
• Enter new segments of an existing market
• To eliminate competition
• Business lacks knowledge or resources to develop organically
• Speed of growth is a high priority

Question 10

drawbacks of takeovers

Answer 10

• High cost involved
• Problems of integration (change management)
• Non-existent cost savings
• Incompatibility of management styles, structures and culture
• High failure rate

Question 11

Common Reasons Why Takeovers Fail

Answer 11

• Lack of decisive change management in the early stages
• The takeover was mishandled
• Cultural incompatibility between the two businesses and poor communication
• Competitors take the opportunity to gain market share whilst the takeover target is being integrated

Question 12

directions of integration

Answer 12

Forward + vertical
Backward + vertical
Horizontal
Conglomerate

Question 13

directions of integration
Forward + vertical

Answer 13

Acquiring a business further up in the supply chain – e.g. manufacturer buys a distributor

Question 14

directions of integration
Backward + vertical

Answer 14

Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler

Question 15

directions of integration
Horizontal

Answer 15

Acquiring a business at the same stage of the supply chain – e.g. a manufacturer buys a competitor

Question 16

directions of integration
Conglomerate

Answer 16

Where the acquisition has no clear connection to the business buying it

Question 17

benefits of horizontal intergration

Answer 17

• Achieve economies of scale
• Potential to secure revenue savings
• Wider range of products
• Reduces competition by removing key rivals
• Buying a existing brand can be cheaper than organically growing a brand – this makes the entry barriers higher for potential rivals

Question 18

benefits of vertical intergration

Answer 18

• business captures a greater share of the profit on each sale
• Create a barrier to entry to potential new competitors
• Gain greater insights into customer needs and wants at each stage of the supply chain

Question 19

what is a merger

Answer 19

a combination of two previously separate firms which is achieved by forming a completely new firm into which the two original businesses are integrated