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

Increasing profits

Answer 2

A key objective for many firms, particularly those whose shares are quoted on stock markets or who are owned by private equity.

Question 3

Achieve economies of scale

Answer 3

By growing the scale of output, a business can achieve lower unit costs, thereby improving a firm’s competitiveness.

Question 4

Increase market power

Answer 4

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

Question 5

Increase market share and brand recognition

Answer 5

Much research points to the link between growing market share and brand recognition with higher profits, so this reason is linked with increasing profits.

Question 6

Grow business and shareholder value

Answer 6

Ultimately the main reason why so many firms adopt a growth strategy. Larger businesses are generally more valuable!

Question 7

what is Economies of scale

Answer 7

Economies of scale arise when unit costs fall as output increases

Question 8

average cost per unit is calculated by

Answer 8

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

Question 9

internal economies of scale

Answer 9

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

Question 10

external economies of scale

Answer 10

Occur within an industry
i.e. all competitors benefit

Question 11

internal economies of scale

Answer 11

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

Question 12

what is a takeover/acquisition

Answer 12

involves one business acquiring control of another business

Question 13

possible reasons for takeovers

Answer 13

• 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 14

drawbacks of takeovers

Answer 14

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

Question 15

Common Reasons Why Takeovers Fail

Answer 15

• 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 16

directions of integration

Answer 16

Forward + vertical
Backward + vertical
Horizontal
Conglomerate

Question 17

directions of integration
Forward + vertical

Answer 17

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

Question 18

directions of integration
Backward + vertical

Answer 18

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

Question 19

directions of integration
Horizontal

Answer 19

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

Question 20

directions of integration
Conglomerate

Answer 20

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

Question 21

benefits of horizontal intergration

Answer 21

• 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 22

benefits of vertical intergration

Answer 22

• 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 23

what is a merger

Answer 23

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