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Business Theme 3 > 3.2 > Flashcards

3.2 Flashcards

1
Q

Why do businesses want to grow?

A

Increase profits
Achieve EOS
Increase market power
Increase market share and brand recognition

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2
Q

What are EOS?

A

When unit costs fall as output increases

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3
Q

How to calculate average cost per unit?

A

Total production costs in period/ total output in period

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4
Q

How EOS can provide a competitive advantage?

A

EOS is a key aim for businesses that wish to position themselves as low cost operators

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5
Q

What are internal EOS?

A

Arise from the increased output of the business itself

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6
Q

What are external EOS?

A

Occur within an industry i.e all competitors benefit

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7
Q

Types of internal EOS

A

Purchasing
Technical
Managerial

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8
Q

Purchasing EOS

A

Buying in greater quantities usually results in a lower price (bulk buying)

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9
Q

Technical EOS

A

Use of specialist equipment or processes to boost productivity

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10
Q

Managerial EOS

A

Specialist managers can be employed to help reduce unit costs and boost efficiency

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11
Q

Examples of external EOS

A
  • having many specialist suppliers close by
  • pool of skilled labour to choose from
  • access for research and development facilities
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12
Q

Diseconomies of scale

A

No guarantee that unit costs will fall as the scale of a business’ operation rises

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13
Q

Examples of DEOS

A
  • control- problems in monitoring productivity and work quality, increasing wastage
  • co operation- workers in large firms may develop a sense of alienation and loss of morale
  • negative effects of internal politica
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14
Q

What is overtrading?

A

When a business expands too quickly without having the financial resources to support such a quick expansion

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15
Q

How overtrading links to business failure?

A

If suitable sources of finance are not obtained, overtrading can lead to business failure
Overtrading can occur even if a business is profitable- issues of working capital and cash flow

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16
Q

Symptoms that a business might be overtrading

A
  • high revenue growth but very low gross and operating profit margins
  • increase in current ratio
  • very low inventory turnover ratio
  • low levels of capacity utilisation
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17
Q

How can businesses manage the risk of overtrading?

A
  • reducing inventory levels
  • scaling back the pace of revenue growth until profit margins and cash reserves have improved
  • leasing rather than buying capital equipment
18
Q

Objectives of small businesses

A
  • survival
  • revenue maximisation
  • profit maximisation
  • cost efficiency and scale
  • customer service
19
Q

Why stay small?

A
  • product differentiation and USPS
  • flexibility in meeting customer needs
  • deliver high standard of customer service
  • exploit opportunities from e-commerce
20
Q

Staying small: product differentiation USPs

A
  • help differentiate against larger competitors
  • customer perception may be an expectation of a better product from a business Yh at fares
  • more scope for adding value through the provision of specialist expertise
21
Q

Staying small: flexibility in meeting customer needs

A
  • talk to their customers regularly
  • communicate in the customers language which give the impression to the customer that they are more in tune with their needs
22
Q

What is organic growth?

A

Involves expansion from within a business
E.g:
Expanding product range

23
Q

What is external growth?

A

Mergers and takeovers

24
Q

What is a takeover?

A

Involves one business acquiring control of another business

25
Q

What is a merger?

A

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

26
Q

Difference between merger and takeover

A

M: involves a new firm being created into which two businesses are merged
T: involves an existing firm acquiring more than 50% of another firm, taking control

27
Q

Reasons for growing through takeovers

A
  • increase market share
  • acquire new skills
  • access EOS
  • acquire intangible assets (brands, parents, trade marks)
28
Q

Drawbacks of takeovers

A

High cost involved
Problems of intervention
Incompatibility of management styles, structures and culture

29
Q

Why do some takeovers fail?

A

Price paid for takeover was too high
Cultural incompatibility between two businesses
Poor communication

30
Q

What is forward + vertical direction?

A

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

31
Q

What is the backward + vertical direction?

A

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

32
Q

What is the horizontal direction?

A

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

33
Q

What is a conglomerate?

A

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

34
Q

What is organic growth?

A

Involves expansion from within a business

E.g expanding product range

35
Q

Advantages of organic growth?

A

Less risk than external growth
Can be financed through internal funds
Builds on business’ strengths
Allows the business to grow at a more sensible rate

36
Q

Disadvantages of organic growth

A

Growth achieved may be dependent on the growth of the overall market
Hard to build market share if business is already a leader
Slow growth- shareholders may prefer more rapid

37
Q

Organic growth: franchising

A

When a franchisor grants a license (franchise) to another business (franchisee) to allow it to trade using the brand/ business format

38
Q

Why franchising is a good growth strategy?

A
  • a classic growth strategy for a proven business format
  • enables much quicker geographical growth for a relatively low investment
  • still have the option to open locations that are operated by the franchisor
  • capital investment by franchises is an important source of growth finance
39
Q

Benefits of franchising for the franchisee

A
  • tried and tested brand
  • advice, support and training
  • easier to raise finance
  • lower risk method of market entry + lower failure rate
40
Q

Drawbacks of franchising for the franchisee

A
  • not cheap: initial fees + royalties and commission
  • restrictions on actions, including selling
  • franchisor owns the brand

Business Theme 3 (7 decks)

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