3.2 Business Growth

Question 1

Why does a business want to grow?

Answer 1

• Owners want to run a large business
• Owners want higher levels of market share and profitability
• Desire for stronger market power
• Desire to reduce costs by benefitting from economies of scale
• Growth provides opportunities for product diversification
• Larger firms often have easier access to finance

Question 2

What are economies of scale?

Answer 2

EoS is when an increase in the scale of output results in a lower cost per unit

Question 3

What is the diagram for Economies of Scale?

Answer 3

https://cdn.savemyexams.com/cdn-cgi/image/f=auto,width=1920,w=1280/uploads/2022/11/3-5-4-economies-and-diseconomies-of-scale.png

Question 4

What are the types of economies of scale?

Answer 4

• Financial economies of scale
• Managerial economies of scale
• Marketing economies of scale
• Purchasing economies of scale
• Technical economies of scale
• Risk bearing economies of scale

Question 5

What are the sources of external economies of scale?

Answer 5

• Geographic cluster - firms move closer to their manufacturers to reduce costs
• Transport links - Improved transport links develop growing industries lowering AC
• Skilled labour - An increase in skilled labour reduced AC
• Favourable legislation - reduces AC

Question 6

What are the problems arising from growth?

Answer 6

1. Diseconomies of scale
2. Internal communication becomes harder
3. Overtrading - takes on more business than it can handle

Question 7

What is a merger?

Answer 7

A merger is where two or more companies combine to form a new company

Question 8

What is a takeover?

Answer 8

A takeover occurs when one company purchases another company

Question 9

Why might business choose to merger and takeover?

Answer 9

1. Strategic fit
2. Economies of scale
3. Synergies
4. Elimination of competition
5. Shareholder value

Question 10

What is vertical integration?

Answer 10

Vertical integration is a merger/takeover of another firm in a different level of the supply chain

Question 11

What is horizontal integration?

Answer 11

Horizontal integration is a merger/takeover of a firm at the same stage of the production process

Question 12

What are the advantages of vertical integration (inorganic growth)?

Answer 12

1. Reduces costs of production
2. Lowers costs to make the firm more competitive
3. Greater control over the supply chain reduces risk
4. Quality can be controlled
5. Forward integration adds additional profit
6. Forward integration can increase brand visibility

Question 13

What are the disadvantages of vertical integration (inorganic growth)?

Answer 13

1. Diseconomies of scale
2. Culture clash between the firms
3. Possibly little expertise running the new firm
4. Large cash outflow at one time