3.2- Business Growth

Question 1

What is business growth defined?

Answer 1

Business growth is the point at which a business needs to expand and seeks options to generate more profits.

Question 2

What are the 4 objectives of growth?

Answer 2

1. To achieve economies of scale (internal and external).
2. Increased market power over customers and suppliers.
3. Increased market share and brand recognition.
4. Increased profitability.

Question 3

What is economies of scale and that are its benefits?

Answer 3

The idea that as a business grows in size it will be able to gain competitive advantage in a number of ways;
• By having more funds to buy stock, so being able to get better deals by buying in bulk
• By having more power
• By having more funds to pay for specialist staff
• By having a better reputation so banks are more willing to lend
• We call this economies of scale (EOS)

Question 4

When do economies do scale occur?

Answer 4

Economies of scale (can we say EOS for short) occur when unit costs or average costs fall as a result as an increase in the level of output of the business.

Question 5

What is risk bearing?

Answer 5

Bigger companies can spread their risk by investing in more products and more markets (diversification).

Question 6

What are the 3 problems that can rise from business growth?

Answer 6

1. Diseconomies of scale.
2. Internal communication
3. Overtrading

Question 7

What is diseconomies of scale, and outline internal and external DEOS.

Answer 7

As the business grows they may expand the scale of production beyond the minimum efficient scale (see next slide)
• At this point the average costs per unit starts to RISE as production RISES
• Internal DEOS; communication, co-ordination, motivation
• External DEOS; overcrowding in industrial areas, traffic congestion, price of land and labour rises

Question 8

What is a Merger?

Answer 8

A merger is a legal deal to bring two businesses together under one board of directors.

The businesses are usually the same size and the name is normally changed (although not always).

Question 9

What is a take-over?

Answer 9

• Also known as an acquisition.
• This is a legal, deal where one larger business purchases a smaller one.
• If the deal is unwanted by the management or board of directors then this is a ‘hostile take-over’.

Question 10

What are the tactical reasons for a merger or takeover?

Answer 10

1. Attempt to ensure increased market share.
2. Access to technology, staff or intellectual property.

Question 11

What are the strategic reasons for a merger or takeover?

Answer 11

1. Access to new markets.
2. Improved distribution networks.
3. Improved brand awareness.

Question 12

What are the reason for a friendly take-over?

Answer 12

A business may be struggling with cash flow problems and invite a takeover from a stronger business, known as a ‘White knight’ as they come in to rescue the struggling business.

Question 13

How does the process of a hostile take-over happen?

Answer 13

The board of directors will try an resist the takeover, but if another business gets 51% shares they can takeover management and control.

Question 14

What is the primary sector of a business?

Answer 14

Primary Sector businesses that are involved in digging, fishing, mining to remove products from the planet at source E.g. a Farm or quarry.

Question 15

What is the secondary sector of a business?

Answer 15

Secondary sector business that are involved in manufacturing raw materials into other products e.g. Clothes factory, cheese maker.

Question 16

What is the Tertiary sector of a business?

Answer 16

Tertiary sector are businesses that sell goods to the customers e.g. Shops, Banks, insurance companies.

Question 17

What is horizontal integration?

Answer 17

Businesses operating in the same sector (e.g. tertiary) merge or takeover another business in the same sector.

Question 18

What is vertical integration?

Answer 18

Vertical integration is when one business in one sector takes over or mergers with a business in another sector or part of the supply chain.

Question 19

What are financial, risks of mergers and takeovers?

Answer 19

• Original purchase cost.
• Cost of change into a new business.
• Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.
• Cost if it all goes wrong.

Question 20

What are the financial rewards of mergers and takeovers?

Answer 20

• Increased revenue
• Economies of scale

Question 21

What are the problems with mergers and take-overs?

Answer 21

• Clash of cultures
• Possible communication problems
• Possible move away from core competencies of original business may cause issues of control
• Unreliable merger partners
• Diseconomies of scale
• Lack of understanding of local markets leading to wrong promotional message
• 75% of all mergers fail

Question 22

What is organic growth defined?

Answer 22

Organic growth is the proc of business growth which comes from within the business, as opposed to mergers and takeovers.

Question 23

What is inorganic growth?

Answer 23

This means that a business has grown by buying its way into being larger, this may be through;
• A merger
• A takeover (also known as an
acquisition)
• A joint venture

Question 24

What are the 4 methods of organic growth?

Answer 24

1. New product launches
2. Opening new stores or branches
3. Expanding into foreign markets
4. Expansion of the workforce

Question 25

What are the advantages of organic growth?

Answer 25

• This avoids all the risks and pitfalls of merging with another business
• Cheaper than merging
• Retains the company culture
• Can be planned for unlike a takeover
• Higher production means EOS and lower average costs
• More influence comes with more market share, can start setting prices for the industry

Question 26

What are the disadvantages of organic growth?

Answer 26

• This is a very high risk strategy, opening lots of stores and taking on thousands of new staff is very risky and capital intensive
• Long period between investment and return on investment
• Growth may be limited and is dependent on reliability of sales forecasts
• New markets and countries can be dangerous to enter into without buying a business already operating in that country

Question 27

What is the definitions of small businesses?

Answer 27

The usual definition of small and medium sized enterprises (SMEs) is any business with fewer than 250 employees.
• There were 5.2 million SMEs in the UK in 2014, which was over 99% of all business.
• Micro-businesses are business with 0-9 employees.
• There were 5million micro-businesses in the UK in 2014, accounting
for 96% of all businesses

Question 28

What is a unique selling point?

Answer 28

USP stands for unique selling point or proposition, it means what makes this product different from others on the market?

It is a way of promoting the features of the product or service of the business; quality, customer service, delivery, price, technical features or function.

Question 29

How can a business respond to customer needs quickly to gain an advantage over large businesses?

Answer 29

• Carrying out research into opinions,
  looking at customers websites
• Gaining feedback; forums, polls, users groups, online communities
• Track social media discussions about the products
• Collect data on customer transactions
• Collaborate with customers to produce new products or services

Question 30

How can a small business survive through customer service?

Answer 30

How else can a business differentiate themselves from their competitors? By giving excellent customer service.

• Consumers appreciate businesses that give them more for their money, especially when times are tough.
• Efficient service, fast delivery and flexible payment terms will help to persuade customers to spend with them rather than a competitor.

Question 31

How can small businesses survive through E-commerce?

Answer 31

• Small businesses can sell successfully through third party websites such as Ebay and Amazon
• 85% of UK consumers aged 18 or over already shop on the Internet
• E-commerce will grow from 14% to 34% of all retail sales by 2020