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A-Level Business Theme 3 > 3.2 - Business Growth > Flashcards

3.2 - Business Growth Flashcards

1
Q

What are the main objectives of growth?

A
  • Achieve economies of scale
  • Increased market power over customers and suppliers
    *Increased market share and brand recognition
  • Increased profitability
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2
Q

What are internal economies of scale?

A

These occur as a result of the growth in the scale of production within the firm

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3
Q

What are the different types of internal economies of scale?

A
  • Financial
  • Managerial
  • Marketing
  • Purchasing
  • Technical
  • Risk bearing
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4
Q

What are external economies of scale?

A

These occur when there is an increase in the size of the industry in which the firm operates

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5
Q

What are the different types of external economies of scale?

A
  • Geographic cluster
  • Transport links
  • Skilled labour
  • Favourable legislation
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6
Q

What are financial economies of scale?

A
  • Large firms often receive lower interest rates on loans than smaller firms, as they are perceived as less risky
  • A cheaper loan lowers the cost per unit (average cost)
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7
Q

What are managerial economies of scale?

A
  • Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost (AC)
  • Managers in small firms often have to fulfill multiple roles and are less specialised
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8
Q

What are marketing economies of scale?

A
  • Large firms spread the cost of advertising over a large number of sales and this reduces the AC
  • They can also reuse marketing materials in different geographic regions, which further lowers the AC
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9
Q

What are purchasing economies of scale?

A
  • Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the AC
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10
Q

What are technical economies of scale?

A
  • Occur as a firm can use its machinery at a higher level of capacity due to the increased output, thereby spreading the cost of the machinery over more units and lowering the AC
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11
Q

What are risk bearing economies of scale?

A
  • Occur when a firm can spread the risk of failure by increasing its number of products, i.e. greater product diversification - less failure lowers AC
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12
Q

What are geographical cluster economies of scale?

A

*As an industry grows, ancillary firms (such as suppliers) move closer to major manufacturers to cut costs and generate more business
* This lowers the AC e.g. car manufacturers in Sunderland rely on the service of over 2,500 ancillary firms

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13
Q

What are transport links economies of scale?

A
  • Improved transport links develop around growing industries to hep get people to work and to improve the transport logistics
  • This lowers the AC e.g. Bangalore is known as India’s Silicon Vallet & transportation projects have been successful in transforming the movement of people and goods
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14
Q

What are skilled labour economies of scale?

A
  • An increase in skilled labour can lower the cost of skilled labour, thereby lowering the AC
  • The larger the geographic cluster, the larger the pool of skilled labour
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15
Q

What are favourable legislation economies of scale?

A
  • This often generates significant reductions in AC as governments support certain industries to achieve their wider objectives
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16
Q

What are the main problems that can arise from growth?

A
  • Diseconomies of scale
  • Internal communication
  • Overtrading
17
Q

What are diseconomies of scale as a problem that arises from growth?

A
  • Occurs when a company grows too large, making it difficult to manage and control its operations
  • It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control
  • The cost per unit ends up increasing as a result of these inefficiencies
18
Q

What is internal communication as a problem that arises from growth?

A
  • Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination
  • This may result in delays, errors, missed opportunities, and impact on employee morale
19
Q

What is overtrading as a problem that arises from growth?

A
  • Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity)
  • This may cause cash flow problems or decreased customer satisfaction e.g. a company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers
20
Q

What is a merger?

A
  • A merger occurs when two or more companies combine to form a new company
  • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
21
Q

What is a takeover?

A
  • A takeover occurs when one company purchases another company, often against its will but not always
  • The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations
22
Q

Why might a business want to integrate with another (merge or takeover)?

A
  • Tactical Reasons
  • Ensure an increase in market share
  • Access to technology
  • Access to staff
  • Access to intellectual property such as patents
  • Strategic reasons
  • Access to new markets
  • Improved distribution networks
  • Improved brands
23
Q

What are the advantages of mergers/takeovers?

A
  • Synergy - the combined company is worth more than the sum of its parts
    *Economies of scale
  • Increased revenues and market share
    *Cross-selling - sell each other the products and services
  • Diversification
    *Acquiring unique capabilities and resources
  • International expansion
24
Q

What are the disadvantages of mergers/takeovers?

A

*Original puchase cost
* Cost of change into a new business
*Redundancies of duplicate staff e.g. only 1 marketing dept. needed
* Cost incurred if the merger fails

25
Q

What is horizontal integration?

A

The merger or takeover of a business producing the same or similar goods and services (operates in the same sector and industry)

26
Q

What is vertical integration?

A
  • Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain - e.g. a dairy farmer merges with an ice cream manufacturer
  • Backward vertical integration involves a merger or takeover with a firm further backward in the supply chain - e.g. an ice cream retailer takes over an ice cream manufacturer
27
Q

What are the advantages of horizontal integration?

A
  • The rapid increase in market share
    *Reductions in the cost per unit due to economies of scale
  • Reduces competition
  • Existing knowledge of the industry means the merger is more likely to be successful
  • The firm may gain new knowledge or expertise
28
Q

What are the disadvantages of horizontal integration?

A

*Diseconomies of scale may occur as costs increase - e.g. unnecessary duplication of management roles
* There can be a culture clash between the two firms that have merged
*The price paid for the new firm may take a long time to recoup

29
Q

What are the advantages of vertical integration?

A
  • Reduces the cost of production as middleman profits are eliminated
  • Lower costs make the firm more competitive
  • Greater control over the supply chain reduces risk as access to raw materials is more certain
  • The quality of raw materials can be controlled
    *Forward integration adds additional profit as the profits from the next stage of production are embodied
    *Forward integration can increase brand visibility
30
Q

What are the disadvantages of vertical integration?

A
  • Diseconomies of scale occur as costs increase - e.g. unnecessary duplication of management roles
    *There can be a culture clash between the two firms that have merged
  • Possibly little expertise in running the new firm, due to it being in a different sector, which results in inefficiencies
    *The price paid for the new firm may take a long time to recoup
31
Q

What are the financial rewards of mergers/takeovers?

A
  • Increased market share
  • Synergy - the value of the two firms combined is greater than the value of each separate part
  • Diversification
  • Access to new markets
    *Increased value
32
Q

What are the financial risks of mergers/takeovers?

A
  • Overpayment - not being able to recoup the investment through increased revenue or cost savings
    *Integration challenges - integrating two companies can be complex and costly
  • Cultural differences - clashes
  • Regulatory hurdles - opposition from regulators or other stakeholders
  • Debt - may take on debt to acquire which can increase financial risk and reduce flexibility
33
Q

What are the problems caused by rapid growth?

A
  • Strain on cash flow (if revenue does not keep up with the expenses)
    *Increased management complexities
  • Quality control issues
    *Customer service issues
  • Culture clash
  • Diseconomies of scale
34
Q

What is the difference between organic and inorganic growth?

A

Organic growth is growth that is achieved by increasing output and enhancing sales, as opposed to inorganic growth from mergers or takeovers

35
Q

What are the methods of organic growth?

A
  • Gaining greater market share
  • Product diversification
    *Opening a new store
  • International expansion
  • Investing in new technology/production machinery
36
Q

What are the advantages of organic growth?

A
  • The pace of growth is more manageable
  • Less risky, as growth is financed by profits and there is industry expertise
  • Avoids diseconomies of scale
  • The management knows and understands every part of the business
37
Q

What are the disadvantages of organic growth?

A

*The pace of growth can be slow and frustrating
*Not necessarily able to benefit from economies of scale
* Access to finance may be limited

38
Q

Why may firms choose to remain small?

A
  • Can offer a more personalised service and focus on building relationships with customers
    *They are unable to access finance for expansion
    *The provide a product that is in a niche market - smaller market size, little room for growth
  • By remaining small, there is a high ability to respond quickly to changing customer needs/preferences
    *Rapid growth can cause diseconomies of scale which can be difficult to deal with
  • Owners goal may not be profit maximisation but rather a goal such as having an acceptable quality of life (satisficing)

A-Level Business Theme 3 (2 decks)

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