Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A LEVEL BUSINESS - TH > 3.2 business growth > Flashcards

3.2 business growth Flashcards

1
Q

what are the objectives of growth?

A

-to achieve economies of scale
-to gain increased market power over customers and suppliers
-to gain increased market share and brand recognition
-to increase profitability
-to allow product diversification
-synergies
-the experience curve (big businesses typically have more experience than smaller businesses)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

profit vs profitability:

A

profit = the absolute amount of money a company makes

profitability = how efficiently a company generates profit relative to its revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what are economies of scale?

A

efficiencies that lower unit costs of production as output rises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what do economies of scale help to do?

A

help large firms to lower their costs of production beyond what small firms can achieve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what are diseconomies of scale?

A

they occur when an increase in output results in a higher cost per unit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what are internal economies of scale?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what are external economies of scale?

A

the whole industry benefits as it grows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what are the costs at different levels of output?

A

with relatively low levels of output…
-the businesses average costs are high

as the business increases its output…
-it begins to benefit from economies of scale, which lower the average unit costs

-at some level of output, a business will not be able to reduce costs any further (this point is called productive efficiency)
-beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what are the types of internal economies of scale?

A

-purchasing economies
-technological economies
-financial economies
-managerial economies
-marketing economies
-risk bearing economies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

internal: purchasing economies

A

-when large firms bulk buy raw materials and receive a discount, which lowers the unit costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

internal: technological economies

A

larger businesses can invest in newer and better technology, which can bring them cost advantages smaller businesses are otherwise unable to achieve.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

internal: financial economies

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 unit costs
-large firms can raise capital more cheaply through the issue of shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

internal: managerial economies

A

-large firms can employ specialist managers who are more efficient in different business functions
-managers in small firms often have to fulfil multiple roles and are less specialised

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

internal: marketing economies

A

-large firms spread the cost of advertising over a large number of sales, reducing the unit costs
-they can also reuse marketing materials in different geographic regions, which further lowers unit costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

internal: risk bearing economies

A

-when a firm can spread the risk of failure by increasing its numbers of products
(greater product diversification → less failure → lower unit costs)

-larger firms may be better equipped to handle unexpected market fluctuations and risks, reducing the overall cost of risk management

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

sources of external economies of scale:

A

-skilled labour
-favourable legislation
-cooperation
-suppliers
-infrastructure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

external: skilled labour economies

A

-as an industry grows in an area, there is likely to be an abundance of skilled workers around that location
-this makes it easier for firms to recruit new workers and also reduces the training costs they might otherwise incur

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

external: favourable legislation economies

A

this often generates significant reductions in unit costs, governments support certain industries to achieve their wider objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

external: cooperation economies

A

as an industry grows in an area, similar firms may find it beneficial to actually cooperate with each other and share resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

external: supplier economies

A

-as an industry grows in an area, suppliers of raw materials and services for that industry are likely to set up nearby due to the abundance of demand
-This will reduce the transport cost of raw materials and lead to more and higher quality services for the firms to benefit from

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

external: infrastructure economies

A

as an industry grows in an area, investment in infrastructure around that location is likely to be tailored to the needs of that industry. This will lead to further gains in efficiency for the firms.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

how to calculate economies of scale: (formula)

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

why is it important to be able to calculate economies of scale even though it isn’t on the spec?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

how to analyse the calculated figure from the economies of scale formula?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

which problems arise from growth?

A

-diseconomies of scale
-internal communication
-overtrading

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

what are diseconomies of scale?

A

they occur when an increase in output results in a higher cost per unit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

when do diseconomies of scale happen?

A

when a business expands beyond an optimum size and becomes less efficient

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

what may diseconomies of scale be due to?

A

-control
-morale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

reasons for diseconomies of scale: control

A

-problems in monitoring productivity and work quality → increased wastage of resources

-to increase control, layers of management are added → this slows down decision-making and quality becomes harder to monitor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

reasons for diseconomies of scale: morale

A

-workers in large firms may develop a sense of alienation and loss of morale
-workers in large organisations find it difficult to see the impact they have and feel less significant

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

problems: internal communication

A

-rapid growth may strain communication channels or result in miscommunication -there may be conflicting priorities and lack of coordination
↳ delays, errors, missed opportunities and impact on employee morale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

what is overtrading?

A

when a business expands too quickly without having the financial resources to support the expansion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

effects of overtrading:

A

-cash flow problems
-decreased customer satisfaction
-business failure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

what is overtrading an issue of?

A

overtrading can occur even a business is profitable, it is an issue of working capital and cash flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

overtrading is most likely to happen when…

A

-growth is achieved by making significant capital investment in production measures before revenues are generated

-sales are made on credit and customers take too long to pay owed amounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

symptoms of overtrading:

A

-high revenue growth but low gross and operating profit margins
-persistent use of a bank overdraft facility
-significant increase in the current ratio
-low levels of capacity utilisation

37
Q

what are the types of growth?

A

-organic
-inorganic (external)

38
Q

methods of inorganic/external growth:

A

-mergers
-takeovers
-joint ventures

39
Q

what is a takeover also called?

A

an acquisition

40
Q

what is a takeover?

A

one business acquires control of another business and its assets

41
Q

types of takeover:

A

-hostile
-voluntary

42
Q

what do businesses attain after a takeover?

A

the acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations

43
Q

reasons for takeovers

A

-to Increase market share
-to acquire new skills
-access economies of scale
-secure better distribution networks
-acquire intangible assets (brands, patents, trade marks)
-overcome barriers to entry to target markets
-to eliminate competition

44
Q

main drawbacks of takeovers:

A

-issues with valuation (is the takeover worth it)
-high failure rate
-integration issues
-non existent cost savings (look at figures like profit margins)

45
Q

takeover drawbacks: integration issues

A

-changed management
-resistance from employees
-clashes of management styles, structures and culture

46
Q

common reasons why takeovers fail:

A

-the price paid for takeover was too high (over-estimate of synergies)
-cultural incompatibility between the two businesses
-poor communication, particularly with management, employees and other stakeholders of the acquired business
-loss of key workers & customers after acquisition
-competitors take the opportunity to gain market share whilst the takeover target is being integrated

47
Q

what is a merger?

A

-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

48
Q

reasons for mergers:

A

-strategic fit
-economies of scale
-synergies
-shareholder value

49
Q

reasons for mergers: strategic fit

A

a company may acquire another company to expand into new markets, diversify its product offerings, or gain access to new technology

50
Q

reasons for mergers: economies of scale

A
51
Q

reasons for mergers: synergies

A

the benefits that result from the combination of two or more companies, such as increased revenue, cost savings, or improved product offerings

52
Q

reasons for mergers: shareholder value

A

-mergers and takeovers can also be used to create value for shareholders
-b y combining companies, shareholders can benefit from increased profits, dividends and stock prices

53
Q

what are the types of integration?

A

-vertical integration (forward or backwards)
-horizontal integration
-conglomerate (the acquisition has no clear connection to the business buying it)

(inorganic)

54
Q

what is forward vertical integration?
(+ example)

A

involves a merger or takeover with a firm further forward in the supply chain

(a christmas tree wholesaler takes over a christmas tree retailer / a dairy farmer merges with an ice cream manufacturer)

55
Q

what is backwards vertical integration?
(+examples)

A

involves a merger/takeover with a firm further backwards in the supply chain

(a christmas tree wholesaler takes over a tree farm supplier / an ice cream retailer takes over an ice cream manufacturer)

56
Q

advantages of backwards 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

57
Q

advantages of forwards vertical integration:

A

-adds additional profit as the profits from the next stage of production are assimilated
-can increase brand visibility

58
Q

disadvantages of vertical integration:

A

-diseconomies of scale occur as costs increase
-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 make up

59
Q

what is horizontal integration?
(+ example)

A

merging with a business at the same level of the supply chain
(merging with another christmas tree wholesaler)

60
Q

benefits of horizontal integration:

A

-economies of scale
-wider range of products (diversification)
-eliminates competition → increases market share and long-run pricing power
-buying an existing and well-known brand can be cheaper than organically growing a brand
-new knowledge / expertise

61
Q

drawbacks of horizontal integration:

A

-diseconomies of scale may occur as costs increase
-culture clash between the two firms that have merged

62
Q

FINANCIAL RISKS & REWARDS
(of inorganic growth)

A
63
Q

financial risks of inorganic growth:

A

-overpayment
-integration challenges
-cultural differences
-regulatory hurdles

64
Q

financial risks of inorganic growth: overpayment

A

if the acquiring company pays too much for the target company, it may not be able to recoup the investment through increased revenue or cost savings

65
Q

financial risks of inorganic growth: cultural differences

A

mergers can result in clashes of company cultures leading to decreased productivity and loss of valuable employees

66
Q

financial risks of inorganic growth: regulatory hurdles

A

mergers may face opposition from regulators or other stakeholders

67
Q

financial rewards of inorganic growth:

A

-increased market share
-synergy
-diversification
-access to new markets
-increased value

68
Q

financial rewards of inorganic growth: increased market share

A

through acquisition. market share increases, leading to increased sales revenue and profitability

69
Q

financial rewards of inorganic growth: diversification

A

selling a wider variety of goods and services reduces the risks associated with selling a single product

70
Q

financial rewards of inorganic growth: access to new markets

A

acquiring a company with a strong presence in a new market may result in a higher customer base and sales revenue

71
Q

financial rewards of inorganic growth:
increased value

A

mergers may increase the overall value of the combined company for shareholders

72
Q

problems with rapid growth:

A

-strain on cash flow
-dencreased management motivation
-quality control issues
-customer service issues
-culture clashes
-diseconomies of scale

73
Q

definition of inorganic growth?

A
74
Q

definition of organic growth?

A

growth that is driven by internal expansion

75
Q

differences of organic and inorganic growth:

A

-organic growth is steady and gradual, whereas external growth is very sudden (fast) and can bring about significant change in an organisation
-organic growth is a lower risk option, while external growth is higher risk

76
Q

methods of organic growth:

A

-franchising
-new business model
-new products
-exporting
-new locations
-investing in new technology/production machinery

77
Q

characteristics of businesses that grow successfully using organic growth:

A

-distinctive brands & portfolios
-use market & product development
-resources to support expansion
-sustained investment in new products
-strong distribution channels

78
Q

benefits of organic growth:

A

-the pace of growth is manageable
-less risky, as growth is financed by profits and there is industry expertise
-avoids diseconomies of scale
-the management knows & understands every part of the business
-can be achieved with internal funds (reinvested profits)
-builds on a business’s strengths

79
Q

drawbacks of organic growth:

A

-the pace of growth can be slow and frustrating (esp to shareholders)
-unable to benefit from economies of scale
-access to finance may be limited
-growth achieved may be dependent on the growth of the overall market
-hard to build market share if there’s already a leader
-franchises can be hard to manage effectively

80
Q

what is franchising?

A

the business licensed individuals or companies to trade under its brand using the goods or services it provides
(if the business model is successful)

81
Q

what does creating a new business model entail?

A

-creating a new business model may involve moving from being a retailer to an e-tailer
-it might could involve setting up a physical operation
-it ould also involve changing the way customers access the product or developing the brand image

82
Q

do all businesses want to grow in size?

A

no, some choose intentionally remain small

83
Q

why do small firms exist?

A

-more personalised service
-unable to access finance for expansion
-flexibility in responding to changing customer needs
-they provide a product that is in a niche market
-owners objective is profit satisficing
-lower running costs
-control & efficiency

84
Q

how do small businesses compete against larger ones?

A

-product differentiation and USPs
-competing through e-commerce
-customer service
-flexibility in responding to customer needs

85
Q

product differentiation and USPs

A

-small firms may look to offer a product or service that is unique and is different from what the large firms can supply or offer
-small firms can target buyers of niche markets
-a small firm has the potential to offer the customer specialist advice and service, adding further value to its USP

(they can use technology to cater for the precise needs of small market niches)

86
Q

competing through e-commerce

A

-through e-commerce, small businesses don’t need to expand to be able to operate on a regional, national or international level (low coast access)
-small firms can reach customers via their own or third-party e-commerce websites

-products can be distributed globally from small distribution centres without investment into expensive retail space
-small businesses can also solely operate online to a large target audience

87
Q

customer service

A

-smaller businesses often find it easier to provide a personal service
-this is partly due to the owners and workers being able to build relationships with a smaller number of customers
-could lead to a personal service or a bespoke product

(large businesses can’t give this to all businesses)

88
Q

flexibility in responding to customer needs:

A

-small businesses are more flexible because decisions can be made very quickly and the operations can be adapted
-eg: they can change the product range, pricing or how the product is made

(in large companies, these sorts of decisions might take months to implement and communicate across the organisation)
↳ this often means that smaller businesses can be the first to adapt to the competitive environment and customer needs

A LEVEL BUSINESS - TH (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions