3.2 Growth

Question 1

3.2.1 What are the objectives of growth?

Answer 1

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

Question 2

3.2.1 Economies of scale

Answer 2

Economies of scale= The reductions in cost caused by the operating on a larger scale

Question 3

3.2.1 Internal Economy of scale and how it can be achieved

Answer 3

Internal Economy of scale= The cost reductions enjoyed by a business as it grows

How to achieve this?

1) Purchasing
2) Managerial
3) Risk Bearing
4) Technical
5) Financial

Question 4

3.2.1 External economy of scale and how to achieve it?

Answer 4

External economy of scale= The cost reduction available to a business as the industry grows

1) Labour
2) Co-Operation

Question 5

3.2.1 Problems arising from growth

Answer 5

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

Question 6

3.2.1 Diseconomies of scale

Answer 6

Diseconomies of scale= The inefficiencies related to growing as a business that can lead to upward pressure on unit costs

This is when a business grows too large for itself

Contributors to diseconomies of scale include lack of control, lack of flexibility and poor motivation.

Question 7

3.2.1 Overtrading

Answer 7

Overtrading= when a business experiences cash flow problems as a result of expanding too quickly without sufficient cash in the bank.

Question 8

3.2.2 Mergers and Takeovers

Answer 8

Inorganic growth comes from outside the business this can come in the form of:

1) Backward vertical integration
2) Horizontal integration
3) Forward vertical Integration
4) Conglomerate integration

Question 9

3.2.2 Backwards Vertical integration

Answer 9

Backwards vertical integration= Joining with a business in the previous stage of the production process.

E.G- Walker crisps buying a potato farm

Question 10

3.2.2 Backwards vertical integration- Pro + Cons

Answer 10

PRO:

• Control of the products purchased (Cost control, quality control, how they’re made etc)
• More control over production process
• Safer investment

CON:

• Loss of competition
• Expensive

Question 11

3.2.2 Forward vertical integration

Answer 11

Forward vertical integration = Joining with a business in the next stage of the production process

E.G- A potato farm buying walkers

Question 12

3.2.2 Forward vertical integration PRO + CON

Answer 12

PRO:

• Guaranteed outlet for businesses products
• Good relations between manufacturer and retailer

CON:

• Consumers may resent the loss of choice
• More power may increase prices therefore bad for customers

Question 13

3.2.2 Horizontal Integration

Answer 13

Horizontal integration = The joining of two businesses that are in the exact same line of business

E.G- Walkers and Doritos

Question 14

3.2.2 Horizontal Integration PRO+ CON

Answer 14

PRO:

• Increase market share
• Increase facilities and resources
• Increase ideas + Experience
• Safest form of inorganic growth

CON:

• Possible clash of cultures
• Duplication of roles
• Can cause communication problems
• Expensive

Question 15

3.2.2 Merger and Takeover

Answer 15

Merger = Where two firms of similar size agree to join forces permanently, creating a new company that is twice the size of each predecessor.

Question 16

3.2.2 Merger and Takeover

Answer 16

Takeover = When one firm buys a majority of the shares in another and therefore full management control.

Question 17

3.2.3 Organic Growth

Answer 17

Organic Growth = A business growth strategy that involves a business growing gradually using its own resources

Question 18

3.2.3 Organic Growth- Methods

Answer 18

• New Markets
• New Business Model
• New products
• New customers
• Franchising

Question 19

3.2.4 Reasons for staying small

Answer 19

1) Costs
2) Low barriers to entry
3) Convenience
4) control and efficiency
5) owner preferences