3.2 - Growth

Question 1

Reasons to grow

Answer 1

1. Increase profits
2. Achieve economies of scale
3. Increase market power
4. Increase market share and brand recognition
5. Grow shareholder value

Question 2

Economies of scale

Answer 2

When unit costs decrease as output increases

Question 3

Formula for unit costs

Answer 3

Total production costs / Total output

Question 4

Types of internal economies of scale

Answer 4

1. Purchasing
2. Technical
3. Managerial
4. Marketing
5. Network
6. Financial
7. Risk bearing

Question 5

Examples of external economies of scale

Answer 5

1. Many specialist suppliers close by
2. Access to research and development facilities
3. Pool of skilled labour to choose from

Question 6

Diseconomies of scale

Answer 6

When unit costs increase as output increases

Question 7

Reasons for diseconomies of scale

Answer 7

1. Lack of motivation and co-operation
2. Lack of co-ordination and control
3. Negative effects of internal politics

Question 8

Overtrading

Answer 8

When a business expands too quickly without having the financial resources to support such a quick expansion

Question 9

Ways to manage the risk of overtrading

Answer 9

1. Reduce inventory levels
2. Leasing rather than buying capital equipment
3. Improving payment terms with customers and suppliers

Question 10

Factors causing overtrading

Answer 10

1. Rapid business growth
2. Insufficient working capital
3. Excessive credit sales
4. Overinvestment in fixed assets

Question 11

Reasons to stay small

Answer 11

1. Product differentiation and unique selling point
2. Flexibility in meeting customer needs
3. Deliver high standards of customer service
4. Exploit opportunities from e-commerce

Question 12

Takeover

Answer 12

When one business acquires control of another business

Question 13

Reasons for takeovers

Answer 13

1. Increase market share
2. Acquire new skills
3. Spread risks by diversifying
4. Secure better distribution
5. Acquire intangible assets (brands, patents and trade marks)

Question 14

Benefits of a takeover

Answer 14

1. Fast growth
2. Access to new skills and technology
3. Economies of scale

Question 15

Drawbacks of a takeover

Answer 15

1. High cost
2. Cultural clashes
3. Job losses

Question 16

Forward vertical integration

Answer 16

When a business acquires or merges with another company further along the supply chain, typically closer to the final consumer. This usually means a manufacturer taking control of a distributor or retailer

Question 17

Advantages of forward vertical integration

Answer 17

1. Stronger market presence
2. Cost savings
3. More stable supply chain

Question 18

Disadvantages of forward vertical integration

Answer 18

1. High initial costs
2. Less flexibility
3. Management challenges

Question 19

Backward vertical integration

Answer 19

When a business acquires or merges with another company earlier in the supply chain, typically a supplier. This means a company takes control of the production of its raw materials or components

Question 20

Advantages of backward vertical integration

Answer 20

1. Lower production costs
2. Improved product quality
3. Better negotiation power

Question 21

Disadvantages of backward vertical integration

Answer 21

1. Risk of inefficiency
2. High initial costs
3. Less flexibility

Question 22

Horizontal integration

Answer 22

When a business merges with or acquires another company at the same stage of the supply chain within the same industry

Question 23

Advantages of horizontal integration

Answer 23

1. Stronger competitive position
2. Cost savings
3. Greater bargaining power

Question 24

Disadvantages of horizontal integration

Answer 24

1. Reduced innovation
2. Culture clashes
3. High costs

Question 25

Conglomerate integration

Answer 25

When a business merges with or acquires another company in a completely different industry

Question 26

Advantages of conglomerate integration

Answer 26

1. Reduced industry-specific risk 2. Stronger brand presence 3. More opportunities for growth

Question 27

Disadvantages of conglomerate integration

Answer 27

1. Lack of industry expertise 2. Potential for brand dilution 3. Management complexity

Question 28

Merger

Answer 28

When two companies agree to combine into a single entity

Question 29

Benefits of a merger

Answer 29

1. Stronger financial position 2. Operational efficiency 3. Boosts innovation

Question 30

Drawbacks of a merger

Answer 30

1. Job losses 2. Regulatory issues 3. Cultural challenges

Question 31

Organic growth

Answer 31

Expansion of a business using its own resources, rather than through mergers, acquisitions, or takeovers. This growth is achieved by increasing sales, launching new products, or expanding into new markets

Question 32

Advantages of organic growth

Answer 32

1. Lower risk 2. Maintains business control 3. Sustainable growth

Question 33

Disadvantages of organic growth

Answer 33

1. Slower expansion 2. Limited resources 3. Missed opportunities

Question 34

Inorganic growth

Answer 34

When a business expands through mergers, acquisitions or takeovers, rather than growing internally

Question 35

Advantages of inorganic growth

Answer 35

1. Rapid expansion 2. Access to new skills and technology 3. Increased market share

Question 36

Disadvantages of inorganic growth

Answer 36

1. Financial risk 2. Regulatory hurdles 3. Job losses