A-Level Economics A: THEME 3 GENERAL KNOWLEDGE Flashcards
3.1.2 Business growth
What are the main objectives of growth?
- Economies of scale
- Increased market share
- Increased profitability
3.1.2 Business growth
Why doa businesses pursue economies of scale as a means of growth?
As a business grows, its output will increase. As a result of this, their costs will be spread over more items. This is likely to result in a decrease in the average costs of the business. As a result, the business’s profit margins will increase causing an increase in the overall profit the business makes.
3.1.2 Business growth
Why do businesses pursue increased market share as a means of growth?
As market share increases so will sales. As a result of this, more people are likely to recognise the brand of the business. Building up a good brand image will help to reduce the business’s customer’s PED as well as attract more sales.
3.1.2 Business growth
Why do businesses pursue increased profits as a means of growth?
Through growth, a business will be able to reduce its costs and increase its prices. This increases their profit margins and therefore their overall profitability.
3.1.2 Business growth
What are some of the problems that may arise from growth?
- Diseconomies of scale
- Internal communication
- Overtrading
3.1.2 Business growth
How might growth cause diseconomies of scale?
As a business grows, their average costs may raise. This is due to the problems of growing such as worse communication and co-ordination.
3.1.2 Business growth
How might growth cause problems in internal communication?
As a business grows they will find it harder to communicate with each other as the hierarchy increases. This will result in businesses being unable to react quickly to changes in the market.
3.1.2 Business growth
How might growth cause overtrading?
When a business tries to grow too quickly they can often end up with liquidity problems. This is due to the fact that most of the business growth will often be done through loans. As a result of this, both their current and non-current liabilities are likely to increase. This will result in a lack of working capital to pay off current liabilities.
3.1.2 Business growth
What are the advantages of organic growth?
- Integration is expensive, time-consuming and high risk. Firms often pay too much for takeovers and integration is often poorly managed with many key workers tending to leave after the change.
- The firm is able to keep control over its business.
3.1.2 Business growth
What are the disadvantages of organic growth?
- Sometimes another firm has a market or an asset which the company would be unable to gain through organic growth. For example, integration would allow a European company to expand into the Asian market which it has no expertise in.
- Organic growth may be too slow for directors who wish to maximise their salaries.
- It will be more difficult for firms to get new ideas
3.1.2 Business growth
What are the advantages of forward and backwards integration?
- There is increased potential for profit as the firm takes the potential profit from a larger part of the chain of production.
- There will be fewer risks as suppliers do not have to worry about buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods.
- With backward integration, businesses can control the quality of supplies and ensure delivery is reliable. Moreover, they don’t have to worry about being charged high prices for supplies, keeping costs low and allowing lower prices for consumers. This can increase competitiveness and sales.
- Forward integration secures retail outlets and can restrict access to these outlets for competitors.
3.1.2 Business growth
What are the disadvantages of forward and backwards integration?
Firms may have no expertise in the industry they took over, for example a car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa.
3.1.2 Business growth
What is an example of vertical integration in the UK?
Tesco’s £3.7bn takeovers of Booker in 2018 is an example of vertical integration. It has led to an increase in sales for Tesco.
3.1.2 Business growth
What are the advantages of horizontal integration?
- This helps to reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets.
- Firms will be able to specialise and rationalise, reducing the areas of the businesses which are duplicated.
- The business is able to grow in a market where it already has the expertise, which is more likely to make the merger successful.
3.1.2 Business growth
What are the disadvantages of horizontal integration?
The problem is that it will increase the risk for the business as if that particular market fails, they have nothing to fall back on and will have invested a lot of money into that area. They are ‘placing all their eggs in one basket.
