Business Growth

Question 1

What are the four reasons firms grow?

Answer 1

• increase profitability
• achieve economies of scale
  -increased market power over customers and suppliers
• increased market share and brand recognition

Question 2

Why do firms grow by increasing profitability?

Answer 2

• growth means more customers
• more customers more revenue
• more profit

Question 3

What are economies of scale?

Answer 3

reductions in unit costs caused by the growth of a business

Question 4

Types of economies of scale?

Answer 4

• purchasing (negotiate cheaper unit costs from supplier)
• managerial (specialist managers)
• technical (firm can afford to buy specialised equipment)

Question 5

What is external economies of scale?

Answer 5

the whole industry expands

Question 6

Five problems arising from growth?

Answer 6

• diseconomies of scale
• poor internal communication (more layers)
• poor employee motivation (lower personal contact)
• poor managerial coordiantion (boss cant control everything)
• overtrading

Question 7

Explain overtrading?

Answer 7

• occurs when a business experiances cash flow problems as a result of expanding too quickly without sufficient cash in bank

Question 8

What is organic growth?

Answer 8

growth that takes place without any merger or takeover

Question 9

What is inorganic growth?

Answer 9

means growth that occurs as a result of taking over or merging with another business

Question 10

When would inorganic growth be used?

Answer 10

• poor record of new product development or innovation
• quick growth
• business looking to eliminate a competitor

Question 11

Give some methods of growing organically?

Answer 11

• staff devlopment
• using retained profits

Question 12

Three advanatages of organic growth?

Answer 12

• leaders influence stays strong (preserve organisational structure)
• reduction of financial risk
• secure career paths ( better management positions, internal promotions)

Question 13

Disadvantages of organic growth?

Answer 13

• limited speed leading to limited size
• failing to fully exploit a short lived opportunity
• predictability

Question 14

WHy is limited speed leading to limited size a drawback of organic growth?

Answer 14

• organic growth is a slow process
• business may fall behind rivals who grow inorganically
• rivals could then use economies of scale and become cheaper

Question 15

Why is failing to fully exploit a short lived opportunity a disadvantage of organic growth?

Answer 15

• as product life cycles shorten rate of change in market increases
• business may fail to fully expand on product before it hits decline, missing out on significant levels oof sales

Question 16

How is predictability a disadvantage of organic growth?

Answer 16

• organic growth can become repetative and can prevent staff who are looking for exciting opportunites staying in the business long term

Question 17

What are the four reasons for mergers and takeovers?

Answer 17

• growth
• cost synergies
• diversification
• market power

Question 18

Why is growth a reason for MandT?

Answer 18

• increase size of organisation

Question 19

What are synergies?

Answer 19

benefits of two things coming together that could not exist when they are separate (economies of scale)

Question 20

What is a merger?

Answer 20

occurs when two businesses of roughly same size agree to come together to create brand new business (owners share leadership)

Question 21

What is a takeover?

Answer 21

occurs when one business buys over 50% of another businesses shares, gaining control

Question 22

What are the four types of intergration?

Answer 22

• backward vertical
• forward vertical
• horizontal
• conglomerate

Question 23

What is vertical intergration?

Answer 23

merger or takeover of two companies at differant stages in the same supply chain

Question 24

What is horizontal integration?

Answer 24

business buys or merges with a rival in the same industry at the same stage of supply chain

Question 25

What is conglomerate integration?

Answer 25

merger or takeover involves two unrelated businesses coming together

Question 26

Benefits of backward vertical?

Answer 26

• secures suppliers
• lower cost of supplies

Question 27

Drawbacks of backward vertixal?

Answer 27

• can tie business into supplier that may not offer best option

Question 28

Benefits of forward vertical?

Answer 28

• guaranteed outlet for the businesses products

Question 29

drawbacks of forward vertical?

Answer 29

• consumers may resent the loss of choice (one firm dominating these outlets)

Question 30

Benefits of horizontal ?

Answer 30

• clear economies of scale

Question 31

Drawbacks of horizontal?

Answer 31

• can lead to diseconomies
• culture clashes

Question 32

benefits of conglomerate?

Answer 32

• diversifies business

Question 33

Drawbacks of conglomerate?

Answer 33

• potential failure to understand target company
• may distract management from orgicinal objective

Question 34

when would a takeover be worth it?

Answer 34

return on investment > interest rate on loans required

Question 35

What are the problems with rapid growth?

Answer 35

• management issues (culture clashes)
• staff have to adjust
• customers or suppliers may have had long term relationship and so may be discomforted to work with others

Question 36

What are the four reasons for staying small?

Answer 36

• product differentions and USPs
• flexibility in responding to customers needs
• customer service
• e- commerce