Business Growth

Question 1

Why do firms choose to stay small

Answer 1

-operating in a niche market:the economies of scale may be very small compared to market size
-lack of economies of scale
-avoid diseconomies of scale
-owners may want to maintain control
-lack of finance for expansion
-the firm may have regional monopoly (only seller of their products in their area

Question 2

Why do firms choose to expand

Answer 2

-economies of scale
-economies of scope
-managers objecitve (increased output-increased sales revenue-increased bonuses)
-to reduce risk
- increased market share

Question 3

What are the two types of growth for firms

Answer 3

Organic and Inorganic

Question 4

What is organic growth

Answer 4

When a firm grows by investing in itself to increase output

Question 5

What is inorganic growth

Answer 5

When a firm grows by merging with or acquiring another firm

Question 6

What are the 4 types of inorganic growth

Answer 6

Horizontal integration
Backward vertical integration
Forward vertical integration
Conglomerate integration

Question 7

Define backward and forward vertical integration

Answer 7

Backward:when a firm integrates with another firm further away from the consumer in the production process

Forward:when a firm integrates with another firm closer to the consumer in the production process

Question 8

Define horizontal integration

Answer 8

When a firm integrates with another firm at the same stage of the production process

Question 9

Define conglomerate integration

Answer 9

When a firm integrates with another firm in an unrelated industry

Question 10

Give the advantages and disadvantages of organic growth

Answer 10

Adv:
Maintain ownership and control (if using retained profits or bank loan)
Less risk

Disadv:
Can lose ownership and control in the business (if selling shares)
Slower growth

Question 11

Give advantages and disadvantages of backward and forward vertical integration

Answer 11

Adv:
Control of the production chain
Reduce intermediary costs (middle man i.e. delivery driver)
Better access to raw materials

Disadv:
Regulation (usually from government)
Can lead to diseconomies of scale

Question 12

Give advantages and disadvantages of horizontal integration

Answer 12

Adv:
Internal economies of scale
Rationalisation (when a firm reorganizes to cut costs,usually when two firms merge)
reduced competition

Disadv:
internal diseconomies of scale
Loss of jobs

Question 13

Give advantages and disadvantages of conglomerate integration

Answer 13

Adv
internal economies of scale
increased brand awareness
knowledge transfers (when the integrated firms learn from each other)

Disadv
internal diseconomies of scale
brand dilution (when the merging brands are too different)
Lack of expertise

Question 14

What is demerger

Answer 14

When a firm divides itself into smaller companies

Question 15

What is economies of scale

Answer 15

When average unit costs decrease as output increases

Question 16

What is diseconomies of scale

Answer 16

When average unit cost increases as output increases

Question 17

What is economies of scope (give an example)

Answer 17

When a company produces similar products with many similarities to decrease production costs
Leather coats and leather wallets

Question 18

What is divorce of ownership from control

Answer 18

This is when the ownership of a company, represented by its shareholders, is separate from control over the company’s operations and decision-making, which is typically done by the management or executives