Business Growth

Question 1

What are signs of business success?

Answer 1

Increasing profits

Attracting new competitors into the industry

Expansion

Favourable customer reviews

Question 2

What are signs of business failure?

Answer 2

Loss of profit – an unsuccessful business will have falling sales, which will lead to decreasing profits year on year, may lead to closure

Unfavourable customer reviews – an unsuccessful business will receive negative feedback from customers

High employee turnover – an unsuccessful business will be unable to attract employees or keep its existing staff, little job security.

Question 3

Explain the type of Internal/Organic Growth - Reinvest its profits

Answer 3

This is when some of the profits are kept within the business rather than borrowing additional money to pay for its expansion.

Question 4

What are advantages of reinvesting your profits for internal growth?

Answer 4

• The business can grow and make more sales.
• No interest paid so it’s cheaper.
• Flexible approach as management can control reinvestment

Question 5

What are disadvantages of reinvesting your profits for internal growth?

Answer 5

• Less money is available to pay dividends to shareholders. Therefore, they may become unhappy and sell their shares.
• Not possible if the business is making a loss.

Question 6

Explain the type of Internal/Organic Growth - Expand its product range

Answer 6

This is when additional products or services may be introduced by the business.

Question 7

What are advantages of Expand its product range for internal growth?

Answer 7

• This leads to more customers and increased sales and profits.
• Increased customer satisfaction, which increases customer loyalty.
• Diversification – if one product fails the business has other products to fall back on.

Question 8

What are disadvantages of Expand its product range for internal growth?

Answer 8

• It takes a long time to yield additional profits, as consumer awareness of the product range needs to be widespread to be of any benefit.
• Market research to find out what customers want will have to be carried out, which can be expensive.
• New products will have to be advertised extensively, which can be costly.

Question 9

Explain the type of Internal/Organic Growth - Increase sales activity

Answer 9

Additional sales can be achieved through opening new retail outlets or increasing the size of existing ones, operating online if this is not already done or trading in new international markets.

Question 10

What are advantages of Increase sales activity range for internal growth?

Answer 10

• Increased market share and the firm could become a market leader.
• The business’ reputation improves which will improve corporate image.
• Diversification – if there is a recession in one country the business can rely on sales in other markets.

Question 11

What are disadvantages of Increasing sales activity range for internal growth?

Answer 11

• The business needs to carry out market research to find out what customers want in other countries. This is expensive.
• Expensive way of achieving growth.

Question 12

Explain the type of external growth - Takeover

Answer 12

When a business buys over control of another business by purchase large number of shares to increase profits and market share.

Question 13

What is a friendly takeover?

Answer 13

When the terms and conditions of the takeover are agreed.

Question 14

What is a hostile takeover?

Answer 14

Where the terms and conditions of the takeover are not agreed

Question 15

Explain the advantages of the a takeover?

Answer 15

• It is a very fast method of growth compared with internal growth.

• The business can now benefit from economies of scale

• Getting rid of a competitor so market share should rise.

• Savings are made as one business needs less resources than two separate businesses.

Question 16

Explain any disadvantages of a takeover?

Answer 16

• Takeovers can be hostile and this can lead to stained relationships in the business.

• Takeovers lead to redundancies, which could damage the corporate of the business.

• Takeovers are very expensive as the price of the shares rise prior to a takeover.

Question 17

Explain this type of external growth - merger

Answer 17

A merger is an agreed joining together of two or more businesses to form one organisation.

All assets and liabilities are pooled together in order to benefit from economies of scale, reduced unit costs and increased profits.

Question 18

Explain any advantages of a merger?

Answer 18

• Economies of scale can be achieved from bulk buying supplies, which can reduce unit costs.

• Mergers minimise duplication of resources since multiple departments can be closed or merged.

• Fewer staff is required to manage the business, reducing costs.

• The market share should increase.

Question 19

Explain any disadvantages of a merger?

Answer 19

• Redundancies are likely since duplication of resources is probable.

• Consumers may face a limited choice of products.

• There may be a lack of competition in the market place.

Question 20

Explain this type of external growth - Franchising

Answer 20

Franchising is a system in which a business idea is hired out to other businesses.

A locally owned business can trade using a national or international brand name – for example, McDonald’s.

Question 21

Explain any advantages of franchising?

Answer 21

• A local business benefits from the terms and conditions set out by the franchising company such as; use of their logo, layout of the premises, staff uniforms and product range supplied.
• The business has more chance of success, as it is already an established brand name.
• The locally owned business benefits from national marketing campaigns
• The franchisor increases market share by entering a greater number of geographical markets.

Question 22

Explain any disadvantages of franchising?

Answer 22

• It does not allow for creativity at a local level
• It’s unlikely that the franchisee will have any input into national marketing campaigns, which may be more relevant to the local market.
• The franchisee could damage the brand if the business is not run well.

Question 23

What are four factors that could limit growth?

Answer 23

1. Lack of Finance
2. Increased Competition
3. Lack of Demand
4. Difficult Economic Climate

Question 24

Explain this factor that could limit growth - Lack of Finance

Answer 24

Capital would be needed to obtain the larger premises and new equipment/machinery etc.

If the business is not credit worthy banks may be unwilling to lend the money too.

If the business cannot raise the required capital it would be impossible for it to expand.

Question 25

Explain this factor that could limit growth - Increased Competition

Answer 25

There could be very strong competition from larger business who can sell products at more competitive prices. Therefore, growth may be restricted, as they do not have enough customers to expand.

Question 26

Explain this factor that could limit growth - Lack of Demand

Answer 26

If consumer demand does not exist for the product/service range, then the business may not be able to secure growth. This may be because the product is so expensive or it is unfashionable.

Question 26

Explain this factor that could limit growth - Difficult Economic Climate

Answer 26

If levels of consumer disposable income decline (for example, during a recession Then consumers will spend less, meaning falling sales and profits for many businesses so they will not be able to expand.

Question 27

Explain technical economies of scale?

Answer 27

Larger businesses can usually afford more advanced technology than small businesses. Increased mechanisation will speed up production and allow the business to use mass production methods – flow production. This means that the costs of labour and power are lowered per unit.

Question 28

What is economies of scale?

Answer 28

Economies of scale are gained when a business increases its production and this causes a decrease in average production costs.

Question 29

Explain financial economies of scale?

Answer 29

Bigger businesses can usually borrow larger sums of money, at lower rates of interest, for a longer period of time because they are thought to be less risky and can provide more security. This reduces the costs for a business hence will lower the average costs.

Question 30

Explain marketing economies of scale?

Answer 30

Distribution – Delivering more goods per delivery lowers the average cost per item. Advertising – A large business is charged the same rate for advertising as a small business. However, in a large business, advertising expenditure is less per unit of production than it is in a small business.

Question 31

Explain purchasing economies of scale?

Answer 31

When raw materials and other supplies are bought in bulk the buyers are able to negotiate larger discounts because they have more power.

Question 32

Advantages of growth?

Answer 32

1. Increased sales volume and profit 2. Benefit from Economies of Scale 3. Greater Market Influence attracting more customers to increase sales

Question 33

Disadvantages of growth?

Answer 33

1. Poor Communication More difficult to maintain high standards of communication between staff and various departments. 2. Lack of Motivation When a business becomes larger employees may not feel as valued and may become demotivated. 3. Difficulties of co-ordination Over widespread geographical locations e.g. Time zones & Language barriers

Question 34

Ways in which companies can ensure their growth strategies are ethical?

Answer 34

* Businesses can make sure that growth does not have a negative impact on the environment. For example, using sustainable materials and renewable energy sources, reducing waste, and recycling * Acting ethically means that suppliers should still be paid a fair price for their produce – in other words, a price which allows them to cover their costs. * Acting ethically means ensuring that overseas suppliers pay their employees a fair wage and provide them with a safe working environment.

Question 35

What is the CMA?

Answer 35

The Competition and Markets Authority (CMA) is an independent body whose purpose is to investigate mergers, acquisitions and other key business practices to ensure that they are fair to consumers.

Question 36

What does the CMA do?

Answer 36

* Undertakes enquiries into monopolies (a market structure where a single seller sells a product or service that has no close substitutes in the market and so can charge a premium price) and mergers. * Enforces consumer protection laws. * Considers appeals on decisions made on mergers and on the abuse of market power.