Chapter 3 - Continuation

Question 1

What is internal growth/organic growth?

Answer 1

IG occurs when a business expands by:

• Increasing the number of goods it can produce, for example by buying more or better machinery
• Developing new products
• Finding new markets for its products
• Much slower

Question 2

What is external growth?

Answer 2

External growth takes place when a business merges with or takes over another business in the same or a different industry. This process is known as integration.

Question 3

What are the types of integration?

Answer 3

• Horizontal integration
• Forward vertical integration
• Backward vertical integration
• Conglomerate integration

Question 4

What is horizontal integration?

Answer 4

Horizontal integration brings together two firms in the same industry who are also in the same sector of business activity, for example two wheat farmers (primary sector), two chocolate manufacturers (secondary sector) or two banks (tertiary sector).

Question 5

What is forward vertical integration?

Answer 5

Forward vertical integration brings together two firms in the same industry, but one is a customer of the other, for example, a shoe manufacturer and a shoe retailer.

Question 6

What is backward vertical integration?

Answer 6

Backward vertical integration brings together two firms in the same industry, but one is the supplier to the other, for example a chocolate manufacturer and a cocoa producer.

Question 7

What is conglomerate integration?

Answer 7

Conglomerate integration is the bringing together of two businesses who are in completely different industries, for example a cosmetics manufacturer and a fizzy drinks manufacturer.

Question 8

What are the problems linked to business growth? (Card 1)

Answer 8

• Internal growth is usually slow. There’s a risk that other businesses, using an external growth strategy, grow much faster.
• These larger firms may the dominate the market and remove the opportunity for other businesses to expand.
• When two separate businesses are brought together, managers and employees in each business may fear loss of their jobs or status.

Question 9

What are the problems linked to business growth? (Card 2)

Answer 9

• If a business becomes too large then diseconomies of scale may occur, increasing the business’s average costs and reducing its profit margins.
• Any two businesses that are brought together through integration are likely to have different ways of doing things.
• The integration of two firms will change the control of the business for the original owners and there will be a loss of control.

Question 10

What is diseconomies of scale?

Answer 10

Factors that cause average costs to rise as the scale of operations increases.

Question 11

What are the risks for a business if they have growth as an objective?

Answer 11

• Often additional capital must be borrowed to finance expansion plans
• If growth is too slow or profits don’t increase, the business may not be able to finance its borrowing
• The business will not survive

*The owners of unincorporated businesses, such as sole traders and partnerships, have unlimited liability for the debts of the business, so they’ll have to use their own wealth to pay business debts.

Question 12

Why do some businesses remain small?

Answer 12

• Owner’s choice
• Market size
• Access and availability
• Market domination

Question 13

Owner’s choice

Answer 13

• The owner doesn’t want the responsibility or workload of managing a larger business
• Lifestyle choice
• Owner wants to keep total control of the business
• Fears that growth will reduce the level of control they have over decision-making and day-to-day management
• Owner wants to maintain a close relationship with customers and provide personal service
• Owner doesn’t want to take the risk of having growth as an objective

Question 14

Market size

Answer 14

• Not all businesses have market size as their objective
• E.g. businesses that serve a local market, such as hairdressers, taxi firms or dentists - may not want to offer their services beyond the local neighbourhood
• They know that consumers in other neighbourhoods will not want to travel to their businesses when there are similar businesses closer to where they live

Question 15

Access and availability of capital

Answer 15

• Important factor influencing growth is the access and availability of capital to finance growth plans
• Small businesses often have difficulty in obtaining loans from banks and other lenders because of a poor credit history and low cash flow
• Prevents most businesses of this type from expanding

Question 16

Market domination

Answer 16

• Certain industries are dominated by a few very large companies and it’s difficult for smaller businesses to compete
• Market domination often means that consumers have a brand loyalty to the larger businesses that can offer lower prices than smaller firms due to them enjoying the benefits of economies of scale

Question 17

10 reasons for business failure

Answer 17

• Poor planning
• Liquidity problems
• Poor management skills
• Lack of objectives
• Failure to invest in new technologies
• Lack of finance
• Poor choice of location
• Poor marketing
• Competition
• Economic influences

Question 18

Poor planning and lack of objectives

Answer 18

• Lack of a detailed business plan
• Clear objectives are essential for success
• Failure to set objectives result in a lack of focus and direction for the business

Question 19

Liquidity problems (Card 1)

Answer 19

• A business receives cash from the sale of its products
• However, most businesses sell their products on a credit basis
• This means they’ll receive the cash from sales on a later date, for example 30 days after delivery to the customer
• Cash will go away when the business spends it on supplies of raw materials, employees’ wages and other business expenses

Question 20

Liquidity problems (Card 2)

Answer 20

• There must be enough cash coming into the business to pay the expenses and other debts
• Sometimes businesses don’t manage the inflow and outflow of cash effectively
• Poor cash management can result in liquidity problems which is that the business doesn’t have enough cash to pay its expenses and debts

Question 21

Poor choice of location

Answer 21

• Location is a very important business decision
• Especially businesses such as retailers, restaurants and leisure facilities which need to be located close to their market

Question 22

Poor management

Answer 22

Many owners of new businesses may have excellent ideas and products, but they often lack the management skills and experience to run their business efficiently.

Question 23

Failure to invest in new technologies

Answer 23

• A business that doesn’t invest in the latest technologies will often find it’s unable to compete in terms of price, design and quality
• Instead, consumers may buy their competitors’ products and the business will fail to survive

Question 24

Poor marketing

Answer 24

• Successful businesses are ones that identify and meet the needs of their customers
• Market research is essential to new businesses for identifying the potential size of the market, level of competition and what consumers want
• Businesses that don’t carry out market research are likely to fail

Question 25

Lack of finance

Answer 25

New businesses often lack the finance they need to take full advantage of the opportunities available to them.

Question 26

What is globalisation?

Answer 26

The growth of multinational businesses and increased international trade.

Question 27

Competition

Answer 27

• One of the reasons for business failure is the effect of the globalisation of markets
• Globalisation gives businesses access to wider markets, but their competition is also increased
• Businesses that are unable to compete on price and quality are unlikely to survive in the long run

Question 28

Economic influences

Answer 28

• Unemployment, high interest rates and taxation may reduce the amount of money consumers have to spend on goods and services produced by businesses
• This will reduce business’ earnings from sales and profits
• Firms that are well established may have the finance to continues even when they’re making a loss
• New businesses may fail
• E.g. most of Madeira’s economy is based on tourism but with Covid 19, they lost a lot of money because tourists couldn’t visit the country.

Question 29

Advantages of being a franchisee

Answer 29

• There is less chance of business failure because the product and brand are already well established.
• The franchisor often provides advice and training as part of the agreement.
• The franchisor will finance the promotion of the brand through national advertising.
• The franchisor will have checked the quality of suppliers.

Question 30

Advantages of being a franchisor

Answer 30

• The franchisor will take a percentage of the revenue or profits made by the franchisee each year.
• Enables the company to enjoy faster growth.
• Brings entrepreneurs full of determination and ideas.
• Creation of a truly global identity
• More restaurants: benefits from economies of sale.