Definitions

Question 1

Define the term SYNERGY.

Answer 1

Synergy is the creation of a whole that is greater than the simple sum of its parts.

This could be when firms and economic agents work together effectively.

Question 2

What are the effects of synergy?

Answer 2

The action of firms and economic agents working together effectively leads to innovation and higher productivity.

Question 3

Define the term VERTICAL INTEGRATION.

Answer 3

Vertical integration is when a firm merges with another company that is involved in a different stage of the production process.

Question 4

Define the term BACKWARDS VERTICAL INTEGRATION.

Answer 4

When firm merges with another company that is closer to their primary product (e.e. Cadbury buying cocoa farm).

Question 5

Define the term FORWARDS VERTICAL INTEGRATION.

Answer 5

When the merger between the firm and company is closer to the customer.

Question 6

Define the term HORIZONTAL INTEGRATION.

Answer 6

When mergers take place between companies at the same stage of the production chain (Morrisons and Safeway).

Question 7

Define the term CONGLOMERATE MERGER.

Answer 7

This is when firms from different industries merge, (Ford and a dairy farm).

Question 8

Define the term ACQUISITION/TAKEOVER.

Answer 8

A takeover involves one from ‘taking over’ another business.

Question 9

Define the term MERGER.

Answer 9

A merger is when two firms join together.

Question 10

What is the main difference between a merger and a takeover?

Answer 10

A merger is less hostile than a takeover/ acquisition as it involves a mutual agreement between the firms to work together rather than one taken over the other.

Question 11

What happens to jobs when rationalisation/consolidation occurs?

Answer 11

Some jobs would be lost as they would be duplicated during a merger/takeover.

Question 12

Give one disadvantage of a takeover/merger.

Answer 12

Redundancies can damage brand image and reputation.

Question 13

State THREE advantages of the BA and Iberia merger.

Answer 13

1. Both airlines target two different parts of the the word so they have no overlapping routes. This allows then to pool together even more passengers.
2. Costs for the firms reduce as well through rationalisation.
3. Lower interests rates can also occur through being a large company as banks will have more confidence in bigger firms. This is especially useful as BA was struggling to survive in 2010.

Question 14

What does it mean by ‘financial muscle with lenders’?

Answer 14

Getting lower interest rates due to banks having more confidence in a bigger company.

Question 15

State one disadvantage of a merger.

Answer 15

BA and Iberia are companies form different countries so there could be language barriers, workers from different cultures and background,

Also the menu on the plane differing from each airline.

Question 16

How could BA and Iberia engage in economies of scale?

Answer 16

Both companies need fuel
Bulk buying fuel (BULK BUYING ECONOMIES OF SCALE)
Cheaper fuel
Same with catering

(Average costs AC) curve

Question 17

What is this merger an example of?

Answer 17

Horizontal integration

Question 18

States FIVE disadvantages of integration.

Answer 18

• Culture clash (language barriers, food,workplace environment + managemnet)
• Lack of knowledge of the other firm (Financial information)
• The takeover firm gets into debt.
• Lack of experience and knowledge of working in that industry.
• Diseconomies of scale (costs going up AS A RESULT bigger firms= difficult to run)

Question 19

Define TECHNICAL ECONOMIES. (INTERNAL)

Answer 19

Bigger firms can afford to buy bigger and better machinery

e.g double decker bus as it is more efficient to run because you can double the number of passenger and double your output by not doubling costs. 2x passengers but no need for driver/fuel/et therefore AC per passenger is lower.

Question 20

Define MANAGERIAL ECONOMIES. (INTERNAL)

Answer 20

Big firms employ specialists in each sector.

Question 21

Define MARKETING ECONOMIES. (INTERNAL)

Answer 21

If a firm doubles what it produces, they don’t double the amount of advertising. As a result, not doubling cost.

Question 22

Define INTERNAL ECONOMIES OF SCALE.

Answer 22

Economies of scale that affect one specific firms.

Question 23

Define ECONOMIES OF SCALE.

Answer 23

Lower average cost the more your produce.

Question 24

Define EXTERNAL ECONOMIES OF SCALE.

Answer 24

Benefit whole industry including rivals.

e.g Farnborough has 2 train stations, airport, motorway etc so get raw materials quicker and cheaper, employees can get to work quicker and cheaply.

Question 25

Give EXAMPLEs of an external economy of scale

Answer 25

• Infrastructure
• clothing firms, they need zips an buttons move into which is cheaper for clothing firms
• Institutions near the firms can train a large amount of workers for firms for a cheaper cost.

Question 26

Define a DEMERGER

Answer 26

Uncoupling of a merger age breakup of BA and Iberia.

Question 27

Reasons of Demeter

Answer 27

Culture clash

No economies of scales

Question 28

Reasons of Demerger.

Answer 28

• Culture clash (AOL and Time Warner) (Cadbury Schweppes)
• No economies of scales
• Firms want to re-focus on what they are good at
• Short of money so they sell off a part of the firm
  (Whitbread sold Costa Coffee to get money)
• Principal agent problem - shareholders want the firm to focus on what they are good at.

Question 29

Diseconomies of scales

Answer 29

Output increases average costs also increase- too big to be efficient.

Firms so big so it is too difficult to run it efficiently.

Question 30

Reasons for diseconomies of scale

Answer 30

• Communication problems
• Coordination problems
• Workers feel alienated and unmotivated as they don’t get a lot of individual attention.