Growth

Question 1

What is business growth?

Answer 1

Implies an increase in one of these things:
-assets
-sales value
-operating profit
-market share
-value added
-employee numbers
-branch numbers

Question 2

What is economies of scale?

Answer 2

Where the unit costs/average costs fall as production increases
-growth enables a business to benefit from economies of scale with a huge impact on the cost of production, it can gain competitive advantage

Question 3

What are the types of economies of scale?

Answer 3

-Purchasing
-Technical
-Specialisation/managerial
-Financial
-Marketing
-Risk Bearing

Question 4

What are the objectives of growth?

Answer 4

-Increased market share and brand recognition (better customer loyalty, more sales)
-Increased profitability (better investment opportunities, expansion, innovation)

Question 5

What are diseconomies of scale?

Answer 5

Where the business grows to a point where more costs are increasing the cost per unit

Question 6

What are the problems with growth?

Answer 6

-Lack of motivation = workers in large companies may feel demotivated which can lead to absenteeism and lateness
-Lack of coordination = must control resources so operations run smoothly
-Internal communication impact = as the workforce size increases there will be less face to face communication
-Risk of over trading = accepting more orders than it can cope with

Question 7

What is inorganic growth?

Answer 7

A business has grown by buying its way into being larger
e.g. merger, takeover, joint venture

Question 8

What is a merger?

Answer 8

When two businesses have agreed to join forces to make a third company

Question 9

What is a takeover?

Answer 9

-Friendly = a business struggling with cash flow and invite a takeover from a stronger business
-Hostile = board of directors can try to resist the takeover but if someone owns over 51% of shares they can gain control

Question 10

Why do companies choose to merge?

Answer 10

-Increase market share
-Access to new technology and staff
-Access to new markets
-Improved brands

Question 11

What are the advantages of mergers?

Answer 11

-Synergy = combined company is worth more than the sum of its parts
-Economies of scale
-Increased revenue and market share
-Cross selling = the companies sell each other’s products
-Diversification = widening the product portfolio to avoid falling demand in other parts of the business
-Acquiring unique capabilities and resources = simpler to buy them
-International expansion = acquiring a local competitor helps get over cultural issues, governmental policies, regulation and other issues related to international expansion

Question 12

What is organic growth?

Answer 12

Growth a company achieves from its existing businesses rather than newly acquired ones

Question 13

How can you grow organically?

Answer 13

-Increasing the product range
-Opening more branches
-Taking on more staff
-Expanding into foreign markets
-Expansion in workforce

Question 14

What are the benefits of growing organically?

Answer 14

-Avoids the risks of merging
-Cheaper than merging
-Retains company culture
-Can be planned for, unlike a takeover
-Higher production means economies of scale can be generated
-More influence meaning potential of more market share

Question 15

What are the drawbacks of growing organically?

Answer 15

-High risk because opening new stores and taking on new staff is capital intensive
-Long wait period between investment and a return
-Limited growth as it is dependant on sales
-Moving into new markets and countries can be dangerous without buying a business already in that market

Question 16

What is a small business?

Answer 16

A business with fewer than 250 employees

Question 17

What is a micro-business?

Answer 17

A business with 0-9 employees

Question 18

What are the benefits of staying small?

Answer 18

-Product differentiation creates value and customer loyalty
-USP’s can promote the features of a product e.g. the quality
-Flexibility can help gain competitive advantage if businesses respond quickly to customer needs
-Customer service
-E commerce is useful as 85% of the UK’s 18+ shop online

Question 19

What is horizontal integration?

Answer 19

Involves two businesses merging where their operations are at the same level in the industry

Question 20

What is vertical integration?

Answer 20

When two businesses merge in the same industry but are at different stages of production

Question 21

What are the financial risks of mergers and takeovers?

Answer 21

-Original purchase cost
-Cost of changing into a new business
-Redundancies of duplicate staff
-Cost if it goes wrong

Question 22

What are the financial rewards of mergers and takeovers?

Answer 22

-Increased revenue
-Economies of scale

Question 23

What problems could arise from acquisitions?

Answer 23

-Clash of cultures
-Communication problems
-Diseconomies of scale
-Moving away from the strengths of the original business
-Lack of understanding in new markets

Question 24

What are risk bearing economies of scale?

Answer 24

Where bigger companies can spread the risk by investing more products and accessing more markets

Question 25

What are purchasing economies of scale?

Answer 25

Businesses can earn discounts and lower prices for the raw materials as they need to purchase more

Question 26

What are technical economies of scale?

Answer 26

Businesses with large scale production can use more advanced machinery, use machinery more efficiency or invest in new technology

Question 27

What are specialisation/managerial economies of scale?

Answer 27

Businesses can afford specialist managers

Question 28

What are financial economies of scale?

Answer 28

Where larger firms can find potential lenders easier and raise money at a lower interest rate

Question 29

What are marketing economies of scale?

Answer 29

As a business gets larger it can spread the cost of marketing over a wider range of products and sales