Growth

Question 0

Horizontal Intergration

Answer 0

When two businesses in the same industry at the same stage of production merge.

Question 1

Mergers

Answer 1

When two businesses agree to merge their operations and become one single company.

Question 2

Vertical intergration

Answer 2

Where a firm develops market dominance by integrating with different stages of production in the industry. Forward integration occurs when a business merges with another business further forward in the supply chain. Backward integration occurs when a firm merges with another business at a previous stage of the supply chain.

Question 3

Conglomerate Merger

Answer 3

The merger of firms in different industries.

Question 4

Takeover

Answer 4

When one company buys another.

Question 5

Demerger

Answer 5

When a firm splits into two or more independent businesses.

Question 6

Synergy

Answer 6

When merging the activities or two firms can create a greater outcome than the sum of their individual parts.

Question 7

Internal Growth

Answer 7

When a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses.

Question 8

Economies Of Scale

Answer 8

A fall in the long run average costs as output rises. This opens up the possibility of them making a bigger profit margins and also building a competitive advantage in their own chosen markets. For consumers, lower costs per unit can be translated into reduction in market prices which leads to a rise in their real purchasing power and a potential improvement in economic welfare.

Question 9

Internal Economies of Scale

Answer 9

Occur due to an increase in the scale of production within a firm.

Question 10

External Economies of Scale

Answer 10

Occur due to an increase in the size of an industry within which a firm operates.

Question 11

Diseconomies of Scale

Answer 11

When a business expands beyond a certain size, average costs per unit may start to increase. As firms grows, management finds it more difficult to organise production efficiently. It is much easier to lose control of costs in a large organisation than in a small business.

Question 12

Why would a firm integrate?

Answer 12

• Quicker to achieve economies of scale
• Existing factors of production
• Rationalisation reduces cost
• Achieves greater concentration within market (reduces competition- one less competitor)

Question 13

What do businesses gain from growth?

Answer 13

• Economies of Scale
• The Risk Motive-> Diversify, E.g. Virgin
• Managerial motives (linked to pay)
• Increase quantity -> Greater revenue -> Greater profit
• Market Power -> provides pricing power
• Increased awareness of product (lowers advertising)

Question 14

Measures of growth?

Answer 14

• Increased Output
• Increased Sales
• Greater retail outlets
• More online clicks

Question 15

Synergy

Answer 15

When merging the activities or two firms can create a greater outcome than the sum of their individual parts.

Question 16

Cost Synergies

Answer 16

Refer to the ability to cut costs of the combined firms due to consolidation of operations e.g. Marketing, rationalising etc.

Question 17

Revenue Synergies

Answer 17

Revenue synergies refer to the ability to sell more products/ services to raise prices due to the deal e.g. R&D and innovation, cross selling etc.

Question 18

How can cost synergies be achieved?

Answer 18

By reducing unnecessary duplicates.

Question 19

Rationalisation

Answer 19

Using capital more effectively when merging.

Question 20

Cross selling

Answer 20

When a consumer purchases one product and the supplier attempts to sell additional products, this is facilitated by mergers.

Question 21

Why may firms demerge?

Answer 21

• No common ground
• Reputation
• Different target market
• Lack of synergy -> information a-symmetry (over- estimation)
• Recession
• Different target market/ Culture clash
• Diseconomies of Scale
• Effect on staff productivity -> may be high staff turnover

Question 22

Examples of purchasing and marketing economies of scale…

Answer 22

• the bigger the business, the more raw materials they buy so therefore prices are lower.
• have lower average costs, it costs the same to advertise in the same way as smaller businesses.

Question 23

Examples of managerial economies of scale…

Answer 23

• specialisation leads to greater efficiency.

- lowers cost of division of labour occurs.

Question 24

Examples of financial economies of scale…

Answer 24

• large firms can get bank loans more easily.
• banks charge smaller interest rates to larger firms - less risk.
• invest in capital to increase money.

Question 25

Examples of technical economies of scale…

Answer 25

• exist due to increasing and decreasing returns to scale.
• arise from what happens during production process, as firms may not make full use of equipment.
• unit costs can change due to the firms size changing.

Question 26

Examples of external economies of scale…

Answer 26

• existing infrastructure.
• labour, locally skilled - less training etc.
• supplies/ raw materials avaliable in the area.
• good transportation network.
• area with a reputation for a product or service - less marketing needed.

Question 27

Why do external economies of scale occur?

Answer 27

• suppliers congregate in an area
• existing workforce
• better infrastructure
• good transportation
• reputation

Question 28

Why do internal diseconomies of scale occur?

Answer 28

• poor communities
• division of labour becomes repetitive
• alienated and demotivated workforce
• lack of effective communication
• corporate bureaucracy
• standardisation

Question 29

Why do external diseconomies of scale occur?

Answer 29

• competition for employers and suppliers
• traffic and congestion
• higher land prices

Question 30

Causes of demergers

Answer 30

• culture clash
• labour productivity
• conglomerates hard to manage
• lack of synergies
• share prices falling
• SR costs vs LR benefits
• change in business cycle

Question 31

Benefits of being a small firm

Answer 31

• easier to manage
• lower start up costs
• local monopolies
• niche market
• lower barriers to entry