Theme 2.1 - Business growth and competitive advantage

Question 1

What are the 4 objectives of growth?

Answer 1

• To achieve economies of scale.
• Increased market power over consumers and producers .
• Increased market share and brand recognition.
• Increased profitability.

Question 2

What are the 3 problems arising from growth?

Answer 2

• Diseconomies of scale.
• Internal communication.
• Potential skill shortages.

Question 3

Define economies of scale

Answer 3

When there is a fall in average total costs as the scale of production increases.

Question 4

What does “Really Fun Mums Try Making Delicious Pies” stand for? Define each of these types of economies of scale.

Answer 4

• Risk-bearing: large businesses are able to sell a range of products in different markets, if one fails they have others to rely on.
• Financial: large businesses are trustsed by banks as they’re deemed as low-risk, so they can get loans with better credit terms (lower interest, more time to pay back).
• Managerial: specialist managers imporve sales and productivity which increases profit margin.
• Technical: machines produce goods faster and less staff are needed so unit costs are lower.
• Marketing: advertising costs are spread across a larger number of products and an ad for one product promotes the general business.
• Distribution: businesses can afford to use larger vehicles without major increase in cost e.g. a new lorry can carry 2x as much but not cost 2x as much.
• Purchaing: bulk-buying means a business can receieve discounts as big businesses are more trusted.

Question 5

What is the difference between internal and external economies of scale?

Answer 5

• Internal: occurs when the firm grows larger and average production costs decrease.
• External: reduces production costs for all businesses in the industry e.g. new technologies can cut costs for the whole industry, helping with international competitiveness.

Question 6

Define minimum efficient scale

Answer 6

Scale of output where internal economies of scale have been fully exploited. Going past this point means the business will experience disecomomies of scale as it becomes less efficient.

Question 7

Compare short run and long run growth

Answer 7

Short run - employing unused resources, or being more efficient in the use of current resources to increase output.

Long run- when the firm increases scale by growing in size.

Question 8

Define corporate culture

Answer 8

The set of important assumptions that are shared by employees and influences the ways in which decisions are made.

Question 9

What are the 3 benefits of a strong corporate culture?

Answer 9

• Employees believe in and support the corporate culture.
• Staff are more loyal and comply with policy.
• Staff turnover is reduced.

Question 10

What is the difference between horizontal and vertical integration?

Answer 10

Vertical: where 2 businesses at different stages of the production merge.
Horizontal: where 2 business at the same stage of the production process merge.

Question 11

What are the advantages and disadvantages of vertical integration?

Answer 11

Advantages:
- Firms can increase control of the market; backwards integration mean they can control supply prices and raise them for other firms.
- More certainty over production e.g. quality, quantity, price.

Disadvantages:
- Vertical integration can create barriers to entry, leading to a less efficient market as firms have less incentive to reduce average costs.

Question 12

What are the advantages and disadvantages of horizontal integration?

Answer 12

Advantages:
- Firms can grow quickly –> competitive advantage
- They can quickly increase output
- The firms will have similar expertise

Disadvantages:
- Quick growth can lead to monopoly power, creating potential of high inefficiency.
- Disagreements between objectives of the 2 firms.

Question 13

What is the difference between forwards vertical integration and backwards vertical integration?

Answer 13

Forwards: when a business integrates with another that’s closer to the consumer/distribution process.
Backwards: when a business integrates with another that’s closer to the producer.

Question 14

What is conglomerate integration?

Answer 14

When 2 firms with no common connection integrate.

Question 15

What are the advantages and disadvantages of conglomerate integration?

Answer 15

Advantages:
- Can help both firms become stronger in the market than if they were individual.
- Risk-bearing economies of scale.
- Reach wider target market.
- Reduced market competition.

Disadvantages:
- Risk of product range being spread too thinly and not being sufficient focus on each product, so quality drops and production costs rise.

Question 16

Define market power

Answer 16

The extent to which a firm can control price and costs in a market.

Question 17

Define marginal cost

Answer 17

The cost of producing another unit, it will decrease average costs.

Question 18

Define monopoly power

Answer 18

Power over consumers and the influence over either price or output.

Question 19

Define monopsony power

Answer 19

Power over suppliers, being able to dictate prices and terms.

Question 20

Define market leader

Answer 20

The business with the most power within a market.

Question 21

What is organic/internal growth?

Answer 21

When a business grows by expansion, using its own resrouces.

Question 22

Give 4 ways in which a business can grow organically.

Answer 22

• Target new markets by using new technology
• Setting up branches in other countries
• Changing the marketing mix
• Develop new products

Question 23

What are the advantages of organic growth?

Answer 23

• Less risky as the business is expanding by doing more of what it’s already doing/good at.
• More control over the exapnsion.
• Less conflict between shareholders.
• More sustainable as the firm is using retained profits rather than a loan.

Question 24

What are the disadvantages of organic growth?

Answer 24

• No new ideas from outside the firm
• Risk of overextending capacity of management team/workers.
• Growth achieved is dependent on the strength of the market, which limits how much and how fast a firm can grow.
• Growth is slow (shareholder want more profits)

Question 25

What is inorganic/external growth?

Answer 25

When a business grows by merger or takeover (or aquisition).

Question 26

Give 2 ways in which inorganic growth leads to increased efficiency.

Answer 26

• Economies of scale, particularly if one business had production facilities/departments that were too small.
• Sharing overheads - one business won’t need 2 head offices etc. This is called rationalisation.

Question 27

What are the disadvantages of inorganic/external growth?

Answer 27

• Debt burden created if takeover includes buying out shares.
• Risk of culture clash.
• Risk of dilition of management focus.
• Customers could lose beloved brands.
• Cost-cutting can lead to making people redundant, leading to tensions and uncertainty among workers.
• Can create bad feelings especially if a business didn’t agree to being taken over.

Question 28

Why do businesses merge?

Answer 28

• Reducing competition
• Diversification of product range (falling sales for one product will have less of an impact on the business).
• Defensive reasons: smaller firms join to stand up to a larger firm.
• Aquisition of brand names
• Entering a new market
• Synergy: merged businesses become stronger than the sum of their parts due to increased efficiency, grow faster and compliment each other’s strengths.