theme 3 - 3.1 business growth

Question 1

economies of scale

Answer 1

occur when an increase in the scale of production results in a fall in long run average costs

Question 1

why do some firms remain small?

Answer 1

• small market
• limited access to finance if seen as high risk to banks
• owner objective to retain control of the business
• lack of economies of scale- no potential cost savings
• individual personalised service
• need for dynamic, responsive, service-led firms

Question 2

why do some firms grow?

Answer 2

• to benefit from economies of scale
• to increase market share
• to reduce risk
• to meet managerial objectives- e.g. increased bonuses

Question 3

principal-agent problem

Answer 3

occurs when the aims of a firm’s owners (profit and investment returns) diverge from those of the managers (sales bonuses), which may lead to a conflict between the aims and policies of the two groups

Question 4

private sector firms

Answer 4

owned by private individuals/groups
usually aim to make a profit
e.g.
- sole proprietors
- partnerships
- joint stock companies
- cooperative societies

Question 5

public sector firms

Answer 5

owned by the government
can survive without making profit
e.g.
- policing
- education
- healthcare
some do aim to make a profit but do have other aims e.g. quality of service

Question 6

profit organisations

Answer 6

aim to make/maximise profit

Question 7

non-profit organisations

Answer 7

part of the private sector
main aim = something other than profit
e.g.
- charities
- social enterprises
cover own costs, and excess is ploughed back into the business

Question 8

organic growth

Answer 8

increase in output and sales using internal resources
done through:
- buying new capital
- more workers
- increasing work hours

Question 9

advantages of organic growth

Answer 9

• management has sound knowledge of the business
• can respond to changes in the market quickly
• no need for restructuring
• less risk

Question 10

disadvantages of organic growth

Answer 10

• growth may be slower
• may decrease competitiveness
• may not take on new ideas/people
• may get too specialised in areas that are out of date

Question 11

external growth

Answer 11

involves expansion of a business by merger or takeover (acquisitions)
BUT financial risk of debt if buy out another firm, and risk of investigation

Question 12

horizontal integration

Answer 12

when firms merge at the same stage of the same production process
are likely to want to increase the range of products they produce or enter new markets

Question 13

advantages of horizontal integration

Answer 13

• gain economies of scale
• increase market share
• gain a degree of market power
• reduces risk of being bought out
• increased revenue from more customers

Question 14

disadvantages of horizontal integration

Answer 14

• diseconomies of scale
• buyout may be very expensive
• workers may lose their jobs
• some assets may be sold off, which may be wasteful

Question 15

vertical integration

Answer 15

when firms merge at a different stage of the production process
2 types:
- backwards vertical (buy out suppliers)
- forwards vertical (buy out retailers)

Question 16

backward vertical integration

Answer 16

increases control over raw materials, and mark-up gained as profit
BUT may not have specialist knowledge

Question 17

forward vertical integration

Answer 17

increases responsiveness to consumer preferences
BUT may not have marketing/sales expertise

Question 18

conglomerate integration/diversification

Answer 18

occurs when a firm buys another unrelated firm
advantages:
- gain recognition
- spreads risk across markets
disadvantages:
- differences in cultures may result in conflict and low productivity

Question 19

constraints on business growth

Answer 19

• government regulation
• capacity constraints e.g. lack of machinery, finance, labour
• market constraints e.g. limited demand = no need to expand
• vision constraints e.g. owner’s ideas of the company like keeping it family owned
• the state of the economy

Question 20

demergers

Answer 20

involves the separation of a large company into smaller ones
may involve dissolution of a previous merger

Question 21

reasons for demergers

Answer 21

• to focus on the core business
• to increase profit- sell the failing parts of the business
• to raise finance
• to avoid diseconomies of scale
• to meet the demands of regulators to increase competition

Question 22

impact of demergers on businesses

Answer 22

allows focus on core business, raising funds, and removing parts making a loss

Question 23

impact of demergers on workers

Answer 23

may be an increase in job security, reduction in conflict between cultures and increased focus on the business
BUT some may lose their job

Question 24

impact of demergers on consumers

Answer 24

greater competition = lower prices, more focused businesses are more able to meet consumer needs
BUT some parts of service may be limited e.g. loss of a local branch