Theme 3 - Business Growth

Question 1

Business Growth

Answer 1

Business growth = is the point at which a business needs to expand and seeks options to generate more profits

Question 2

What is objective 1 of business growth?

Answer 2

**To achieve economies of scale **

-Growth enables a business to benefit from eos with a huge impact on the cost of production
-Lower cost of prodcution can increase the profit margins of the business or they can choose to reduce prices to gain more market share

Question 3

What are the benefits of economies of scale?

Answer 3

• By having more stock funds to buy tsock, better deals by buying in bulk
• By having more funds to pay for specalist staff
• By having a better reputation so banks are more willing to lend

Question 4

When does eos occur?

Answer 4

EOS occurs when unit costs or average costs fall as a result of an increase in the level of output of the buiness - the more they make the cheaper it gets per item

Question 5

What is the formulas for eos?

Answer 5

Total costs of production = variable costs X Output + Fixed costs

Average cost per unit = Total costs / output

Question 6

What is bulk buying / purchasing economies?

Answer 6

• As business grow they need to order large quantities of production inputs
• As the order value increases, a business obtains more bargaining power with its suppliers
• May be able to obtain discounts and lower prices for the raw materials

Question 7

Internal economies of scale

Answer 7

When a business invests in expanding production resulting in lower average costs

Question 8

What are the different types of eos?

Answer 8

Financisl eos
Marketing eos
Mangerial eos
Technical eos
Risk bearing eos

Question 9

What are financial eos?

Answer 9

Large firms have advantages when they try to raise fianance as they will have a wider variety of sources to choose from and they can often gain better interest rates

• Small businesses find it hard to obtain finance or cost of finance is too high
• Small businesses are percieved as being riskier than larger businesses that have developed a good track record
  -Larger firms find it easiet to find potential lenders and to raise money at lower interest rates
• Larger firms benefit from better interest deals on loans and wider sources of cheap finances, they may attract more investment from shareholders

Question 10

What is Marketing eos?

Answer 10

Large firms are likley to get better rates when buying raw materials in bulk

• As a business grows it is able to send the cost of marketing over a wider range of products and sales therefore cutting the average marketing cost per unit
• A larger business may have an extensive portfolio or products but may choose to just market the corporates brand name( e.g. kitkat - nestle )
• Large companies can attract specialist buyers who dont waste money buying stock that will not sell. They also have specalist sellers marketing staff who ensure

Question 11

What is Techinal eos?

Answer 11

Large businesses can often be more effcient through the use of capital equipment

• Businesses with large scale prodcution can use more advanced technology machinery ( or use existing machinery effciently )
• This may include using mass prodcution techniques , which are more effcient form of production. Fixed costs of purchasing machinery spread over higher levels of output
• A larger firm can also afford to invest more in research and development

Question 12

What is mangerial eos?

Answer 12

As a firm grows larger they can afford to employ specalist managers e.g. marketing, human resources etc

• As a business grows larger they will need to take on specalist staff for some more techincal roles
• Large companies have the money/material to attract specalist and experienced managers who make the most effective business decisions and increase effciency over time

Question 13

What is risk bearing eos?

Answer 13

As a firm grows they may diversify to reduce risk

• Bigger companies can spread their risk by investing in more prodcuts and more markets - diversification
• Large companies benefit from having a more diversed prodcut range, they are able to understand the risk of a fall in demand for one good/service

Question 14

What us objective 2?

Answer 14

Increased market power over customers and suppliers:
- A business might be wanting to grow to reduce the powers of suppliers and customers
- This is the short to medium term objectivewhich flows from the longer term objective of the busienss to increase their profitability

Question 15

How can objective 2 be achieved ?

Answer 15

• Limit power of suppliers by looking for new suppliers
• Backward vertical integration and merge to take over the supplier
  Bargaining power of customers:
• Makse it too expensive for a customer to switch
• Forward vertically integrate

Question 16

What is objective 3?

Answer 16

Increased market share and brand recognition
- In dynamic and competitive markets, businesses may seek to grow to achieve increased market share
- Other businesses may seek to merge or acquire other companies in the same industry in ordet to aqvuire recognised brands

Question 17

What is objective 4?

Answer 17

Increases profitability
-Many businesses seek to grow and expand to increase their profitability
- This means as they increase their output, prodcution becomes cheaper per unit (eos) and the whole business becomes more profitable because costs are rduced

Question 18

What is the difference between profit and profitability?

Answer 18

Profit
- Is a number
-found at bottom of statement of financial psoition

Profitability
- A measure of effciency
-Shows how well businesses perform with their investments
-Is about the inputs required to generate profit

Question 19

What is diseconomies of scale?

Answer 19

Diseconomies of scaleis when a business grows they might expand the scale of production beyod the minimum effcient scale
A rise in average unit costs as a business grows in size
- Average costs per unit start to rise as production increaes

Question 20

What is internal diseconomies of scale?

Answer 20

Internal diseconomies of scale= communication, co-ordination, motivation

Question 21

What is external deos?

Answer 21

External diseconomies of scale= overcrowding, industrial areas, traffic congestiom, price of land and labour rises

Question 22

What occurs as a result of deos?

Answer 22

Lack of motivation:
- Workers in large companies may feel demotivated which can lead to powerlessness and alienation
-This can lead to absenteeism and lateness which leads to reduction in productivity, lower output per worker anc increased unit costs
Lack of co-ordination
- As companies grow it requires lots of coordination
-All prodcuts / resources need to be contolled so that operations can run smoothy
- Workers may need monitoring which adds costs
- May need more managers which increases cost per unit

Question 23

What are the formulas for deos?

Answer 23

Total cost of production =vc x output + fixed costs
Average cost per unit = tc / output

Question 24

What is overtrading?

Answer 24

Overtrading = where a business accepts more orders than it can cope with and this can result in cash flow problem

Question 25

What is internal communication

Answer 25

Internal communication:
- As the size of the workforce increases there will be less face to face communication
Therefore takes a long time for message to get through layers of managment

Question 26

What does less effective communication lead to?

Answer 26

• Mistakes being made
  -More wastage occuring
• Therefore higher average unit costs

Question 27

What is internal economies of scale?

Answer 27

**Internal economies of scale increase efficency within the business **
When a business invests in expanding production resulting in lower average costs

This can be achieved through
- Large businesses negotaiting bigger discounts with suppliers, reducing costs of raw materials
- Large businesses are more able to hire specalist managers than smaller businesses. Managers can oversee stratergies that result in work being done more effciently which can reduce unit costs

Question 28

What is external economies of scale?

Answer 28

External economies of scale = happen when industries are concentrated in small geographical areas
The average cost reductions avaliable to all businesses as industry grows
-

Question 29

What is organic growth?

Answer 29

Organic growth = the process of business growth which comes from internally within the business
E.g. Expanding product range, number of units or locations

Question 30

What does organic growth consist of?

Answer 30

• increasing the product range, opening more branches, taking on more staff, renting larger premises

Question 31

What is inorganic growth?

Answer 31

Inorganic growth = the process of business growth which comes from external sources, mergers and take overs

Question 32

What does inorganic growth consist of?

Answer 32

• Business has grown from a merger, a take over or a joint venture

Question 33

What are the methods of growing internally (organic)?

Answer 33

New product launches: Launching new product, if succesful will gain increased revenue and profit, can be a brand extenstion where a product branch is extended to include a new line
Opening new stores: New stores or outlets, Major supermakrets all have property plans which outline how many stores they want to open in the future
Expanding into foreign markets: If business has saturated uk market, can extend product lifecycle by selling into new foreign markets
Expansion of the workforce: As business expands it needs more capacity, to produce or provide a good/service, easiest way to achieve this is to take on new staff to spread workload, expand production and take advantage of new skills and expertise

Question 34

What are the pros and cons of organic growth?

Answer 34

Ads:
- Avoids all the risk and pitfalls of merging with another business
-Cheaper than merging
-Retains company culture
- Higher production levels means eos and lower average costs
- More influence comes with more markeyt share, camn start setting perices for industry
Dis:
- A very high risk stratergy, opening multiple stores is very risky and capital intensive
- Long period between investment and return on investment
- Growth may be limited and is dependant on reliablity of sales forecast
-

Question 35

What is a take over?

Answer 35

Take over ( acquisisiton)= the legal deal where one larger business purchaes a smaller one

• If a deal is unwanted by the managment or board of directors then this is a hostile take over

Question 36

What are the tactical reasons for mergers and take overs?

Answer 36

• Attempts to ensure increased market share
• Access to technology, staff or intellecutual property
• Access to new markets

Question 37

What are the stratergic reasons for mergers and take overs?

Answer 37

• Improved distribution networks
• Access to new markets
• Improved brand awareness

Question 38

What is a friendly take over?

Answer 38

A friendly takeover= ‘white knight’ is where a business aquires a target company close to be taken over by a ‘black knight’

• White knights offer better terms and pledge to keep core operations running, rather than closing operations and just asset stripping and taking brand names

Question 39

What is a hostile take over?

Answer 39

A hostile takeover = black knight occurs when a company attempts to takeover another business aginsts the wishes of the management

E.g. the company that wishes to make the purchase may go direct to the shareholders and attempt to replace management

Question 40

What is CMA?

Answer 40

CMA = Competition and Makrets Authority who work to promote competition for the benefit of consumers in the UK

• Work to ensure that customers get a good deal when a buying goods and services, and businesses operating within law
• Investigate mergers between oragnisations to make sure they dont reduce competition
• Investigate entire markets if there are competition or consumer problems
• Take action against businesses and individuals thattake part in carlets or anti competitive behaviour
• Protect comsumers from unfair trading practices
• Encourage government and other regulators to use competition effecrivley on behalf of consumers

Question 41

Three sectors within a business

Answer 41

Primary sector = Businesses that are involved in digging, fishing, mining to remove products from the planet at source e.g. a farm
Secondary sector = Businesses that are involved in manufacturing raw materials into other products e.g. clotehs factor, cheese maker
Teritary sector = Businesses that sell goods to customers e.g. shops, banks

Question 42

What is horizontal integration?

Answer 42

Horizontal integration = occurs when a business combines with another business in the same industry at the same stage of production processes

Question 43

What is vertical integration?

Answer 43

Vertical integration = when businesses combine with another business in the same industry but at a different stage of the production process

Question 44

What are the financial risks of mergers and take overs?

Answer 44

• Orginal purchase costs
• Cost of change into a new business
• Redundancies of duplicate staff
• Cost if all goes wrong

Question 45

What are the financial rewards of mergers and takeovers?

Answer 45

• Increased revenue
• Economies of scale
  *

Question 46

What are the short term problems of rapid growth?

Answer 46

• Businesses might grow out of their premises in the short term and may not be enough space for everyone to work effciently
• Morale may drop of staff cant cope with the extra work so productivity may drop
• May be shortage of cash to meet expansion needs/costs
• Taking on more work to generate more income places additonal pressure on the premises and staff

Question 47

What are the managment pressure problems due to rapid growth?

Answer 47

• Managment might be under pressure working reactivley rather than proactivley
• Quality of product and services can drop - increase in customer complaints
• May lose customers to competitors
• Staff turnover may increase due to heavy workloads - vital knowledge lost, hiring and training new staff = time+money

Question 48

What is a small business?

Answer 48

Small business = small to medium sized enterprises is any business with fewer than 250 employees

• Companies house defines small businesses as employing less than 50 people, turnover of 6.5 million and a medium business as less than 250 employees and a turnover of 25.9million

Question 49

Differentiation stratergy of a small business

Answer 49

• Creates value: highlights quality or durability of the product
• Non price competition: focus on other ways of attracting customers such as taste and style
• Brand loyalty: can gain customer loyalty
• No percieved substitute: focuses on quality and design may give the impression that there are no suitable substitutes in the market place

Question 50

What is a usp?

Answer 50

USP= Unique selling point, or propostion. The factors that make a product differentaite from others on the market

• A way of promoting the features of the product or service
• Quality, customer service, delivery, price and design
• Technical features or functions e.g a feature is the reliability of the product, the benefit to the customer is less breakdowns and repairs

Question 51

Flexibility in responding to customer needs

Answer 51

• Small businesses can gain a signifcant competitive advantage over larger companies if it responds quickly to customer needs
• It can do this by ; carrying out market research, gaining feedback forums, polls, user groups, online communities, track social media diccusions about the products, collect data on customer transactions collobarate with customers to produce new products or services

Question 52

Customer service

Answer 52

• Small businesses can compete in very competitive markets by giving excellent customer service
• Consumers appreciate businesses thatgove customers more for their money especially when times are tough
• Effcient service, fast delivery and flexible payments terms will help perusade cutsomers to spend with them
• carry out cutsomer research

Question 53

E-commerce

Answer 53

E-commerce = buying and selling of goods and services over the internet
* Small businesses can sell succesfullt through third party websites such as ebay,etsy and amazon
* Very easy for small business owners to cheaply develop their own wesbite with basic it skills, using sites like wix
* email is great way to communicate with customers
* social media platforms used to promote the products.

Question 54

Economies of scale

Answer 54

EOS= when average costs can fall as total output increases in a business

Question 55

External economies of scale

Answer 55

The average cost reductions avaliable to all businesses as the industry grows

Question 56

Microbusiness

Answer 56

Microbusiness = business with 0-9 employees