Topic 2.1 Growing the business

Question 1

What is internal growth?

Answer 1

is when a business grows by expanding it’s own activities

Question 2

What is a positive of internal growth?

Answer 2

relatively inexpensive, generally means the firm expands by doing more of what its already good at

Question 3

What is a negative of internal growth?

Answer 3

it is slow, it won’t work for a business that wants to grow quickly

Question 4

What are the two methods of organic growth (internal growth)?

Answer 4

• targeting new markets
• developing new product

Question 5

What is external growth?

Answer 5

usually involves a merger or takeover

Question 6

What is a merger?

Answer 6

when two firms join together to form a new (but larger) firm

Question 7

What is a takekover?

Answer 7

when an existing firm expands by buying more than half the shares in another firm

Question 8

What are the four basic ways a firm can merge or take over another firm?

Answer 8

• join with a supplier
• join with a competitor
• join with a customer
• join with an unrelated firm

Question 9

What are the chances of a merger or takeover being unsuccessful?

Answer 9

more than half

Question 10

What is a negative to a business being merged or taken over?

Answer 10

it can create a bad feeling, especially if the firm didn’t agree to being taken over

Question 11

What can merging and takeovers often lead to?

Answer 11

cost-cutting

Question 12

What will happen to the output if the firm expands?

Answer 12

increases

Question 13

What are the different reasons for economies of sales happening?

Answer 13

• larger firms need more supplies, so will buy in bulk = get a cheaper unit price
• larger firms can afford to buy and operate more advanced machinery which makes progress faster or cheaper = not as many staff
• the law of dimensions means that’s 10x as big will be less than 10x expensive

Question 14

What are the risks of expanding it’s economies?

Answer 14

the risk of diseconomies of scale = are areas of growth can lead to increases in average unit costs

Question 15

What are the 3 negatives of a big firm?

Answer 15

• the bigger the firm the more expensive it is and harder to manage
• more people = harder to communicate = demotivated staff, communication takes time, productivity goes down
• production processes may be more complex and more difficult to coordinate

Question 16

Where can large firms find sources’ of internal funding?

Answer 16

• retained profit = profits that the owners have decided to plough back into the business after they’ve paid themselves in dividends
• fixed assets = can raise cash by selling fixed assets that are no longer in use