Topic 9.1 - Assessing a change in scale

Question 1

Reasons a business grows

Answer 1

• increase profitability
• become more efficient
• market dominance

Question 2

Reasons a business retrenches

Answer 2

• to survive a recession
• delayering to improve competitiveness
• prevent losses at the end of a products life cycle
• strategic change of direction

Question 3

Organic growth

Answer 3

Expand from within

• product portfolio
• new stores

Question 4

External

Answer 4

Growth by takeover or merger

Question 5

Purchasing economies of scale

Answer 5

Businesses reach a large size and can bulk buy from suppliers leading to cheaper prices

Question 6

Technical economies of scale

Answer 6

Adopt new technology allowing a lower unit cost

Question 7

Managerial economies of scale

Answer 7

Large enough to employ specialists for each business function

Question 8

Economies of scope

Answer 8

Spread costs over several markets or products

Question 9

Diseconomies of scale

Answer 9

• difficult communication
• harder to motivate
• harder to control and coordinate

Question 10

The experience curve

Answer 10

Better knowledge makes better decisions which makes cost advantages

Question 11

Synergies

Answer 11

Two or more businesses combine and are worth more than them individually

Question 12

Overtrading

Answer 12

Business experiences liquidity problems associated with the cost of growth

Question 13

Problems associated with growth

Answer 13

Overtrading

• inflows come in after outflows
• cash forecasting
• arrange new capital

Mergers and takeover

• inherit bad debt
• different organisational cultures

Question 14

Problems associated with retrenchment

Answer 14

Redundancies

- harms overall staff morale

Question 15

Impact of growth and retrenchment on the functional areas

Answer 15

Marketing

• growth - competitive markets may have to have better value for money
• retrenchment - scale down production so less promotion and less new product development

Finance

• growth - cash flow problems
• retrenchment - redundancy payments affect cash outflows

HR

• growth - additional staff for extra workloads
• retrenchment - improve staff morale

Operations

• growth - ensure additional demand can be met
• retrenchment - investment in new machinery and equipment likely to be halted

Question 16

Mergers

Answer 16

A merger is a combination of two previously separate firms which is achieved by forming a completely new business into which the two original firms are integrated

Question 17

Takeover

Answer 17

A takeover (or acquisition) involves one business acquiring control of another business

Question 18

Reasons for a merger or takeover

Answer 18

• growth
• cost synergies
• diversification
• market power
• acquire new skills
• Increase market share
• secure better distribution
• acquire intangible assets (brands, patents, trade marks)
• overcome barriers to entry to target markets
• defend itself against a takeover threat
• eliminate competition

Question 19

Risks of takeovers

Answer 19

• high costs
• employee resistance
• incompatible management styles

Question 20

Venture

Answer 20

A joint venture (JV) is a separate business entity created by two or more parties, involving shared ownership, returns and risks

Question 21

Franchising

Answer 21

When franchisee pay to be able to use your brand, menu or assets

Question 22

Vertical integration

Answer 22

When one firm takes over or mergers with another at a different stage of the production process

Question 23

Horizontal integration

Answer 23

When one firm buys out another a the same stage of the supply chain

Question 24

Conglomerate integration

Answer 24

One firm buys out another with no clear link to its line of business

Question 25

Advantages of backwards vertical integration

Answer 25

• closer links to suppliers allowing higher control over quality and timing
• ## higher profit margins

Question 26

Disadvantages of backwards vertical integration

Answer 26

• suppliers may lose aspects of team morale

- reduce variety of goods available

Question 27

Advantages of forward vertical integration

Answer 27

• control competition
• direct contact with customers
• increase control

Answer 28

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