UNIT 1: 1.5 Growth and Evolution

Question 1

What is economies of scale?

Answer 1

Business benefits from lower average costs, by increasing the size of its operations

Question 2

What is dis economies of scale?

Answer 2

firms average costs rise-Occurs if a firm goes beyond its ability to operate efficiently

Question 3

Internal economies of scale

Answer 3

Economies of scale that occur inside the firm (within the firms control)

Question 4

What are the 5 reasons these cost benefits arise?
(reductions in average production costs)

Answer 4

1) Purchasing economies- bulk-buying (lower price)
2) Technical economies- specialist equipment or processes to boost productivity
3) Financial economies- larger firms benefit from access to cheaper finance
4) Marketing economies- employ advertising agency (costs spread over more sales)
5) Managerial economies- attract specialist functional managers (who operate efficiently)

Question 5

Internal dis economies of scale

Answer 5

dis economies of scale that occur inside the firm:

When a business’s scale of operation increases beyond a certain size

Question 6

What are the 3 reasons that average costs of production rise?

Answer 6

1) Communication problems- large scale operations, poor feedback to workers, management inefficiency
2) Alienation of the workforce- bigger operation, harder to involve every worker +give them a sense of purpose
3)Poor coordination and slow decision-making

Question 7

External economies of scale

Answer 7

Business enhancement factors that occur outside a company but within the same industry

When a business operates in an expanding industry (especially one particular industry), further cost benefits might be gained

Question 8

Ways in which cost benefits are gained for external economies of scale?

Answer 8

Common for businesses in the same industry to be clustered in same region, meaning:

• attract large pool of qualified, experienced workers to area
  -network of supplying businesses

Question 9

External dis economies of scale

Answer 9

Any industry-wide effects that make it more difficult or more costly to perform business operations

e.g. taxes, regulations,or resource constraints

Question 10

Internal Growth (organic growth)

Answer 10

When a company uses its own tools and resources to expand
e.g. a retailing business opening more shops in towns and cities where it previously had none

Question 11

External Growth

Answer 11

Business expansion achieved by means of merging with or taking over another business, from either the same or a different industry

-Mergers
- Acquisitions
- Takeovers

Question 12

List reasons for businesses to grow

Answer 12

• increase market share and market power
  -benefit from unit cost advantages (able to offer lower prices to customers)
• to reduce risk (by expanding into other markets, diff industries ect can make up for reduction in sales of original product)
• Increased profit (motives for expanding likely result in higher profits)

Question 13

List reasons for businesses to stay small

Answer 13

• The market that the business operates in is small (e.g. The size of the market for repairing antique clocks is small)
  -Maintaining a personal service to customers (owners of small businesses often value personal contact they enjoy w customers)
• The lifestyle choice of the owner (sole control means happy work-life balance)

Question 14

List the external growth methods

Answer 14

• (M&A’s) Mergers and Aquisitions
• Takeover
• Joint ventures
  -Strategic alliances
• Franchising

Question 15

Types of integration (resulting from external growth)

Answer 15

• Horizontal integration
• Forward Vertical integration
• Backward vertical integration
• Conglomerate integration

Question 16

Horizontal integration

Answer 16

Company aquires or merges with another company of the

SAME industry and SAME stage of production

EXAMPLE: A smartphone manufacturer acquiring another smartphone company to expand its market share and product offerings

IGS “buys” Kew high

Question 17

Forward vertical integration

Answer 17

company aquiring or integrating with a business in the

SAME industry, leaning towards CUSTOMER

e.g. Amazon buys AusPost

Question 18

Backward vertical integration

Answer 18

company aquiring or integrating with a business in the

SAME industry, leaning towards SUPPLIER

e.g. Toyota (car company), buying the wheel supplier company to ensure steady supply

Question 19

Conglomerate diversification

Answer 19

merging or acquisition of companies that are in a

DIFFERENT INDUSTRY (unrelated in terms of products or services they offer)

e.g. an electronics company buys a food and beverage company

Ivanhoe Grammar buying a bakery

Question 20

What is a Merger?

Answer 20

Two or more businesses form a new, larger business entity together

Question 21

What is acquisition?

Answer 21

Acquisitions occur when one company purchases another company (usually by acquiring all or a majority of its shares

• usually friendly and negotiated

Question 22

What is a takeover?

Answer 22

When company gains control over another company, often by purchasing a majority of its shares (without consent/permission, hostile action/unfriendly)

e.g. Microsoft taking over LinkedIn

Question 23

What is a joint venture?

Answer 23

Two or more companies collaborating to pursue a specific business opportunity or project while retaining their separate identities.

Question 24

What is a strategic alliance?

Answer 24

An agreement between businesses in which each agrees to commit resources to achieve an agreed set of objectives

Question 25

What is franchising?

Answer 25

A business that uses the name, logo and trading systems of an existing successful business