Unit 1.5 Growth & Evolution

Question 1

Define the term economies of scale.

Answer 1

Economies of scale are efficiencies that lower a business’s average costs as its scale of output increases.

Question 2

True or False?

Diseconomies of scale occur when average costs decrease with increasing output.

Answer 2

False.

Diseconomies of scale occur when average costs increase with increasing output.

Question 3

What is productive efficiency?

Answer 3

Productive efficiency is the point at which a business cannot reduce costs any further as output increases.

Question 4

What are internal economies of scale?

Answer 4

Internal economies of scale are lower average costs achieved as a business grows, due to factors inside the organisation.

Question 5

What are financial economies?

Answer 5

Financial economies are achieved when large firms receive lower interest rates on loans than smaller firms, lowering their cost per unit.

Question 6

What are external economies of scale?

Answer 6

External economies of scale are the lower average costs achieved as the industry grows, due to factors outside of the business.

Question 7

True or False?

Geographic clusters are a source of external economies of scale.

Answer 7

True.

Geographic clusters are a source of external economies of scale.

Question 8

Define management diseconomies.

Answer 8

Management diseconomies occur when managers work more in their own interests than in the interests of the firm, reducing efficiency and increasing average costs.

Question 9

What are communication diseconomies?

Answer 9

Communication diseconomies occur when a firm’s organisational structure becomes increasingly complex, resulting in communication difficulties that increase average costs.

Question 10

True or False?

As output levels increase, total production costs fall.

Answer 10

False.

As output levels increase, total production costs rise, but average costs may fall due to economies of scale.

Question 11

What are purchasing economies?

Answer 11

Purchasing economies occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the average cost.

Question 12

Which type of diseconomy may occur when a firm has bases of operations across multiple locations?

Answer 12

When a firm has bases of operations across multiple locations, a geographical diseconomy may occur.

Question 13

State two reasons why businesses grow.

Answer 13

Businesses grow for a range of reasons, including to:

Increase market share and profitability

Benefit from economies of scale

Gain stronger market power

Access a wider range of finance

Achieve entrepreneurial or social aims

Question 14

What is satisficing?

Answer 14

Satisficing is when business owners prioritise an acceptable quality of life over profit maximisation.

Question 15

True or False?

All small firms eventually grow into large companies.

Answer 15

False.

Many business owners intentionally choose to keep their businesses small.

Question 16

True or False?

Small businesses can often respond quickly to changing customer needs and preferences.

Answer 16

True.

By remaining small, there is a high ability to respond quickly to changing customer needs and preferences and provide a personalised service.

Question 17

Define the term niche market.

Answer 17

A niche market is a small, specialised market segment for a particular product or service.

Question 18

What is the difference between profit and profitability?

Answer 18

Profit is the absolute amount of money a company makes. Profitability is a measure of how efficiently a company generates profit relative to its revenue or investment.

Question 19

True or False?

Small firms are less at risk from changes in the wider economy than large firms.

Answer 19

False.

Small firms are more at risk from changes in the wider economy than large firms, especially during recessions.

Question 20

True or False?

Changes in technology only benefit large-scale operations.

Answer 20

False.

Technology such as the internet, which offers low cost access to global markets, can work to the advantage of small firms.

Question 21

Define the term product diversification.

Answer 21

Product diversification is the strategy of introducing new products or product lines to reach new markets or customer segments.

Question 22

What is meant by monopoly power?

Answer 22

Monopoly power is where a large business dominates a market.

Question 23

What is meant by the term organic growth?

Answer 23

Organic growth is internal growth generated by gaining greater market share, product diversification, opening new stores, or international expansion.

Question 24

Define the term vertical integration.

Answer 24

Vertical integration involves a firm merging with another in its supply chain.

Question 25

What is the difference between forward and backward vertical integration?

Answer 25

Forward vertical integration involves merging with a firm further forward in the supply chain, such as a customer.

Backward vertical integration involves merging with a firm further backward in the supply chain, such as a supplier.

Question 26

Define the term horizontal integration.

Answer 26

Horizontal integration is a type of external growth where a firm integrates with a competitor in the same industry, e.g. one ice cream manufacturer purchases another.

Question 27

What is a joint venture?

Answer 27

A joint venture occurs when two businesses join together to share their knowledge, resources, and skills to form a separate business entity for a specified period of time.

Question 28

Define the term franchising.

Answer 28

Franchising is a business model where the rights to operate a business model, use its branding and software tools, and receive support are sold to a smaller business in exchange for ongoing fees.

Question 29

What is a strategic alliance?

Answer 29

A strategic alliance is a cooperative arrangement between two or more companies without the formation of a new legal entity.

Question 30

True or False?

In a joint venture, participating companies retain their individual ownership and control.

Answer 30

False.

In a joint venture, participating companies jointly own and control the new business entity.

Question 31

What is the main difference in duration between a joint venture and a strategic alliance?

Answer 31

Joint ventures are often intended to be long-term or permanent collaborations.

Strategic alliances can vary in duration and are generally formed for a specific project.

Question 32

Define conglomerate integration.

Answer 32

Conglomerate integration is a type of external growth where a firm integrates with another in an unrelated industry, e.g. Toyota purchases a company in the drinks industry.