UNIT 2 - Business Organisation

Question 1

How can a business grow?

Answer 1

1. Internal growth (also known as organic growth) by selling more product or service.
2. External growth (also know as integration) by joining with another business
3. Selling franchises - this involves selling the rights to the business’s name and products to another business.

Question 2

What are the two types of external growth?

Answer 2

MERGER - when two or more firms join together to creat a new business (e.g. Activision and Blizzard).

TAKEOVER (or acquisition) - occurs when one firm gains control of another and buys it up (Reebok sold their shares to Adidas - therefore Adidas took over Reebok)

Question 3

What is meant by organic growth?

Answer 3

Organic growth is internal growth where a business grows because it sells more of its product

Question 4

What is meant by external growth?

Answer 4

External growth (for integration) occurs when a business joins together with another business

Question 5

What is a merger?

Answer 5

A merger occurs when two or more businesses join together to form a new business

Question 6

What is mean by a takeover?

Answer 6

A takeover (acquisition) occurs when a business gains control of another business

Question 7

What is meant by franchise?

Answer 7

A franchise occurs when one business (a franchisor) sells the rights to its name and products to anther (a franchisee).

Question 8

External growth of a business is now as integration). Give three examples of integration

Answer 8

HORIZONTAL INTEGRATION - this is where one firm joins another firm at the same stage of the production process. EG in 2007 Nippon Sheet Glass company bought Pilkington (another glass manufacturer).

VERTICAL INTEGRATION - this is where one firm joins another firm at a different stage of the same production process. This can be “backward vertical integration” or “forward vertical integration”.

CONGLOMERATE INTEGRATION - this occurs when one firm joins another firm in a different type of production process. EG Rentokil’s business includes office cleaning, security, pest control and parcel delivery.

Question 9

What is meant by “backward vertical integration”?

Answer 9

Backward vertical integration is when a firm joins together with another firm in a different type of production process.

Question 10

What is meant by “forward vertical integration”?

Answer 10

Forward vertical integration is when a firm joins with its distributers (when Pepsi bought KFC) so it could sell its drinks there.

Question 11

What are the advantages of integration?

Answer 11

By joining together firms can cut overheads/costs (if there are two accounts depts then by getting rid of one will save costs), share ideas, experiences, resources and skills and have a stronger position in market.

HORIZONTAL integration = can lead to “economises of scale” as more of the same output is being produced

VERTICAL integration = can ensure a firm keeps control of its suplies or distribution which reliability and costs.

CONGLOMERATE integration = can spread risks as a firm is operating in more than one market

Question 12

What are the 2 main disadvantages of integration?

Answer 12

DISECONOMIES OF SCALE - problems with controlling, communicating and motivating staff in a bigger business

CULTURE CLASHES - can occur because firms are used to doing things in different ways. Morrisons, the supermarket chain, fund this out when it took over Safeway in 2004.

Question 13

What are the 5 main advantages of selling franchises?

Answer 13

1. The Franchisor gets a fee and percentage of profits from franchisee
2. The franchisee provides most of the finance to set up the new outlet which means the overall business can grow faster
3. The franchisee takes a major proportion of the profits and so should be very motivated to make the business a great success
4. Franchisees can learn from each other, which helps the business overall to do better
5. All franchisees can help to finance an overall marketing campaign that can raise awareness of the brand much more effectively than if one outlet had to finance the whole campaign.

Question 14

What are the two main disadvantages of selling franchises

Answer 14

1. The original entrepreneurs no longer own the entire business, most of the profits go to the franchisees.
2. If there are quality problems with one franchisee this can damage the whole business.

Question 15

What are the 4 advantages of growth for the stakeholders?

Answer 15

1. Employees may have more job security and receive greater rewards if the business is growing and doing well.
2. Suppliers may benefit from additional orders and more opportunities to supply the bigger business.
3. The local community may benefit if the business has more funds to invest.
4. The governemnt may benefit, both from higher income tax being paid by employees and because it has to pay fewer benefits if there is a lower rate of unemployment

Question 16

What are the main disadvantages of growth for the stakeholders?

Answer 16

1. Suppliers may be bullied by a much bigger firm. A big firm can insist on lower prices due to the volume of its orders
2. Employees may no longer feel art of the business because it is so big.
3. Communication can be harder in big business and employees may not feel properly informed.
4. The business may not invest in the community and may switch some of its production overseas because it is cheaper.
5. The government may not benefit if the business relocates some of its production overseas

Question 17

How can stakeholders protect their interests?

Answer 17

1. Lobby Government - stakeholders can try and get government to force the business to change its policies perhaps by chnging law or by preventing it from getting any bigger.
2. Boycott the products - If customers feel that a business is behaving badly they can stop buying the product which may persuade the buisness to change its policies.
3. Strike - A strike is when employees stop working and bring production to a halt. Strikes may occur if employees feel they are badly treated or underpaid.
4. Complain - Employees, suppliers, the community or the government could complain to the business and if enough people argue then the business may change their policy.

Question 18

What are the two types of companies under the 1980 company Act?

Answer 18

A private limited company and a public limited company

Question 19

What s a private limited company?

Answer 19

A private limited company is a private company (members of the public cannot apply to won shares). Usually a private limited company has restrictions on who can hold the shares such as family members.

A primavet limited company has the words Limited of Ltd after its name.

Question 20

What is a public limited company?

Answer 20

A public limited company means the shares can be held by members of the public. It is listed on the stock exchange and must have share capital over £50,000. There is no restriction on who can hold these shares, unlike witha private limited company.

A public limited company as the letters plc after its name.

Question 21

What is a “flotation”?

Answer 21

A flotation occurs when private limited company decides to became public limited compny. To do this, shares must be sold t the general public abd the firm must meet the regulations of the stock Exchange.

Question 22

Whar are the advantages pof becoming a public limited company?

Answer 22

(i) Can advertise ots shares tp the general public which means it can get far more investors and raise large sums of money.
(ii) By being a plc it is likely to have much higher media coverage which will raise the profile of the company.
(iii) Public limited companies are more prestigious and can impress customers
(iv) It is easier to sell your shares in a plc so more invesors are likely to invest in the plc

Question 23

What are the disadvantages of a Public limited company?

Answer 23

(i) `increased media coverage can be good but if it is negative then it is bad for the company
(ii) Competitors may try and buy up all of the shares (as there is no restriction and take over the company) and take over the company
(iii) A plc is more regulated than a ltd and it mus comply with more laws which can be a pain.
(iv) the lack of restriction on who owns the shares of a plc means that ofetn larger shareholders may not agree with the original owners and this could create conflict.

Question 24

What is the difference between managers and shareholders

Answer 24

Shareholders own the business but do not make the day to day business decisions as these are undertalen by the managers.

Managers do not necessarily own the business although often they do especially in private limited companies.

Question 25

How can conflict arise between the managers and owners (shareholders)?

Answer 25

Managers may often want to invest in long term projects for the growth of the company and the owners may want to see a more immediate return on their investment.

Question 26

What is a holding company?

Answer 26

A holding company is a business/company that holds shares in other companies but does not actually produc anything. Its function is to simply hold the shares of other companies.

Question 27

What is a subsidary company?

Answer 27

A subsidary company is a business that is owned by another company. EG if Company B is owned by Company A the Company B is said to be a subsidary of Company A.

Question 28

Give 5 reasons the reasons why a business changes its aims and objectives?

Answer 28

1. Business wants more growth
2. Business may want a greater market share
3. Business may want to improve innovations
4. Business may want to diversify into new markets
5. Business may want to go international
6. Ethical and environmental considerations

Question 29

Why do businesses go international?

Answer 29

1. It gives the business access to far more customers
2. It may offer a growing market. If sales in the UK are slowing up there may be opportunities in another country where sales are taking off.
3. If firm is strugging to get bigger in UK coz of government restrictions then going overseas is a great move.
4. It spreads the risk by having operations in more than one country. As such if sale sin one country is a problem, resourcse can focus on sales in other countries.

Question 30

If a business had sales of £200,000 and this increases to £250,000 what is the rate of growth?

Please set out the forumla and work this out.

Answer 30

the change in value x 100
the original value

In this case:

(£250,000 - £200,000) x 100
£200,000

= 25%

Question 31

When an established business (as opposed to a start up business) is considering a change of location what does it need to consider?

Answer 31

1. The costs involved. This will include labour costs, govenment taxes, costs of relocation (moving staff and equipment) and premises costs.
2. The possible impact upon revenues. Will the new location increase sales and if so by how much?
3. The availability of resources. Can the business recruit from local labour? This is why many UK companies have moved overseas because labour in China is cheaper than in the UK.

Question 32

Give 5 advantages to locating overseas?

Answer 32

1. Cheaper labour - i.e. China and India
2. Access to respurces not available in UK - ie growing bananas in South America is better than the UK
3. Financial incentives from foreign governments who are keen t attract foreign investment in their country
4. Avoids proectionist measures by foreign governments. Some governments want to help their own firms so they impose tariffs (import taxes) on foregign companies importing into that country. By loacting in that country the business will avoid these tariffs.
5. The overseas market may be growing much faster that the UK market.

Question 33

Give 2 disadvantages to locating overseas

Answer 33

1. There are different laws and regulations and a business needs to ensure they understand these or they could get into trouble
2. Customers may have different tastes and products may need to change to cater for this.