Unit 2; Growing a Business

Question 1

Why do firms choose to expand?

Answer 1

• Economies of Scale
• Diversification
• Financial Support
• Personal Vanity
• Domination of the Market

Question 2

Explain the + and - of internal expansion?

Answer 2

+ Relatively inexpensive
+ Already good at it
- Takes a long time

Question 3

What’s the difference between internal and external expansion?

Answer 3

Internal (organic) growth happens inside the business whereas external (inorganic) growth consists of either merging or taking over a different company.

Question 4

How can a business grow inorganically?

Answer 4

Merges, takeovers and franchises

Question 5

What are some reasons that merges/takeovers don’t work?

Answer 5

• Difficult to make 2 businesses work as 1, as different management styles can cause confusion
• Arguments/disagreements
• Many people can be made redundant, affects motiavtion

Question 6

How are private and public limited companies shares sold differently?

Answer 6

Public limited companies can sell shares to anybody who wants to buy them on the stock exchange.
Private limited companies can only sell shares if all shareholders agree.

Question 7

What are the + and - of becoming a plc?

Answer 7

\+ Still have limited liability
\+ Raise more capital via shares
\+ Allows growth
\+ Status is increase
- Shareholders own the company 
- Company could be taken over if enough shares are bought

Question 8

What is a MNE/TNC?

Answer 8

MNE: multinational enterprises
TNC: transnational corporations
Firms that have expanded overseas

Question 9

What are social costs of a business?

Answer 9

• Environmental costs e.g pollution
• Most resources are non-renewable
• Some businesses make products that can be harmful to people e.g smoking
• Other ethical questions e.g cheap labour/animal testing

Question 10

What are social benefits of a business?

Answer 10

• Taxes on profits help pay for government services e.g schools/hospitals
• Provide jobs
• Provide essential services
• Medicines etc can improve health

Question 11

What is the product life cycle?

Answer 11

• Development: market research
• Introduction: product is launched and put on sale, involves lots of advertising and sales promotions
• Growth: sales and profitability increase
• Maturity: sales are at their peak, promotion is less important
• Decline: sales start to fall as rival products take over, the product becomes obsolete.

Question 12

What is a product portfolio?

Answer 12

The range of different products that a firm sells.

Question 13

What are the 4 pricing methods?

Answer 13

Penetration Pricing: charges a very low price at the beginning to get lots of people interested
Loss Leader Pricing: price is set below cost, when it becomes established it will be increased.
Price skimming: begins with a high price and then lowers in to interest more people.
Competitive pricing: charge similar prices to other firms e.g petrol

Question 14

What are the 7 methods of promotion?

Answer 14

Discounts
Product trials
Free gifts
BOGOF
Competitions
Point of sale Advertising
Use of credit

Question 15

What are the 4 distribution channels?

Answer 15

Manufacturer - Wholesaler - Consumer
Manufacturer - Wholesaler - Retailer - Consumer
Manufacturer - Retailer - Consumer
Manufacturer - Consumer

Question 16

What are the sources of finance for large firms?

Answer 16

Retained Profit
Re-Invested Savings
Fixed Assets
Shares
Debentures
Loans/Mortgages

Question 17

How do you calculate gross profit margin?

Answer 17

Gross profit / sales

Question 18

How do you calculate net profit margin

Answer 18

net profit / sales

Question 19

What are the 2 liquidity ratios?

Answer 19

Current ratio = current assets/current liabilities

Acid test ratio: (current assets - stock) / current liabilities

Question 20

How can structure your organisation?

Answer 20

By function:
- Mainly in limited companies
+ Specialists can focus on their job
- Different departments may not work well together
By product:
- Common in companies with many products
+ Managers can make decisions that are relevant to their sector
- Wasteful duplication of resources between sectors
By Region:
- Multinational businesses
+ Day to day control is easier
- Wasteful duplication of resources between regions

Question 21

What is a hierarchy?

Answer 21

A series of levels within the business, where each level has responsibility and authority over the levels below.

Question 22

What is a centralised organisation?

Answer 22

• All major decisions are made by few senior members at the top of the hierarchy
  + These members have plenty experience
• Can slow down decision making
• Organisation reacts slowly to change

Question 23

What is a decentralised organisation?

Answer 23

• The authority to make most decisions is shared out
  + Quick decisions
  + Expert knowledge on their sector
• Decisions might not meet overall needs of the business

Question 24

What is a chain of communication?

Answer 24

The chain of people messages travel through to get from one layer of the hierarchy to another.

• This takes a long time to travel up and down the hierarchy, which leaves people low down feeling isolated.
• A game of chinese whispers is played.

Question 25

What is a wide span of control?

Answer 25

The number of workers who report to one manager in the hierarchy.

• Lots of people for the manager to communicate with, can be difficult to manage effectively
• Takes a long time

Question 26

What are the 3 types of training?

Answer 26

Induction:

• Introduces the new employee to their workplace
• Normally starts on the first day
• Introduces them to new workers and shows them the rules
• May include initial training

On the job:

• Most common
• Gets better at their job by being shown how to do it and then practising it themselves.
• Cost-effective
• Bad working practices may be passed on.

Off the job:

• When a person is away from their workplace
• Its expensive and sometimes not related to the job
• Higher quality as it is taught by professionals