Unit 2 - The Business Organisation

Question 1

Give 5 reasons why a business may want to expand.

Answer 1

• Benefit from Economies of Scale.
• Can afford diversification (Producing more products).
• Benefit from financial support - Less likely to go bust, as they can borrow money more easily from banks. This makes it easier for them to survive cash flow problems. Also, larger firms are more likely to receive financial support from the government, because they employ lots of people.
• Personal vanity - Power and status.
• Domination of the market - Fewer threats and more control over prices, easier to elimiante rivals by charging prices they can’t compete with.

Question 2

Give 3 methods of Internal Expansion.

Answer 2

• Produce more of its current products to sell to existing markets (Increase market share).
• Sell the current products to new markets.
• Launch a new product. If it is similar, it is called line extension. If it is completely different, it is called diversification.

Question 3

Give a benefit and problem to Internal Expansion.

Answer 3

Benefits

• It is relatively inexpensive.
• Less likely to go wrong if expanding by line extension.
• Inexpensive to the business if you decide to change your mind.

Problems

• It can take a long time to achieve growth.

Question 4

What are the 5 methods of External Expansion?

Answer 4

Question 5

What are the two ways of iraddicating competition?

Answer 5

• Merger - The two businesses join together into a single entity.
• Takeover - A business takes over ownership of another business.

Question 6

What are the problems with Takeovers and Mergers?

Answer 6

• Less than half of all takeovers and mergers are successful.
• Management styles often differ. Employees may not be motivated by one company’s style.
• Disagreements.
• Often hostile and unpopular.
• They often lead to cost-cutting, making lots of people redundant, and leading to tension and uncertainty among workers.

Question 7

What are the positives and negatives to franchising for the franchisor?

Answer 7

Positives

• Rapidly increase brand awareness.
• Greater economies of scale.
• Brand consistency.

Negatives

• Reputation of one business can affect reputation of all franchises.
• The franchisor takes most of the risk.

Question 8

What are the positives and negatives to franchising for franchisees?

Answer 8

Positives

• Lower risks for the franchisee - the brand is established.
• More likely to be accepted for a bank loan.
• Wider marketing provided by the franchisor.
• Franchisor may provide training.

Negatives

• Reputation of one business can affect reputation of all franchises.
• Must follow the franchisors rules.
• Usually high initial expense.

Question 9

What are the rules for Private Limited Companies (Ltd) for selling shares.

Answer 9

They can only sell new shares if all of the current shareholders agree.

Question 10

What are the advantages to becoming a plc?

Answer 10

• Still retain limited liability.
• Can raise lots of money through share capital.
• Increased capital allows the company to grow and diversify.
• The status of the company is increased by becoming a plc, so banks are more willing to lend money to them.

Question 11

What are the disadvantages to becoming a plc?

Answer 11

• The shareholders own the company, the directors control the day-to-day running of the company. This is called ‘divorce of ownership and control’, and there may be disagreements if the directors make decisions that don’t directly benefit the shareholders.
• Always threat that someone will buy enough shares to take over the company.
• Shareholders generally want to make as much profit as possible, which makes it difficult for a plc to pursue other objectives, like helping the environment.

Question 12

How do a business’ objectives change as it grows?

Answer 12

• New and small businesses focus on survival and worker’s needs.
• Larger businesses focus on profit and customer’s needs.
• Larger, more established businesses have more financial security so can pursue other objectives, such as dominating the market, expanding overseas etc…

Question 13

What are the benefits for firms becoming multinational/locating overseas?

Answer 13

• Keep transport costs down.
• Increase knowledge of local market conditions.
• Avoid trade barriers by producing inside a country.
• Reduce risks from foreign exchange fluctuations.
• Gain access to raw materials and cheap labour.
• Employ expert acountants and shuffle money between countries, to avoid paying tax/reduce tax rates.
• Win subsidies from governments and force workers to accept lower wages by threating to relocate production to another country.

Question 14

What is an MNE?

Answer 14

A Multinational Enterprise.

Question 15

How do MNE’s benefit the Host Country?

Answer 15

• They are often a source of foreign investment.
• They create employment for locals.
• They bring their own methods of working, and give the host country access to foreign technology.
• Profits can be a source of taxation revenue.
• MNE’s exportations can improve host country’s balance of payments (The difference between money coming into a country through exports and money going out of the country through imports).

Question 16

What problems do MNE’s give the Host Country?

Answer 16

• Jobs are often unskilled, for long hours and with lower wages than they’d get in the MNE’s home country. Some people argue that the workers are being treated unfairly.
• MNE’s may ask for reduced tax rates and subsidies from the government, or ask the government to improve infrastructure.
• MNE benefitting from economies of scale may drive out local industries.
• They can exert a strong influence to change laws/environmental controls/worker protection laws.
• MNE’s can cause long-term environmental degradation in developing countries.
• When MNE’s locate in poorer countries, the benefits to that country are often much less than the benefits to the MNE.