Unit 9 - Growth

Question 1

Retrenchment

Answer 1

The cutting back of an organisations scale of operations

Question 2

Why do businesses retrench

Answer 2

• Poor performance
• strong competition
• to focus on core
• economic landscape (e.g. recession)

Question 3

How do businesses retrench

Answer 3

• reduce capacity
• delayer
• close stores/offices/factories
• redundancies

Question 4

Internal growth (organic)

Answer 4

When a firm expands its existing capacity or range of activities by extending its premises/ building new factories from its own resources rather than by integrating with another firm

Question 5

External growth

Answer 5

Mergers, takeovers, franchising, ventures

Question 6

Ventures

Answer 6

Venture capitalists/ larger companies invest in companies in their early stages of development. Prepared to support new businesses with technical and managerial expertise
(High risk high rewards)

Question 7

Vertical integration

Answer 7

The coming together of firms in the same industry but at different stages of the production process e.g. Tesco buying a farm / BP buying a fuel supplier

Question 8

Vertical forwards integration

Answer 8

Where a manufacturer integrates with a retailer that sells its finished product

Question 9

Backwards vertical integration

Answer 9

A manufacturer integrates with the supplier of its raw material

Question 10

Horizontal integration

Answer 10

The coming together of firms at the same stage of production and in the same market
E.g. Disney and Pixar

Question 11

Conglomerate integration

Answer 11

The coming together of firms operating in unrelated markets
(Diversification to spread risk)

Question 12

Impacts of growth

Answer 12

• economies of scale
• diseconomies of scale
• economies of scope
• synergy

Question 13

Synergy

Answer 13

Two firms join together and the resulting outcome is expected to be much better than two individual companies working alone. Teamwork creates an overall better result if working towards the same goal

Question 14

Overtrading

Answer 14

When a business expands too quickly without having the financial resources to support such a quick expansion, putting strain on working capital
E.g. a business opening a store without the sales to cover the costs/ a business taking a large bid and maximising their overdraft for additional funds to pay for supplies

Question 15

Implications of overtrading on business strategies

Answer 15

• cash flow strategies
• extend payable days and reduce receivable days to hold cash for a longer time to allow sufficient working capital
• closure of business

Question 16

Economies of scope

Answer 16

When unit costs are lower due to spreading costs when a business produces a wider range of products rather than specialise in just one or a few products
E.g. supermarket like Tesco, Amazon , Unilever (diverse product portfolio)

Question 17

Advantages and disadvantages of economies of scope

Answer 17

+ gain efficiency
+ more security
+ using the same resources to produce multiple products saves money and time
+ increased customer choice
-less experience with new products
-damaging reputation
-loss of image
-market research is time consuming

Question 18

Diseconomies of scale

Answer 18

The disadvantages that an organisation experiences due to an increase in size

Question 19

Poor motivation from diseconomies of scale?

Answer 19

Business grows - less personal contact with management- alienation- staff feeling under valued- decreased motivation- decrease in labour productivity (output)- increase unit costs

Question 20

Poor communications due to diseconomies of scale?

Answer 20

Poor motivation / too many levels of hierarchy - communication deteriorates - misunderstandings- problems in operations

Question 21

Poor coordination due to diseconomies of scale?

Answer 21

Growth - hard for people at the top to control and coordinate effectively - if leader refuses to delegate they may be unable to cope with increases work load - problems in operations

Question 22

Economies of scale

Answer 22

Advantages of being a large business

Question 23

Purchasing economy of scale

Answer 23

Negotiate discounts when buying supplied in large quantities and get longer credit periods that small competitors - USP/ control cash flow

Question 24

Managerial economies of scale

Answer 24

Employ the best managers with specialist skills - greater knowledge and skill - motivated staff/ innovations- increased productivity - lower unit costs

Question 25

Technical economies of scale

Answer 25

Large businesses can afford to buy better and more advanced machinery - increased efficiency - lower unit costs

Question 26

Impact of growth on marketing

Answer 26

+ afford to lower price if price elastic
+ diversity
+ expansion of target marker
+ product life cycle extension strategies
+ localisation of advertisement (international markets / different languages )
+ enhanced customer data insight
+ economies of scope

Question 27

Impact of retrenchment on marketing

Answer 27

• reduced marketing budgets
• less advertising
• narrowed target audience
• reductions in product or service offerings

Question 28

Impact of growth on operations

Answer 28

• economies of scale (bulk, technology, managerial)
• extend payable days
• increased capacity utilisation
• invest more in technology and automation

Question 29

Impact of retrenchment on operations

Answer 29

• diseconomies of scale
• decreased capacity utilisation (downsizing)

Question 30

Impact of growth on finance

Answer 30

• good cashflow forecast for budgeting
• more recievable days than payable days
• higher operational costs (rent, utilities, wages etc)
• potential for higher revenue and profit

Question 31

Impact of retrenchment on finance

Answer 31

• sell assets
• reduced operating expenses
• short term financial relief (liquidity)
• decreased revenue potential
• low investor confidence

Question 32

Impact of growth on Human Resources

Answer 32

• training (increased time and costs)
• more layers in structure of business so less control
• emphasis on managing business culture
• higher demand for employee support and resources

Question 33

Impact of retrenchment on Human Resources

Answer 33

• higher redundancies
• reduce training
• delayer business structure