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GCSE Edexcel Business > 2.1 Growing the Business > Flashcards

2.1 Growing the Business Flashcards

1
Q

Why do firms seek to grow?

A
  • Profit Motive: increasing market share can lead to higher revenues and profits
  • Market power Motive: Higher market power can give firms increased pricing power
  • Cost Motive: Economies of scale can decrease costs helping to increase profit margins
  • Risk Motive: Diversifying production helps a firm decrease risk as falling sales in one market might be compensated by stronger demand in another market
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2
Q

Define organic growth

A

Internal growth: when a business grows by expanding its own activities rather than relying on takeovers and mergers

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3
Q

State two methods of internal growth

A
  1. Targeting new markets
  2. Developing new products
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4
Q

Describe how firms can target new markets

A
  • through new technology, such as e-commerce
  • by lowering its prices and targeting a low income market
  • by changing its marketing mix
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5
Q

State the advantages of organic growth

A
  • Less risk of losing ownership
  • Can be financed through internal funds = no debt
  • builds on a business’s existing strengths, which maintains its culture
  • Business’s can grow at a sensible rate - can benefit from the economies of scale
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6
Q

What are the disadvantages of organic growth?

A
  • could be slow
  • hard to build market share
  • slow growth, as it takes long to gain a return on an investment
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7
Q

Define inorganic growth

A

When firms merge or takeover other businesses

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8
Q

Define merger

A

When two existing firms join together to form a new (but larger) firm

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9
Q

Define takeover

A

When an existing firm expands by buying more than half the shares in another firm

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10
Q

What are the advantages of inorganic growth?

A
  • can benefit from economies of scale
  • aids international expansions
  • increased revenue and market share
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11
Q

What are the disadvantages of inorganic growth?

A
  • clash of cultures between companies
  • diseconomies of scale: as a business gets larger, costs will go up with problems of motivation, communication and coordination
  • communication problems
  • unreliable merger partners
  • can create a bad feeling, especially if the firm didn’t agree to being taken over
  • leads to cost-cutting, which may lead to redundancy of many employees
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12
Q

What are the four basic ways that a company can merge or take over other firms?

A
  • forward integration
  • backward integration
  • horizontal integration
  • conglomerate integration
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13
Q

Define forward integration

A

Merges with firm in same industry and at a later stage of production (closer to consumer).
E.g: A shirt factory buying a retail store to sell their clothes

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14
Q

Define backward integration

A

Merges with firm in the same industry and at an earlier stage of production (closer to raw materials).
E.g: A shirt factory buying a cotton farm

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15
Q

Define horizontal intergration

A

Merges with firm in same industry and same stage of production
e.g: A shirt factory merging with a rival shirt factory

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16
Q

Define conglomerate integration

A

Merges with a firm in a completely different and unrelated industry
eg: A shirt factory merges with a brewery

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17
Q

What is the motive for horizontal integration?

A
  • increasing market share in one product, resulting in the economies of scale
  • high market share may also result in market power
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18
Q

What is the motive for forward integration?

A
  • control of outlets
  • cut out ‘middleman’ and capture profits
  • Rationalisation (cost saving) and coordination benefits aross the stages of production
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19
Q

What are the motives for backward integration?

A
  • control of inputs
  • cut out ‘middleman’ and capture profits
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20
Q

What is the motive for conglomerate integration?

A
  • diversification
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21
Q

What are economies of scale?

A

Reduction in average unit cost that comes from producing on a large scale

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22
Q

What are diseconomies of scale?

A

When growth can lead to an increase in average unit costs, such as:
- larger firms are harder and more expensive to manage properly
- communications take longer
- production process may become more complex

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23
Q

Why might a business decide to become a public limited company?

A

It can bring in lots of extra finance, especially when shares are in high demand, as this will increase their value

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24
Q

What are the advantages of becoming a public limited company?

A
  • limited liability
  • easy to raise capital: issue more shares
  • Banks more willing to lend money to a large, well-established company as there is less risk
  • easier to grow and expand into multinational and operate in more than one country
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25
Q

Define stock market flotation

A

The process of changing a business to a public limited company by issuing shares for sale on a stock exchange

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26
Q

What are the disadvantages of a public limited company?

A
  • expensive
  • risk of potential takeover
  • many want a share of the companies profits
  • the accounts have to be public, so everyone including competitors can see if a business is struggling
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27
Q

What are the two types of finances available for growth?

A

Internal and external

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28
Q

State the internal finances available for growth

A
  • retained profit
  • selling assets
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29
Q

What are the advantages of retained profits?

A
  • easy to access money
  • no interest
  • no repayments or debt
30
Q

What are the disadvantages of retained profit?

A
  • may not have enough retained profit needed to expand
  • once the money is used, it cannot be used for something else in the future
31
Q

What are the advantages of selling assets?

A
  • large amount
  • quick to obtain
  • no intrest
  • no longer have to pay for maintanence of the asset in question
32
Q

What are the disadvantages of selling assets?

A
  • may have to lease: increases long term costs
  • might not get the actual market value
  • might need the assets in the future
33
Q

What are the external sources of finance?

A
  • loan capital
  • share capital
  • stock market flotation
34
Q

What are the advantages of a loan capital?

A
  • large amount
  • quick to obtain
  • smaller, regular payments made over time, which helps with cash flow
35
Q

What are the disadvantages of using a loan capital?

A
  • interest is charged
  • unlikely to get a loan if new business
  • banks may ask for collateral
  • if risky/small business, interest rate is set higher
36
Q

What are the advantages of using a share capital?

A
  • doesn’t need to be paid back
  • no interest
  • business can choose who it sells shares to in an ltd
37
Q

What are the disadvantages of using share capital?

A
  • lose profits
  • pay dividends
  • dilutes ownership
38
Q

Define share dilution

A

As new shares are made and sold, the shareholders worth of their shares would decrease, which means that they would own less % of the company

39
Q

Name three common aims and objectives

A
  • survival
  • profit maximisation
  • sales maximisation
  • cost efficiency
  • employee welfare
  • customer satisfaction
  • social objectives
40
Q

Why do business aims and objectives change?

A
  • To keep up with the dynamic market
  • As a response to the factors within a company
  • As a business evolves
41
Q

State some of the external reasons that will cause a business’s aims and objectives to change

A
  • new legislation
  • changes in market conditions
  • changes in technology
42
Q

State the internal reasons that might cause a business’s aims and objectives to change

A
  • perfomance
  • change in staff or management
  • change in size of workforce
  • change in size of product range
43
Q

Why might a business’s aims and objectives change as the business evolves?

A
  • changes aims from survival to growth
  • enter growing markets or exit shrinking markets
44
Q

Define globalisation

A

When businesses operate on an international scale and gain international influence or power

45
Q

Define import

A

A product made overseas and bought into the UK

46
Q

Define export

A

A product that is produced in the UK and sold overseas

47
Q

Why do countries import products?

A
  • goods have to be bought in because we don’t make them
  • goods that require a lot of labour time which is cheaper in countries such as Bangladesh
  • goods are made both in the UK and elswhere, which usually requires high technology and skills, which we in the UK may not possess
48
Q

State the impacts of imports

A
  • pro: firms have a larger market to buy from, so they may be able to buy supplies cheaply, which reduces costs and increases profits
  • con: local businesses may suffer
49
Q

Define offshoring

A

Relocation of business activity from the home country to a different, international country

50
Q

Why might businesses choose to offshore?

A
  • legislation in the other country may be more lenient
  • cheaper labour
  • more skilled labour
  • cheaper raw materials
  • better technology
  • increased output
  • may have improved quality due to cheaper materials
51
Q

Define multinational

A

A company that trades in more than one country

52
Q

What are the advantages of becoming a multinational company?

A
  • new market opportunities
  • access to technology and resources
53
Q

What are the disadvantages of becoming a multinational company?

A
  • threat from foreign competitors
  • challenge of adapting products + services to foreign standards
54
Q

Define international trade

A

The flow of goods and services between countries

55
Q

Define tariff

A

A tax on an import to increase its price and decrease its demand

56
Q

What are the benefits of tariffs?

A
  • UK goods do not have to pay tariffs, and so are cheaper
  • allow local businesses to gain a price advantage compared to imports
  • can raise important tax revenue for the government
  • can protect new businesses from being swamped with international competition
57
Q

What are the drawbacks of tariffs?

A
  • high import prices may not necessarily put customers off
  • may increase prices for consumers
  • other countries may impose their tariffs in response to ours, causing a potential trade war
58
Q

Define trade bloc

A

A group of countries who make a trade agreement not to place tariffs on imports between member countries

59
Q

Define glocalisation

A

Changing products in order to adapt to other countries’ cultural differences, tastes and legal requirements

60
Q

How might a business change its marketing mix to compete internationally?

A
  • price: may have to be adjusted to take exchange rates into account
  • product: may need adaptation to suit local tastes
  • place: reliable methods of transporting their goods to international customers
  • promotion: need the right promotion to encourage foreign customers to try the products
61
Q

How might a business use e-commerce and the internet to sell internationally?

A
  • enables businesses to access international markets without the need to distribute their products through foreign retailers
  • can trade 24 hours a day
  • trade barriers still apply
  • can promote themselves through social media
62
Q

Define ethics

A

The understanding of morals, and right and wrong

63
Q

Define trade-off

A

A compromise between ethics and profit

64
Q

What are the benefits of ethical behaviour?

A
  • Higher revenue: demand from positive customer support
  • Improved brand image, awareness and recognition
  • better employee recognition and recruitment
  • new sources of finances, eg: ethical investors
65
Q

What are the disadvantages of ethical behaviour?

A
  • higher costs
  • higher overheads eg: training and communication of ethical policy
  • danger of building up false expectations
  • may be difficult to find raw materials
66
Q

What are pressure groups?

A

Organisations that try to influence what customers think about a business and its environment

67
Q

What is the impact of a pressure group on a business?

A
  • start campaign
  • causing customers to lose trust in a brand
  • sales, profit and revenue fall
  • business changes its trade to be more ethical
68
Q

What are the short term impacts of a business on the environment?

A
  • traffic congestion through transportation of deliveries
  • air,noise and water pollution through manufacturing and industry
69
Q

What are the long term impacts of a business on the environment?

A
  • climate change
  • depletion of land, food and natural resources
70
Q

How can a business reduce its impact on the environment?

A
  • biodegradable packaging
  • using renewable energy
  • reducing food miles
  • partaking in social enterprises

GCSE Edexcel Business (12 decks)

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