1.5 - Growth and Evolution

Question 1

business growth definition

Answer 1

how quickly a business can grow in size

Question 2

how can a business’s size be measured

Answer 2

• revenue
• number of employees
• market share
• market capitalisation
  (value of business on the stock market - price per share x number of shares)

Question 3

what are economies of scale/diseconomies of scale

Answer 3

economies of scale
* as the rate of production increases, the cost of producing decreases (the unit cost of producing a product)

diseconomies of scale
* as the rate of production increases, so does the unit cost of producing a product

Question 4

examples of internal economies of scale

Answer 4

manegerial economies
* more skilled managers
technical economies
* technology - faster production and mass production
purchasing economies
* bulk-buying discounts
financial economises
* larger firms - trusted more by banks for lower interes rates (lower costs of borrowing)
marketing economies
* spreading a marketing campaign over more units of sales

Question 5

examples of internal diseconomies of scale

Answer 5

as a firm gets bigger it can lead to:
* communication issues
* coordination and control issues
* motivation issues

Question 6

what is the difference between internal/external economies of scale

Answer 6

internal economies of scale:
- economies of scale results from inside of the business

external economies of scale:
- economies of scale results from outside of the business - (the whole industry growing in size)

Question 7

examples of external economies of scale

Answer 7

• infrastructure improvements
• more skille labour
• suppliers may become more efficient

Question 8

what are some reasons to grow a business

Answer 8

• higher sales revenue
  (higher profit)
• higher market share
  (more power in market)
• better brand recognition
  (favoured by retailers)
• economies of scale
• more power over suppliers
• sense of achievement for owner
• enables investment in research and development

Question 9

what are some reasons why a business should stay small

Answer 9

• easier for owner to manage
• more limited and special - can sell for higher prices (exclusivity)
• more personal service to customers
• quicker decision making
• growing - may require additional investment - may lead to giving up part of the business - loss of control and conflict with the nature of the business

Question 10

what factors can contribute to finding the perfect size for a business

Answer 10

• level of control that is wanted to be obtained
• size of the market
• objectives of the business

Question 11

internal growth/external growth definitions

Answer 11

internal growth
* the expansion of a business using its own resources rather than employing other businesses

external growth
* the expansion of a business through th euse of other businesses

Question 12

list the external growth methods

Answer 12

• mergers and acquisitions
• takeover
• joint venture
• strategic alliance
• franchise

Question 13

merger definition

Answer 13

when two businesses combine to create one larger business

Question 14

acquisition definition

Answer 14

when a company buys another company
* buying all stocks
* or owning majority of shares

Question 15

takeover definition

Answer 15

when a company buys more than 50% of the stocks within another business to take control of another business - without the will of the other business

Question 16

what are the different forms of mergers and acqiusitions and takeovers

Answer 16

horizontal integration
vertical integration
backward vertical integration
forward vertical integration
conglomerate diversification

Question 17

horizontal integration definition

Answer 17

the integration or combining of two companies in the same industry or same stage of production

Question 18

vertical integration definition

Answer 18

the integration or combining of two companies in the same industry but a different stage of production

Question 19

backward vertical integration definition

Answer 19

the integration or combining of two companies in the same industry but earlier stage of production
eg. retailer buying a supplier

Question 20

forward vertical integration definition

Answer 20

the integration or combining of two companies in the same industry but later stage of production
eg. supplier buying retailer

Question 21

conglomerate integration/diversification definition

Answer 21

the integration or combining of two companies in completely different industries

Question 22

what is a conglomerate business

Answer 22

a business that operates in a variety of different industries through conglomerate integration

Question 23

pros/cons of horizontal integration

Answer 23

pros
* greater market share and market dominance
* the ability to enter a new market (eg. US market as well as European)
* economies of scale

cons
* possibility of leadership and culture clash
* government will ensure that business does not have too much control over the market
* potential for diseconomies of scale

Question 24

pros/cons of vertical integration

Answer 24

pros
* control supply chain more directly (backward)
* greater knowledge of market (forward)
* economies of scale

cons
* culture clash
* cost of acquiring other business
* potential for diseconomies of scale
* may lose focus on main business activities

Question 25

pros/cons of conglomerate integration

Answer 25

pros * ability to spread risk through diversification * access to wider range of consumers/markets * economies of scale cons * shift from main business objectives * cost for acquiring other businesses * potential for diseconomies of scale

Question 26

strategic alliance definition

Answer 26

an agreement between two or more firms to work together on specific actvities while remaining fully independent companies eg: * Collaborate on a certain project for a period of time * United sells Starbucks on their flights

Question 27

joint venture definition

Answer 27

When two business combine their resources to set up a new business * two businesses remain independent * The business split the costs and rewards, control and risk eg. Chery Jaguar Land Rover - to set up production in China

Question 28

pros/cons of joint ventures

Answer 28

pros * Share knowledge and expertise * Remain independent business * To enter foreign market cons * Disagreement about the terms of the deal * Clash over key decisions * Culture Clash

Question 29

what is a franchise

Answer 29

when a business (franchisor) allows another business (franchisee) to use its name, brand image, business model and product in return for a percentage of the profit and revenue

Question 30

pros/cons of franchisor

Answer 30

pros * company is able to grow quickly * do not haveto pay for expansion - instead recieve profit cons * one bad franchise may ruin business * have to make sure quality is upheld in all franchises

Question 31

pros/cons of franchisee

Answer 31

pros * benedits from preexisting brand image and consumer base * free marketing, supply chain, training and more * more bargaining power as franchise is large group cons * can not make personal decisions * brand image damaged - damages whole franchise * have to pay part of sales profit to franchisor * limited influence in running of business