1.5 Growth and evolution

Question 1

Acquisition

Answer 1

method of external growth that involves one company buying a controlling interest in another company, with the agreement and approval of the target company’s Board of Directors

Question 2

Backward verticle integration

Answer 2

occurs when a business amalgamates with a firm operating in an earlier stage of production, such as a car manufacturer taking over a supplier of tyres or other components

Question 3

Economies of scale

Answer 3

lower average costs of production as a firm operates on a larger scale due to gains in productive efficiency, such as easier and cheaper access to source of finance

Question 4

External economies of scale

Answer 4

occur when an organization’s average cost falls as the industry grows. Hence, all firms in the industry benefit

Question 5

Forward verticle integration

Answer 5

growth strategy that occurs with the amalgamation of a firm operating at a later stage in the production process, such as book publisher acquiring book retailers

Question 6

Franchising

Answer 6

agreement between a franchisor selling its rights to other businesses to allow them to sell products under its corporate name in return for a fee and regular royalty payments

Question 7

Horizontal integration

Answer 7

external growth strategy that occurs when a business amalgamates(combine) with a firm operating in the same stage of production

Question 8

Internal diseconomies of scale

Answer 8

occur due to internal problems of mismanagement, casuing average costs of production to increase as a firm grows

Question 9

Joint venture

Answer 9

growth strategy that combines the contributions and responsibilities of two or more different organizations in a shared project by creating a separate legal enterprise

Question 10

Lateral integration

Answer 10

external growth of firms that have similar operations but do not directly compete with each other

Question 11

Merger

Answer 11

form of external growth whereby two (or more) firms agree to form a new organization, thereby losing their original identities

Question 12

Takeover

Answer 12

occurs when a company buys a controlling interest in another firm without the prior agreement or approval of the target company’s Board of Directors

Question 13

Vertical integration

Answer 13

takes place between businesses that are at different stages of production