3.1 Business Growth

Question 1

Suggest a reason why some firms choose to grow.

Answer 1

A reason for firms to grow is the desire to gain stronger market power to increase profits.

Question 2

What is meant by economies of scale?

Answer 2

Economies of scale are the reductions in average costs as a firm increases its output.

Question 3

True or False? All firms aim to grow larger.

Answer 3

False.

Question 4

What is a reason for some firms to remain small?

Answer 4

A reason for some firms to remain small is to offer a more personalised service and focus on non-price factors.

Question 5

Define the principal-agent problem.

Answer 5

The principal-agent problem is the conflict of interest that develops between a company’s owners and its managers as it grows larger.

Question 6

What is meant by a public sector organisation?

Answer 6

A public sector organisation is owned and controlled by the government.

Question 7

How do private sector organisations differ from those in the public sector?

Answer 7

Private sector organisations are owned and controlled by private individuals. Public sector organisations are owned and controlled by the government.

Question 8

What is assumed to be the main objective of most private sector organisations?

Answer 8

The main objective of most private sector organisations is to maximise profits by operating at an output where marginal costs (MC) = marginal revenue (MR).

Question 9

What are not-for-profit organisations?

Answer 9

Not-for-profit organisations operate to provide a service or meet a need rather than to make a profit.

Question 10

True or False? Not-for-profit organisations never sell goods or services.

Answer 10

False.

Question 11

What is meant by profit satisficing?

Answer 11

Profit satisficing is when business owners aim for an acceptable quality of life with a respectable level of profits rather than profit maximising.

Question 12

How do principals attempt to address the principal-agent problem?

Answer 12

Principals attempt to address the principal-agent problem by granting share options to managers. This aligns their interests with those of the owners.

Question 13

What is organic growth?

Answer 13

Organic growth is when firms expand internally by opening more outlets, buying better technology and employing more labour.

Question 14

What does inorganic growth mean?

Answer 14

Inorganic growth is when firms expand through external methods like mergers, takeovers or acquisitions.

Question 15

What is forward vertical integration?

Answer 15

Forward vertical integration is when a firm joins with another firm in the same industry at a later stage of production.

Question 16

Define backward vertical integration.

Answer 16

Backward vertical integration is when a firm joins with another firm in the same industry at an earlier stage of production.

Question 17

What is horizontal integration?

Answer 17

Horizontal integration is when a firm joins with another firm in the same industry at the same stage of production.

Question 18

Define conglomerate integration.

Answer 18

Conglomerate integration is when a firm joins with another firm in an unrelated industry.

Question 19

What is an advantage of organic growth?

Answer 19

An advantage of organic growth is that the pace of growth can be controlled and is manageable.

Question 20

True or False? Vertical integration always reduces costs.

Answer 20

False.

Question 21

What is an advantage of horizontal integration?

Answer 21

An advantage of horizontal integration is a rapid increase in market share.

Question 22

How can the size of a market constrain business growth?

Answer 22

The size of a market can constrain business growth by limiting the number of potential customers especially in niche markets.

Question 23

What is a disadvantage of conglomerate integration?

Answer 23

A disadvantage of conglomerate integration is a possible lack of expertise in new products or industries.

Question 24

How can the objectives of owners constrain business growth?

Answer 24

The objectives of owners can constrain business growth when they prefer to expand only to a point that provides an acceptable standard of living.

Question 25

What is a demerger?

Answer 25

A demerger is when a firm sells off at least one part of the business it owns. It may split itself into separate parts to create two or more firms.

Question 26

Define diseconomies of scale.

Answer 26

Diseconomies of scale are the increases in average costs as a firm grows beyond its optimum size.

Question 27

Why do demergers occur?

Answer 27

Demergers occur to reduce diseconomies of scale.

Question 28

How can a company's business focus be affected by demergers?

Answer 28

Demergers can affect a company's business focus by enabling it to concentrate on its operations more narrowly. This could increase profitability.

Question 29

True or False? Cultural differences are a common reason for demergers.

Answer 29

True.

Question 30

How might demergers affect employees?

Answer 30

Demergers may have a negative impact on employees as some workers may lose their jobs.

Question 31

How can demergers affect consumers?

Answer 31

Demergers may result in improved product quality and customer service which could have a positive impact on consumers.

Question 32

State a possible financial gain for a business from demerging.

Answer 32

A potential financial gain from demerging is increased liquidity and dividend payments in the year of the demerger.

Question 33

How might demergers affect efficiency?

Answer 33

Demergers can increase productive efficiency by lowering average costs.

Question 34

Why might businesses be required to demerge?

Answer 34

Firms might be required to demerge to comply with the country's competition authorities. In the UK, this is the Competition and Markets Authority (CMA).

Question 35

True or false? Demergers always result in job losses.

Answer 35

False.

Question 36

What effect might demergers have on the range of products?

Answer 36

Demergers can have a negative impact on the product range. They can result in fewer available products.