3.2

Question 1

key reasons for growth

Answer 1

• Increasing profits
• Achieve economies of scale
• Increase market power
• Increase market share and brand recognition
• Grow business and shareholder value

Question 2

Increase market power

Answer 2

Larger firms may be able to exert greater bargaining power over suppliers and/or customers to gain a competitive advantage

Question 3

what is Economies of scale

Answer 3

Economies of scale arise when unit costs fall as output increases

Question 4

average cost per unit is calculated by

Answer 4

total production costs in period (£) / total output in period (units)

Question 5

internal economies of scale

Answer 5

when a company’s cost increases due to its growth, despite the company’s increasing its output

Question 6

external economies of scale

Answer 6

Occur within an industry, so all competitors benefit.
this occurs due to
- expertise - more skilled workers
- cooperation - more efficient

Question 7

internal economies of scale

Answer 7

• purchasing economies
• technical
• managerial
• marketing
• netowork
• financial

Question 8

Problems arising from growth:
o diseconomies of scale

Answer 8

where long-run average total costs arise as the quantity of output increases

Question 9

Problems arising from growth:
o internal communication

Answer 9

too much growth, makes the organisational structure more complicated, making it more difficult for effective communication

Question 10

Problems arising from growth:
o overtrading

Answer 10

expandinig a business without obtaining all the necessary finance so a cash flow shortage develops

Question 11

what is a takeover/acquisition

Answer 11

involves one business acquiring control of another business

Question 12

possible reasons for takeovers

Answer 12

• Acquire new skills
• Access economies of scale
• Spread risks by diversifying
• Enter new segments of an existing market
• To eliminate competition
• Business lacks knowledge or resources to develop organically
• Speed of growth is a high priority

Question 13

drawbacks of takeovers

Answer 13

• High cost involved
• Problems of integration (change management)
• Non-existent cost savings
• Incompatibility of management styles, structures and culture
• High failure rate

Question 14

Common Reasons Why Takeovers Fail

Answer 14

• Lack of decisive change management in the early stages
• The takeover was mishandled
• Cultural incompatibility between the two businesses and poor communication
• Competitors take the opportunity to gain market share whilst the takeover target is being integrated

Question 15

directions of integration

Answer 15

Forward + vertical
Backward + vertical
Horizontal
Conglomerate

Question 16

directions of integration
Forward + vertical

Answer 16

Acquiring a business further up in the supply chain – e.g. manufacturer buys a distributor

Question 17

directions of integration
Backward + vertical

Answer 17

Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler

Question 18

directions of integration
Horizontal

Answer 18

Acquiring a business at the same stage of the supply chain – e.g. a manufacturer buys a competitor

Question 19

directions of integration
Conglomerate

Answer 19

Where the acquisition has no clear connection to the business buying it

Question 20

benefits of horizontal intergration

Answer 20

• Achieve economies of scale
• Potential to secure revenue savings
• Wider range of products
• Reduces competition by removing key rivals
• Buying a existing brand can be cheaper than organically growing a brand – this makes the entry barriers higher for potential rivals

Question 21

benefits of vertical intergration

Answer 21

• business captures a greater share of the profit on each sale
• Create a barrier to entry to potential new competitors
• Gain greater insights into customer needs and wants at each stage of the supply chain

Question 22

what is a merger

Answer 22

a combination of two previously separate firms which is achieved by forming a completely new firm into which the two original businesses are integrated

Question 23

financial risks of inorganic growth

Answer 23

• Overpayment: may not recoup the investment through increased revenue if they pay too much
• Integration Challenges: can be complex and costly
• Cultural Differences: Mergers result in clashes of company cultures leading to decreased productivity and loss of employees
• Regulatory Hurdles: face opposition from regulators or stakeholders
• Debt: Acquiring companies may take on debt to finance the merger, which increases the financial risk

Question 24

Financial rewards of inorganic growth

Answer 24

• Increased Market Share
• Synergy: cost savings by eliminating duplicate functions and increased efficiency, leading to increased profitability
• Diversification: wider variety of goods and services reduces the risks with selling a single product
• Access to New Markets: result in a higher customer base and sales revenue
• Increased Value

Question 25

problems with rapid growth

Answer 25

- strain on cash flow - increased management complexities - diseconomies of scale - quality/ customer service issues - culture clash

Question 26

Organic growth (internal) is usually generated by

Answer 26

- gaining greater market share - product diversification - opening a new store - International expansion - investing in new technology Firms will grow organically to the point where they can financially integrate with others

Question 27

Advantages of organic growth

Answer 27

- pace of growth is manageable - Less risky, as profits finance growth - There's industry expertise - Avoids diseconomies of scale - The management understands every part of the business

Question 28

Disadvantages of organic growth

Answer 28

- pace of growth is slow and frustrating - Not able to benefit from economies of scale - Access to finance may be limited

Question 29

why firms stay small

Answer 29

- offer a personalised service and focus on building relations - cant access finance for expansion - product is in a niche market, smaller market size but can be very profitable - higher ability to respond quickly to changing customer preferences - Rapid growth causes diseconomies of scale, which is difficult to deal - goal is not profit maximisation but an acceptable quality of life