3.2 Business Growth

Question 1

How can a business achieve economies of scale?

Answer 1

Increased sales
Increased output required to meet demand

Question 2

What are the three main sources of economies of scale?

Answer 2

Purchasing economies of scale (bulk-buying)
Managerial economies of scale (employing specialists)
Technical economies of scale (efficient machinery)

Question 3

What are the four main objectives of growth?

Answer 3

Achieving economies of scale.
Increased market power over customers and suppliers.
Increased market share and brand recognition.
Increased profitability.

Question 4

What are the two main problems that can arise from business growth?

Answer 4

Diseconomies of scale, including poor internal communication.
Overtrading.

Question 5

What are the three main sources of diseconomies of scale?

Answer 5

Poor internal communication.
Poor employee motivation.
Poor managerial coordination.

Question 6

What are the effects of economies of scale?

Answer 6

Substantial bulk-buying discounts.
Managerial economies through specialisation.
Technical economies using robotics.

Question 7

What are the effects of diseconomies of scale?

Answer 7

Problems of effective coordination.
Weak, yet expensive, communications.

Question 8

How can business growth lead to overtrading?

Answer 8

Cash flow out of business increases.
Inflows take time to arrive.
Company must wait for customers to pay up.
Possibility of running out of cash in mean time.

Question 9

What reasons are there for mergers and takeovers?

Answer 9

Cost synergies (eliminate duplicated roles and processes)
Diversification
Market power (power over customers and suppliers)

Question 10

What is the difference between a merger and a takeover?

Answer 10

In a merger two companies disappear and a new one is created.
A takeover means one company engulfs another, so only one disappears.

Question 11

What are the different types of merger / takeover?

Answer 11

Backward vertical integration (with supplier)
Forward vertical integration (with customer)
Horizontal integration (with competitor)
Conglomerate integration (with an unrelated business)

Question 12

What are the benefits of backward vertical integration?

Answer 12

Secure supplies
Lower cost of supplies

Question 13

What are the drawbacks of backward vertical integration?

Answer 13

Ties the business to a supplier that might not always offer the best option.

Question 14

What are the benefits of forward vertical integration?

Answer 14

Guaranteed outlet for a business’s products.

Question 15

What are the drawbacks of forward vertical integration?

Answer 15

Consumers may resent the loss of choice.

Question 16

What are the benefits of horizontal integration?

Answer 16

Provide clear economies of scale.

Question 17

What are the drawbacks of horizontal integration?

Answer 17

Possible diseconomies of scale.
Confusion over which culture should be adopted.

Question 18

What are the benefits of conglomerate integration?

Answer 18

Diversifies the business, spreading risk.

Question 19

What are the drawbacks of conglomerate integration?

Answer 19

Potential failure to understand the target company as it will be an unfamiliar market.
Distract management from original business as a result of unfamiliarity and slowness to integrate.

Question 20

What are the potential problems of rapid growth?

Answer 20

New management structure must be created.
One group of staff is likely to need to adapt their methods.
Customers and suppliers may feel uncomfortable if they have to deal with new contacts within the business.

Question 21

What are the two main approaches to organic growth?

Answer 21

Target new markets.
Launch new products.

Question 22

What are the advantages of organic growth?

Answer 22

Influence of leaders stays strong.
Reduction of financial risk.
Secure career paths.

Question 23

What are the disadvantage of organic growth?

Answer 23

Limited speed
Failing to fully exploit a short-lived opportunity
Predictability

Question 24

Why might a business choose to stay small?

Answer 24

Avoid the problems associated with growth.
Pursue objectives that might be damaged by growth.
Better chance of differentiation in competitive markets.

Question 25

What are the main ways of small business survival in competitive markets?

Answer 25

Differentiation and USPs
Flexibility in responding to customer needs
Customer service
E-commerce