3.2 - Business Growth

Question 1

Explain what the reasons are for a business staying small in size (5)

Answer 1

Personal service - many people prefer to do business with the company directly and are prepared to pay higher prices to do so

Owners preference - An owner may be happy with the businesses performance and may not want the added responsibility of growth

Flexibility and efficiency - small firms are often more flexible and innovative, able to react quicker to changes in market conditions

Low barriers to entry - Low set up costs make it easier for smaller businesses to compete

Small firms can be monopolists- can supply a service to the local community that no other firm does

Question 2

Explain how product differentiation and USP’s allow small businesses to compete

What does a USP include

Answer 2

Make their product/service different to competitors, attracting customers and developing brand loyalty.

Includes: Quality, Customer service, Features and functions, Delivery and Price

Question 3

Explain how flexibility in responding to customer needs allows small businesses to compete

Answer 3

Smaller businesses can identify new opportunities and meet the changing needs of customers faster than larger competitors. Can respond quicker to external factors and make a product more specific for the customer

Question 4

Explain how customer service allows a small business to compete

Answer 4

Can differentiate a smaller business to their competitors. Easier for a smaller firm to have better communications with customers and offer a more personal service

Question 5

Explain how E-commerce allows a small business to compete

Give examples of types of E-commerce

Answer 5

Can sell their product/service online to access the same customers as large competitors

Online shop- selling products online independents or through third party sites like Amazon and Ebay
Social media consultants- offer a service to improve a firms social media networking, to improve communications with customers
Information sites- provide information to customers and make revenue through advertisements
Tutoring or training- offering a service to customers who are willing to pay to learn something

Question 6

Define Merger

Answer 6

Is a legal deal between two businesses of similar size bringing both firms together under one board of directors, with a name change usually taking place. E.g. T-mobile and Orange formed EE

Question 7

Define Takeover

Answer 7

Is a legal deal where one business acquires another business , buying enough shares to have control over the business

Question 8

What are reasons for mergers and takeovers (5)

Answer 8

Attempt to increase market share (increased control of market)

Access to technology, employees or property (acquiring a foreign firm to gain cheaper tax rates)

Access to new markets

Improved distribution networks

Improved brand awareness

Question 9

Define a Friendly Takeover

Answer 9

Occurs because the business may have cash flow problems and invite a takeover from a stronger business, known as a white knight.

Question 10

Define a hostile takeover

Answer 10

Occurs when the board of directors will try to resist takeover, but if 51% of shares are bought management and control changes

Question 11

Define Integration

Answer 11

When businesses join together to form one

Question 12

Define Horizontal integration

Answer 12

Occurs when two firms in the same sector and the same stage of production join together. Both have knowledge of the market and less risk of failure

Question 13

Define Vertical Integration

Answer 13

Occurs when two firms in different sectors and stages of production join together. Can be forward, join with a firm in next stage of production, or backwards, join with firm in previous stage of production. Can lead to cheaper costs and a guaranteed supply output

Question 14

What are the Financial Risks of mergers and takeovers (4)

Answer 14

Regulatory intervention - CMA has power to block a deal if they feel it goes against the interests of consumer

Resistance from employees - likely to be job losses , employees likely t9 disrupt proceedings, decreased productivity

Integration costs - complex, expensive and time consuming process to physically integrate two firms

Bidding wars - if more than one business wants to acquire a business the price starts to rise

Question 15

What are the financial rewards of mergers and takeovers (4)

Answer 15

Speedy growth- grow quicker than internal methods leading to a larger market share,lower costs and economies of scale

Higher remuneration for senior employees - salaries of senior staff will rise as they are in control of a larger firm

Rewards for previous owners - owners of acquired business gain significant financial reward

Increased profitability - future revenues will increase and costs will decrease due to economies of scale, increasing profits

Question 16

What are the problems of rapid growth (5)

Answer 16

Drain on resources - mergers and takeovers are expensive, can stretch financial resources

Coping with change- difficulty in merging two cultures, can cause conflict

Alienation of customers- can lose close relationship with customers, damaging brand image and a loss of customers

Loss of control- increased chain of command effects communication

Shortages of resources - increased demand for resources due to growth increases price

Question 17

Define growth

Answer 17

Growth is a stage where a business reaches the point for expansion and seeks additional options to generate more profit

Question 18

State the objectives of growth

Answer 18

Economies of scale
Increased market power
Increased market share and brand recognition
Increased profitability

Question 19

Explain Economies of scale as a benefit of growth

List the types

Answer 19

Economies of scale are reductions in average costs arising from growth of the firm

Internal Economies of scale:
Financial EOS - Large firms have easier access to loans as they have large assets to offer as security
Purchasing EOS- Large firms buy large quantities of stock, lower average costs
Technical EOS - Large firms can invest in large scale technology which decreases average costs and increases productivity
Marketing EOS - Large firms have larger marketing budgets, spread put over a large output
Managerial EOS - Can employ specialist managers (marketing, finance ect), increasing efficiency and decreasing average costs

External economies of scale are reductions in Average costs arising from the growth of the industry. E.g. better transport infrastructure and suppliers relocating closer

Question 20

Explain increased market power as a benefit of growth

Answer 20

Allows a large firm to dominate customers and suppliers in transactions

Suppliers- can force suppliers to decrease prices of materials
Customers - can charge higher prices and lack innovation due to lack of competition

Question 21

Explain increased market share and brand recognition as a benefit of growth

Answer 21

Allows a firm to charge higher prices, create customer loyalty, enhance product recognition and launch new products easier as a result of increased power over the market.

Question 22

Explain increased profitability as a benefit of growth

Answer 22

Increased profitability is more common in larger firms, allows investment and innovation to develop and launch new products, to grow even further

Question 23

State the problems arising from growth

Answer 23

Diseconomies of scale
Internal communication
Overtrading

Question 24

Explain diseconomies of scale as a problem of growth

List the types

Answer 24

Occurs where a large business expands production beyond the Minimum Efficient Scale (output that minimises average costs) and therefore average costs increase

Reasons for diseconomies of scale :
Control- less control leads to less productivity
Communication- harder to communicate
Coordination- hard to ensure all departments work similarly
Motivation- employees feel less valued, decreased productivity

Question 25

Explain internal communication as a problem of growth

Answer 25

Is the exchange of messages inside a business. If a business grows too big there could be a problem and distortion with communication, leading to a waste of time, resources and productivity

Question 26

Explain overtrading as a problem of growth

Why does it mostly occur

Answer 26

Occurs when a business tries to fund large volumes of business without sufficient resources, can run out of cash and collapse

Mostly occurs due to :
Do not have enough capital to produce large volumes
Offer too much trade credit to customers
Operating with slim profit margins , not enough profit to fuel growth

Question 27

Define organic growth

Answer 27

Is a business growth strategy that involves a business growing gradually using its own resources

Question 28

Define Inorganic growth

Answer 28

Is a business growth strategy that involves two or more businesses forming together to form one much larger one

Question 29

State the methods of growing organically (5)

Answer 29

New customers
New products
New markets
New business model
Franchising

Question 30

Explain new customers as a method of growing organically

Answer 30

A firm may gradually increase production to supply more customers , continuing to grow and expand when full capacity is reached

Question 31

Explain new products as a method of growing organically

Answer 31

A firm may be very innovative and committed to research and development to be able to develop new products to stand out from competitors and grow

Question 32

Explain new markets as a method of growing organically

Answer 32

A firm may replicate their operations and practices in a different area to increase their customer base

Question 33

Explain new business models as a method of growing organically

Answer 33

Developments in technology or social change may change the way a business operates or grows. A firm may use e-commerce to grow

Question 34

Explain franchising as a method of growing organically

Answer 34

Where the firm sells the naming rights and products to other entrepreneurs to sell, involves the franchisee opening a new store to trade in

Question 35

Explain the advantages of organic growth (5)

Answer 35

Less risk than other growth strategies- errors are prevented as the culture and operations are already established.

Cheaper than other growth strategies- financed from retained profit with no finance costs, inorganic methods use external methods of finance, adding to the cost of growth

Maintain control- have complete control of the growth process and how they operate.

Better protected financial position- gradual growth so less strain on financial resources, allowing stronger cash flow

Less likely to have diseconomies of scale- sharp increases in unit costs are less likely to occur

Question 36

Explain the disadvantages of organic growth (5)

Answer 36

Pace of organic growth may be too slow for shareholders -may sell their shares

May prevent the business from accessing the resources, knowledge and profitable developments owned by other businesses

Slow growth may mean the firm is left behind in the market - may lose ability to compete effectively

Longer time to achieve economies of scale- would have to operate at higher costs and lower profit margins for longer time

Not appropriate in a rapidly growing market