9 - Assessing Change In Scale

Question 1

What Is Retrenchment?

Answer 1

Downsizing the scale of a businesses operations, to reduce costs.

Question 2

What Are Methods To Retrenching A Business?
(4 Points)

Answer 2

~ Reduce output.

~ Reduce staff size.

~ Reduce product portfolio.

~ Reduce amount of trade partners.

Question 3

Why Might Businesses Choose To Retrench?
(4 Points)

Answer 3

~ Leave a market, due to economic downturns.

~ Reduce DEOS, to become more efficient.

~ Focus on core competences.

~ Sell off unprofitable parts of the business.

Question 4

What Are The Problems With Retrenchment?
(4 Points)

Answer 4

~ May loose gains from EOS.

~ May loose gains from economies of scope, if product portfolio is reduced.

~ May reduce motivation for existing employees, if it has lead to redundancies.

~ Impacts on stakeholders.

Question 5

What Is Growth?

Answer 5

Increasing the size of the business operations.

Question 6

Why Might Businesses Choose To Grow?
(3 Points)

Answer 6

~ Reduce average costs, by benefiting from EOS.

~ Increased market share.

~ Ability to achieve economies of scope.

Question 7

What Are The Problems With Growth?
(2 Points)

Answer 7

~ DEOS.

~ Overtrading, problems on cash flow.

Question 8

What Are The Types Of Growth?
(2 Points)

Answer 8

~ Internal (Organic) growth.

~ External (Inorganic) growth.

Question 9

What Is Organic Growth?

Answer 9

When a business expands in size, by opening new stores or branches.

Question 10

What Is External Growth?

Answer 10

When a business expands, by either merging with or taking over other business.

Question 11

What Are The Types Of External Growth?
(4 Points)

Answer 11

~ Forwards vertical integration.

~ Backward vertical integration.

~ Horizontal integration.

~ Conglomerate integration.

Question 12

What Is Forward Vertical Integration?

Answer 12

Expanding operations, by joining a firm further forward in the supply chain.

Question 13

What Is Backward Vertical Integration?

Answer 13

Expanding operations, by joining a firm further back in the supply chain.

Question 14

What Are The Benefits Of Vertical Integration?
(4 Points)

Answer 14

Forward:
~ More control over outlets and retailers.

~ More control over distribution network.

Backward:
~ More control of supply chain, negotiations to reduce costs.

~ Leads to better quality control and an efficient production process.

Question 15

What Are The Drawbacks Of Vertical Integration?
(4 Points)

Answer 15

~ Cultural clashes, leading to conflicts.

~ DEOS.

~ Expertise loss, due to entrance of a new market.

~ Can require complex management.

Question 16

What Is Horizontal Integration?

Answer 16

Expanding operations, by joining a firm at the same stage of the production process.

Question 17

What Are The Benefits Of Horizontal Integration?
(4 Points)

Answer 17

~ Increased market share.

~ EOS, due to producing on a larger scale, reducing the threat of new entrants.

~ Reduce competition, if integrating with a competitor.

~ Greater access to new markets and customers.

Question 18

What Are The Drawbacks Of Horizontal Integration?
(4 Points)

Answer 18

~ Reduced competition.

~ DEOS, larger business size.

~ Cultural clashes.

~ High costs involved.

Question 19

What Is Conglomerate Integration?

Answer 19

Expanding into unrelated industries.

Question 20

What Are The Benefits Of Conglomerate Integration?
(2 Points)

Answer 20

~ Spreads risk over different industries, due to potential diversification.

~ Greater access to new markets and customers.

Question 21

What Are The Drawbacks Of Conglomerate Integration?
(3 Points)

Answer 21

~ Possible lack of expertise in the new market.

~ DEOS.

~ Cultural clashes.

Question 22

What Are The Methods Of Growth A Business Can Adopt?
(4 Points)

Answer 22

~ Mergers.

~ Takeovers.

~ Joint ventures.

~ Franchising.

Question 23

What Is A Merger?

Answer 23

Combination of 2 firms, into a single entity.

Question 24

What Is A Takeover?

Answer 24

One company gains 51% of shares to acquire control of another organisation.

Question 25

What Is A Joint Venture? (2 Points)

Answer 25

~ 2 or more business, agree to act collectively to set up a new business venture. ~ With all parties contributing funds to start up the business.

Question 26

What Are The Benefits Of A Joint Venture? (2 Points)

Answer 26

~ Sharing of resources and risks. ~ Combined expertise.

Question 27

What Are The Drawbacks Of A Joint Venture? (3 Points)

Answer 27

~ Conflicts in all areas. ~ Cultural differences. ~ Shared revenue.

Question 28

What Is Franchising?

Answer 28

When franchisor grants the rights to operate under their brand.

Question 29

What Are The Benefits Of Franchising? (2 Points)

Answer 29

~ Rapid expansion, with minimal capital invested due to franchisee paying for rights. ~ Local expertise, from franchisees.

Question 30

What Are The Drawbacks Of A Franchising?

Answer 30

Can lead to less consistency in quality, as they do not operate how the franchisor does.

Question 31

What Are The Issues With Growth? (5 Points)

Answer 31

~ EOS. ~ Economies of scope. ~ DEOS. ~ Synergies. ~ Overtrading.

Question 32

Describe Technical EOS (2 Points)

Answer 32

~ Bringing in specialist machinery and workers as a firm gets larger. ~ Boosting productivity and lowers AC, as costs are spread over more units of output.

Question 33

Describe Purchasing EOS (2 Points)

Answer 33

~ When a firm can buy their raw materials in bulk as they grow, negotiating unit discounts. ~ Lowering AC as a result.

Question 34

Describe Managerial EOS (4 Points)

Answer 34

~ As a firm gets larger, they can employ specialist managers. ~ These managers monitor the productivity of the workforce, boosting it. ~ They bring in their specialist skills, which workers then benefit from, increasing productivity. ~ Which then decreases DEOS.

Question 35

What Are The Types Of Causes Of DEOS? (4 Points)

Answer 35

~ Control. ~ Communication. ~ Coordination. ~ Motivation.

Question 36

What Is Economies Of Scope? (3 Points)

Answer 36

~ Offering a range of different products, distributing costs over a range. ~ Leading to a fall in unit costs, meaning lower prices. ~ E.g. Diversification, entering new markets.

Question 37

What Is A Synergy? (2 Points)

Answer 37

~ When 2 businesses join together, they will be able to achieve more than the sum of 2 businesses operating separately. ~ 1+1 = 3.

Question 38

What Is Overtrading? (2 Points)

Answer 38

~ When a business has grown too quickly, resulting in it operating at a level beyond its resources. ~ Leading to liquidity problems.

Question 39

What Are Solutions To Preventing Overtrading? (3 Points)

Answer 39

~ Ensure there is a cash flow forecast. ~ Reduce receivable days. ~ Expand payable days.