Business expansion

Question 1

List the ways of measuring the size of a business:

Answer 1

• Value of sales - value of a firm’s sales (revenue/turnover) and market share
• Value of the business - value of its assets - liabilities and calculate the value of shares (market capitalisation - value of all its shares price of share x number of shares)
• Number of employees

Question 2

What two ways can a business grow?

Answer 2

• Internal growth (organic growth)

- External growth (inorganic growth/ integration)

Question 3

How can businesses grow internally?

Answer 3

Internal growth can occur in several different ways. These include franchising, opening new stores, e-commerce and outsourcing.

Question 4

What does franchise mean?

Answer 4

A franchise is the existing business that allows someone to use their business name to sell goods/services.

Question 5

What does franchisor mean?

Answer 5

The franchisor for a fee will provide equipment, premises, support and training.

Question 6

What does franchisee mean?

Answer 6

A franchisee is the person that asks permission to trade under an existing business name.

Question 7

What is a e-commerce?

Answer 7

E-commerce is the act of buying a product using an electronic system such as the internet.

Question 8

What outsourcing means and give a reason why a business may need to outsource.

Answer 8

Outsourcing occurs when a business uses another business to produce its products for it. This may happen if it has a large order and doesn’t have the capacity to meet it alone or there’s an increase in demand and they don’t want to risk investing in increasing its productive capacity.

Question 9

What ways can a business grow externally?

Answer 9

Merger or takeover.

Question 10

What is a merger?

Answer 10

An agreement between business owners to combine two businesses and operate as one large one.

Question 11

What is a takeover?

Answer 11

One business buys another business.

Question 12

What are the different ways a business can grow externally?

Answer 12

• Vertical forwards/backwards integration
• Horizontal integration
• Conglomerate integration (Diversification)

Question 13

What does horizontal integration?

Answer 13

Horizontal integration is when two businesses join in the same industry and same stage of production - two hairdressers.

Question 14

What does Vertical backwards integration?

Answer 14

Vertical backwards integration is when two businesses join from the same industry but different stages of production, towards the supplier - computer manufacturer takes over a microchip manufacturer.

Question 15

What does vertical forward integration mean?

Answer 15

Vertical forward integration is when two businesses join from the same industry but different stages of production, towards the customer - farmer takes over a butcher’s shop.

Question 16

What does Conglomerate integration mean?

Answer 16

Conglomerate integration (diversification) is when two businesses join from different industries - insurance company and publishing business.

Question 17

What do you think is good about business expansion?

Answer 17

• Can lead to economies of scale
• Can lead to more power in the market
• Have more status
• More expensive to takeover
• Rewards for staff are often linked to the size of the business

Question 18

What do you think is bad about business expansion?

Answer 18

• Decision making becomes slower
• Employees may feel isolated and demotivated
• Controlling and coordinating a business that has many clients or products and that is possibly based in many different places can be difficult and possibly less efficient

Question 19

What is meant by economies of scale?

Answer 19

Economies of scale occur when a business’s unit costs of production fall as output rises and the business expands.

Question 20

What is meant by diseconomies of scale?

Answer 20

Diseconomies is the opposite and occur when unit costs increases as business expands.

Question 21

What are the different types of economies of scale?

Answer 21

• Purchasing (Bulk-buying)
• Technical
• Managerial
• Financial Economies
• Risk bearing
• Research and Development

Question 22

What is bulk buying?

Answer 22

Bulk buying is when firms buy in bulk so they can negotiate better prices with suppliers. Technical economy of scale occurs when large scale production enables a business to make efficient use of technology.

Question 23

WHat are the different types of diseconomies of scale?

Answer 23

• Poor Communication
• Poor Motivation
• Poor Coordination
• Congestion
• Property prices
• Shortage of skilled labour

Question 24

Businesses can also grow by setting up in another country, what are the challenges with this?

Answer 24

• The law and regulations facing businesses may differ
• The existing businesses may resist new entrants to the market
• Customers’ buying habits and expectations may be different