Theme 3

Question 1

Business size can be measured by:

Answer 1

-Market share
-Profit (growth or absolute)
-Employees/ outlets
-Market power
-DIversification (risk spread)

Question 2

Economies of scale

Answer 2

Refer to the cost advantage (average cost falling) experienced by a firm when it increases its level of output

Question 3

Diseconomies of scale

Answer 3

Occur as average costs start to rise beyond a certain level of output

Question 4

Principle- Agent problem

Answer 4

-Refers to the divorce of ownership between the principal and agent
- ie shareholders and managers have different objectives which might conflict. Managers might choose to make a personal gain, such as a bonus, rather than maximise the dividends of the shareholder. (to fix this managers could be given shares in the business)

Question 5

Public sector business

Answer 5

Controlled by the government e.g. schools, hospitals, libraries, (TAX)
Government (or state) has control of an industry, such as the NHS. Many industries in UK were nationalised after 1945 (railway, coal, electricity, steel)
A number of these were natural monopolies. For example, only one firm will provide water because it is inefficient to have multiple sets of water pipes.
Public sector industries have different objectives to private sector industries. Social welfare or industrial strategy might be a priority of a public sector industry.

Question 6

Private sector business

Answer 6

Aim to make a profit, from small local businesses to large businesses
Free market economists will argue that the private sector gives firms incentives to operate efficiently, which increases economic welfare.
Firms have to produce the goods and services consumers want, which increases allocative efficiency and might mean goods and services are of a higher quality.
Competition might also result in lower prices. This is because firms operating on the free market have a profit incentive, which public sector firms do not.

Question 7

Why do businesses grow

Answer 7

-Shareholder pressure
-Increase profit
-Increase market share
-New locations
-Survive
-Innovation
-Gap in market
-Achieve economies of scale
-Meet demand
-Managerial objectives like sales bonuses
-Synergy effects- new revenue streams

Question 8

Organic Growth

Answer 8

Refers to a business growing gradually with their own resources

Question 9

Methods of organic growth

Answer 9

-New customers- opening a new outlet or store
-New products- developing a new range of products
-New markets- - e.g. finding customers in a different location- Tesco tried to open in the USA, it was a flop
-Franchising- e.g. allowing other businesses to trade under your name (Subway, McDonald’s)

Question 10

Organic Growth Advantages

Answer 10

-Lot less riskier than inorganic growth- cultures, practises, the way they do things are all established.
-Much cheaper than inorganic- can be financed through retained profit rather than borrowing or raising share capital.
-Retain Capital
-Less likley to experience diseconomies of scale

Question 11

Organic Growth Disadvantages

Answer 11

-Slow pace of growth- might be hard to keep shareholders happy- they want high returns quick.
-May get left behind if rivals are all growing inorganically
-Cant tap into knowledge and expertise of other businesses as would be the case with inorganic growth.

Question 12

Two Types of External Growth( inorganic)

Answer 12

-Merger- two businesses join together for mutual benefit.
-Takeover/ acquisition- one business acquires another along with all its assets. Can be hostile or voluntary.

Question 13

Horizontal Integration

Answer 13

Merging or taking over a business at the same level of the supply chain, or in same industry at the same stage of production. It can create economies of scale and sharing expertise (synergies). For examples in 2019, The Walt Disney Company acquired 21st Century Fox’s entertainment assets in a deal that marked horizontal integration in the media and entertainment industry. The acquisition included film and television studios, cable and international TV businesses, and various other assets.

Question 14

Forwards vertical Integration

Answer 14

Occurs when a company expands its operations by acquiring or controlling businesses that are closer to the end consumer or the distribution side of the supply chain. Allows businesses to determine how products are promoted and build relationships with consumers. For example : In 2017, Amazon, an e-commerce and technology giant, acquired Whole Foods Market, a high-end grocery store chain. This acquisition was a forward vertical integration move for Amazon, as it allowed the company to enter the brick-and-mortar retail space and expand its reach into the grocery industry.

Question 15

Backwards vertical integration

Answer 15

With backward vertical integration, a company acquires or takes control of businesses positioned earlier in the production or supply chain.
By doing so, the company aims to ensure a stable and reliable source of raw materials, reduce dependency on external suppliers, and achieve cost savings through economies of scale.
It also means that business dont have to pay extra (profit margins) to suppliers.
For example, a car manufacturer may backward integrate by acquiring a steel manufacturer to secure a supply of steel for their car production.
For example, Nike owns its own factories, which gives it more control over the production of its shoes & apparel. Nike also owns its own retail stores, which gives it more control over the distribution of its shoes.

Tesla use forward and backwards vertical integration.

Question 16

Conglomerate

Answer 16

A conglomerate has acquired many diversified businesses. It takes over businesses in a different market, spreading risk.
The world’s biggest conglomerates include businesses such as 3M in the United States, Siemens from Germany and Philips (Netherlands).
Samsung – the South Korean electronics giant - makes military hardware, apartments, ships and is also operates an amusement park.

Question 17

Advantages of inorganic growth

Answer 17

-Greater profitability
-Market share and assets become larger
-Additional skills and expertise of new staff
-Easier to obtain capital when needed

Question 18

Disadvantages of inorganic growth

Answer 18

-May be additional debt acquired
-Possibly large upfront cost
-Management challenges with integrating acquisitors
-More regulation (Asda/Sainsbury’s got stopped)
-Resistance to chnage

Question 19

Vertical integration

Answer 19

Vertical integration is a business strategy where a company expands its operations by acquiring or controlling other businesses that are either upstream or downstream in the supply chain.
This means that a company integrates different stages of production or distribution within the same industry under its ownership.
The main goal is to gain more control over the entire value chain, from raw materials to the final product or service delivery.
There are two types of vertical integration – backward and forward

Question 20

Adv of forward vertical integration

Answer 20

-Increased market power: A company can gain more control over distribution channels and access to final customers. This can increase market power and bargaining position with retailers or distributors.
-Enhanced control over distribution: Forward integration allows a company to have control over how its products are distributed and displayed to customers. This can lead to better brand representation, consistent messaging, and improved customer experiences.
-Profitability: By cutting out distributors, a company can capture a larger portion of the value chain, leading to higher profit margins on its products.

Question 21

Benefits of vertical integration

Answer 21

-Control of the supply chain – this helps to reduce unit costs and improve the quality of inputs into the production (supply) process
-Improved access to key raw materials perhaps at the expense of rivals who must then pay more for them
-Better control over retail distribution channels + adding new channels to sales platforms to build business revenues
-Removing suppliers and taking market intelligence away from competitors which then helps to make a market less contestable (it increases a firm’s market power)

Question 22

Drawbacks of vertical integration

Answer 22

-Mergers can often create new problems of communication and coordination within a bigger and more disparate firm. It can then lead to diseconomies of scale where the new bigger firm is more inefficient.
-Companies might lose the benefits of specialized expertise when they integrate various stages of the supply chain.
-In some cases, vertical integration may raise competition concerns, especially when a company gains significant control over an entire industry or market.
-With internal control over different stages, companies may become complacent and rely less on external innovation

Question 23

Adv of Horizontal integration

Answer 23

-Exploit internal economies of scale (leading to lower LRAC) – lower average costs can lead to increased profits
-Cost savings from the rationalization of the business – this often this involves job losses in a bid to increase productivity.
-Create a wider range of products - (diversification) – this creates opportunities for economies of scope.
-Reduces competition by removing one or more key rivals – this increases market share and long-run pricing power.
-Buying a well-known brand can be cheaper in the long run than organically growing a brand and makes entry barriers higher for potential rivals

Question 24

DisAdv of Horizontal Integration

Answer 24

-Reduced flexibility – the addition of more personnel and processes in the merged business means more legal accountability and extra red tape which can then slow down the rate of business innovation
-Risk of diseconomies of scale (which causes an increase in long run average cost) from the enlarged businesses especially if there are clashes of management style and corporate culture
-Risk of attracting scrutiny from competition authorities who might be worried that a merger might lead to a lessening of competition which could lead to higher prices and a decline in consumer welfare. For example, a merger between Sainsbury & Asda was blocked on competition grounds (2019)

Question 25

Motivations for business growth

Answer 25

-Profit motive: Businesses grow to generate improved returns for shareholders. Share valuation is influenced by expectations of future revenues & profits
-Cost motive: Economies of scale increase the capacity of the business leading to lower average costs. This can help to raise profit margins.
-Market power motive: Firms may want market dominance giving them extra pricing power. Larger businesses can take advantage of monopsony power
-Risk motive: Diversification across products & markets can reduce investor risk
-Managerial motives: Managers with objectives tied to business growth often aim for rapid expansion

Question 26

Mergers and takeovers are good for firms and economies- agree and disagree

Answer 26

For:
-Economies of scale
-Increase market share
-Increase sales and profits
-Brand name becomes established
-Reduced risk

Against:
-Deciding HQ location
-Job Cuts
-Business becomes too large/ monopoly
-Diseconmies of scale

Question 27

Limits to business growth

Answer 27

-Regulatory Benefits
-Finding skilled staff
-Disruptive technologies
-Financial Constraints
-Size of potential markets
-Controlling costs of a growing business

Question 28

Regulation and compliance costs

Answer 28

-Health and safety: businesses must adhere to regulations, which may involve purchasing safety equipment, conducting inspections, and providing training for employees
-UK’s General Data Protection Regulation (GDPR) has introduced strict data protection rules for businesses.
-Red tape and delayed planning - getting planning permission for new construction or development projects can be a lengthy and complex process

Question 29

Competition from new technologies

Answer 29

-Many businesses in the UK have faced challenges from disruptive technologies that have fundamentally changed their industries:
1.London’s iconic black cab drivers faced significant challenges from the emergence of ride-hailing platforms like Uber and Lyft.
2.E-commerce has posed challenges to brick-and-mortar retailers
3.Banks have experienced disruption from fintech startups such as Monzo and Revolut offering innovative digital financial services.
4.Traditional media outlets, including newspapers have faced challenges from online platforms and social media

Question 30

Financial constraints on business growth

Answer 30

-Limited Access to Capital and Debt – including difficulty in securing loans from banks, attracting venture capital, or accessing equity investment. Smaller businesses often face higher interest rates on loans
-Cash-flow issues - poor cash flow management can impede growth. If a business is struggling to collect payments from customers, has extended payment terms with suppliers, or faces seasonality in its sales.
-High debt levels - excessive debt can become a constraint. High interest payments and principal repayments can limit a business’s ability to allocate funds to growth-oriented activities.

Question 31

Size of market as a constraint on growth

Answer 31

-Businesses that rely on local customers in small towns or rural areas can face market size constraints
-Some businesses offer custom-made products tailored to individual customers’ preferences. Market size for such products might be limited due to the time and resources required to create each unique item
-Regional cultural products - Some cultural products are inherently limited by regional or cultural appeal such as traditional crafts & foods
-Market size might be constrained by high average prices which causes effective demand to be lower – example: unaffordable electric cars

Question 32

Economies of scope

Answer 32

Occur where it is cheaper to produce a range of products rather than specialize in a handful of products

Question 33

Diseconomies of scale

Answer 33

Occur when a business grows so large that the costs per unit increase. As output rises, it is not inevitable that unit costs will fall. Sometimes a business can get too big.

Question 34

Economies of scale

Answer 34

• Economies of scale are cost advantages companies experience when production becomes efficient, as costs can be spread over a larger amount of goods.
• A business’s size is related to whether it can achieve an economy of scale-larger companies will have more cost savings and higher production levels.
• Economies of scale can be both internal and external. Internal economies are caused by factors within a single company while external factors affect the entire industry.

Question 35

Internal economies of scale

Answer 35

Originate within the company, due to changes in how that company functions or produces goods.
Internal economies of scale happen when a company cuts costs internally, so they’re unique to that particular firm. This may be the result of the sheer size of a company or because of decisions from the firm’s management. There are different kinds of internal economies of scale. These include:
* Technical: large-scale machines or production processes that increase productivity
* Purchasing: discounts on cost due to purchasing in bulk
* Managerial: employing specialists to oversee and improve different parts of the production process
* Risk-Bearing: spreading risks out across multiple investors
* Financial: higher creditworthiness, which increases access to capital and more favourable interest rates
* Marketing: more advertising power spread out across a larger market, as well as a position in the market to negotiate

Question 36

External Economies of Scale

Answer 36

Based on factors that affect the entire industry, rather than a single company.
External economies of scale, on the other hand, are achieved because of external factors, or factors that affect an entire industry. That means no one company controls costs on its own. These occur when there is a highly-skilled labour pool, subsidies and/or tax reductions, and partnerships and joint ventures-anything that can cut down on costs to many companies in a specific industry.