Theme 3 Section B Questions Flashcards
Examine 2 reasons for a firm to stay small [ 8 - 10 marks ]
AN1: Lack of access to finance; banks are unwilling to lend to small businesses; can’t invest in expanding their scale of operation
EV1: Crowdfunding is becoming more popular for small firms to gain access to funds, e.g. social media outreach
AN1: Size of market; small markets provide a ‘ceiling’ in terms of how big the firm can grow; niche market or little scope for growth outside their current market
EV2: Firms can look to grow outside of their existing industry; diversifying into new markets provides new opportunities for growth
Evaluate 2 reasons for a horizontal merger [ 8 - 10 - 12 marks ]
AN1: Increase market share; increase price setting power in the industry; looking to maximise LR profits by increasing their current market share; C&R diagram showing outward shift in AR & MR due to combined market share of firms leading to greater profit
EV1: CMA could prevent merger if it goes against consumer interest; ‘substantial lessening of competition’
AN2: Gain economies of scale, e.g. technology advances due to breaking down patenting between the two firms; EoS diagram
EV2: Diseconomies of scale; communication issues; show on diagram as LRAC3.Q3
Evaluate 2 reasons for a vertical merger [ 8 - 10 - 12 marks ]
AN1: Greater control of supply chain backwards e.g. IKEA buying forests in Romania and Sweden; can prevent competitors using the same supplier
EV1: Very expensive; there are future cost gains and spread out; but there is a large initial cost
AN2: Greater control over distribution and customer retail experience; e.g. vehicle manufacturer buying its retail business
EV2: Valuation problems when acquiring a company; may over-pay for the acquisition // Diseconomies of scale
Assess the benefits that might arise as a result of a merger [ 10 - 12 - 15 marks ]
Benefits: Economies of scale, increased market share, increased revenue, greater control of supply chain
Costs: Expensive, valuation problems, diseconomies of scale, dreaded CMA innit
Assess the constraints on a firm’s ability to grow [ 8 - 10 marks]
AN1: Lack of access to finance - banks unwilling to lend to small businesses
EV1: Crowdfunding is a relatively new way for small firms to access finance
AN2: Size of market - small markets provide a ‘ceiling’ in terms of how big the firm is able to grow
EV2: Firms can look to grow outside of their existing industry - diversifying into new markets provides new opportunities for growth
Assess the reasons for a firm to demerger [ 10 - 12 - 15 marks ]
AN1: To focus on core business goals - large firms may lose sight of what made them successful in the first place (especially conglomerates) so demerging allows them to re-focus on this and improve customer satisfaction
EV1: PLCs may not feel able to justify this to shareholders who are looking for constant growth (in order to increase share price & dividends
AN2: Diseconomies of scale - if the firm is so large that it experiences D.o.S. then a demerger may enable it to reduce costs and increase profitability
EV2: Difficult to be certain about whether costs will rise or fall - information problems means impact on LRAC is hard to predict
