9.1 Changes in Scale (AQA A Level Business): Flashcards

Closing unprofitable branches, cutting staff, selling off assets or withdrawing from certain markets.

Financial strain/losses and intense competition (also refocusing on core activities).

External growth achieved through mergers and takeovers is also known as inorganic growth.

False.

Organic growth is less risky — it is financed by profits and uses the firm's existing expertise.

True.

Retrenchment reduces size or scope to cut costs, improve cash flow and focus on the strongest activities.

Vertical, horizontal and conglomerate integration.

Vertical integration is a merger/takeover of a firm at a different stage of the supply chain.

Forward = merging with a firm further up the supply chain (e.g. a manufacturer buying a retailer); backward = further back (e.g. a retailer buying a manufacturer).

Horizontal integration is a merger/takeover of a firm at the same stage of the production process.

A rapid increase in market share (also economies of scale, reduced competition and shared industry knowledge).

Conglomerate integration is a merger/takeover between firms in entirely different industries.

It spreads risk across industries (also uses surplus cash/skills and shares key expertise).

A merger is when two or more companies combine to form a new company — the originals cease to exist.

A takeover is when one company buys a controlling stake (>50% of shares) in another, often against its will.

Economies of scale and rapid entry into new markets (also acquiring technology, reducing competition and market power).

Hard-to-blend cultures/systems, a heavier debt burden, or the risk that regulators block the deal.

A joint venture is when two businesses combine knowledge, resources and skills to form a separate business entity for a limited period.

Conflicting objectives, being too small to compete, or limited control for a minority partner.

Franchising is where a franchisee buys the rights to operate a franchisor's business model and branding for a lump sum plus ongoing fees.

Rapid expansion with little capital (also motivated local owners, stronger joint marketing and a lighter management workload).

Less direct control (also shared profits, risk of conflict and ongoing training/support costs).

A takeover involves buying a controlling stake of more than 50% of a company's shares.

False.

The original companies cease to exist; their assets and liabilities transfer to the new entity.

True.

Backward vertical integration is a merger/takeover with a firm earlier in the supply chain, e.g. a supplier.

Economies of scale are efficiencies from increased output that lower a business's average cost per unit.

The level of output at which average cost is at its lowest and cannot be reduced any further.

Managerial, purchasing and technical (also marketing and risk-bearing economies).

Buying raw materials in greater volumes to gain a bulk purchase discount, lowering average cost.

Diseconomies of scale occur when a business grows too large to manage effectively, so cost per unit rises.

Management and communication diseconomies (also geographical and cultural).

Decentralise decision-making, invest in communication systems, and strengthen motivation and culture.

Economies of scope occur when it is cheaper for one firm to produce a range of goods/services together than separately.

Disney (characters across films, streaming, parks and toys) or Amazon (one platform for many products).

Synergy is the extra value created when two businesses combine so the joint result is greater than the sum of the parts.

Cost synergies (lower costs) and revenue/product synergies (higher sales).

Cultural clashes between workforces and higher-than-expected integration costs.

Overtrading is when a business grows faster than its working capital can support.

A cash flow squeeze that can force costly borrowing, rushed asset sales or, in extreme cases, business failure.

Cash-flow planning, arranging short-term finance as a safety net, or tightening cash control.

Buying materials in bulk to gain discounts is an example of purchasing economies of scale.

False.

That describes economies of scale; economies of scope come from producing a range of different products together.

True.

Cash gets tied up in stock and unpaid invoices while wages, suppliers and interest still must be paid.

Bigger budgets for national/global campaigns, easier cross-promotion, and stronger bargaining power with retailers.

Higher retained profits and assets improve credit ratings, and fixed costs spread over more units raise margins.

Cash tied up in extra stock, receivables and facilities raises the danger of overtrading; reporting also becomes more complex.

Communication gaps, weaker motivation, a taller hierarchy slowing decisions, and culture clashes after mergers.

Larger production runs cut unit costs, bulk-buying lowers input prices, and advanced technology becomes affordable.

Longer, more complex supply chains, quality may fall if systems lag output, and higher fixed costs.

Asset sales and lower overheads improve liquidity, but one-off restructuring costs cut short-term profit.

HR manages redundancies and redeployment; a leaner structure speeds decisions but morale among remaining staff falls.

Closing inefficient sites raises capacity utilisation, but fewer sites can increase delivery times and weaken supplier relations.

When a business grows too quickly and ties up too much cash, it risks overtrading.

False.

It can improve cash flow and let a business refocus on its strengths (e.g. M&S shifting into e-commerce).

True.

As a business grows, communication gaps can widen and extra layers of hierarchy can slow decision-making.