Expanding a Business (AQA GCSE Business): Flashcards
Exam code: 8132
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Why might the owners of a business want it to grow?
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Why might the owners of a business want it to grow?
Some owners want to run a large business, and shareholders often demand higher market share and profitability. Larger firms also have easier access to finance and more chances to diversify their products.
Define retrenchment.
Retrenchment is when a business scales down its operations, for example by reducing its workforce, closing less profitable outlets or exiting markets.
Define organic growth.
Organic growth is business growth driven by internal expansion, using reinvested profits or loans.
True or False?
Organic growth is usually a fast way for a business to grow.
False.
The pace of organic growth is usually manageable but slow, which can be frustrating for ambitious entrepreneurs.
Define franchising.
Franchising is a method of growth where a business sells the rights to operate its business model, including its branding, to other business owners.
Define merger.
A merger is when two or more companies combine to form a new company, and the original companies cease to exist.
What happens in a takeover?
One company buys a controlling stake (more than 50%) of another company's shares and gains control of its operations, often against its will.
The benefits that result from combining two or more companies, such as increased revenue or cost savings, are called _______.
The benefits that result from combining two or more companies, such as increased revenue or cost savings, are called synergies.
What is vertical integration?
Vertical integration is when a business merges with or takes over another firm in its supply chain, at a different stage of the production process.
True or False?
A dairy farmer merging with an ice cream manufacturer is an example of forward vertical integration.
True.
The ice cream manufacturer is further forward in the supply chain than the dairy farmer, so this is forward vertical integration.
What is horizontal integration?
Horizontal integration is when a business merges with or takes over a business at the same stage of the production process.
Why might a business use conglomerate integration?
Conglomerate integration means merging with or taking over an unrelated business. It is used to spread risk across more than one market.
How does expansion give a business greater market power?
A larger business is in a good position to persuade retailers to stock its products and may be able to charge higher prices for its recognised brands. It is also less likely to be taken over by rivals.
What is overtrading?
Overtrading is when a business grows too fast and does not have enough cash to fund its operations, so it risks failure.
Define economies of scale.
Economies of scale are the efficiencies a business gains as it increases its scale of output, which lower its average costs of production.
True or False?
Economies of scale reduce a business's total costs.
False.
Economies of scale lower average (unit) costs, not total costs. Total costs still increase, but at a decreasing rate per unit.
What is a purchasing economy of scale?
A purchasing economy occurs when a business buys raw materials or components in greater volumes and receives a bulk purchase discount, which lowers its average cost.
A _______ economy of scale occurs when a business invests in more advanced machinery and technology, which increases efficiency and reduces the cost per unit.
A technical economy of scale occurs when a business invests in more advanced machinery and technology, which increases efficiency and reduces the cost per unit.
How do managerial economies of scale lower average costs?
Larger businesses can employ specialist managers who are skilled and efficient at certain tasks, and this efficiency lowers the average cost.
Define external economies of scale.
External economies of scale lower average costs for individual businesses when the market as a whole grows.
True or False?
Workers recruited in a large, growing industry often need less training.
True.
A growing industry builds a concentration of workers with industry-specific skills, so new recruits need less training and become productive quickly.
How can a growing industry lead to improved infrastructure?
A growing industry that employs many people can persuade local authorities to improve transport and communications, which makes distribution more efficient.
Define diseconomies of scale.
Diseconomies of scale are the reasons why a firm's average costs start to increase as it continues to increase its scale of output.
How can poor communication cause diseconomies of scale in a growing business?
As more managers and employees join, the chain of command lengthens and communication becomes slower. Mistakes may be made, which worsens efficiency.
Larger businesses need extensive administration to coordinate their many resources, which is known as increased _________.
Larger businesses need extensive administration to coordinate their many resources, which is known as increased bureaucracy.
Why might employees show a lack of commitment in a very large business?
Workers may feel less valued because their contact with management is limited. They may become demotivated, so output falls and average costs rise.
Define average unit cost.
The average unit cost is the cost of producing one item, taking into account both fixed and variable costs.
Unit cost = Total costs ÷ Units of output
True or False?
If a business's unit costs fall as its output increases and its selling price stays the same, its profits should rise.
True.
Falling unit costs as output increases mean each item costs less to produce. With an unchanged selling price, the business makes more profit on each item sold.
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