3.2 – Business Growth

3.2.1 – Growth

1. a) Objectives of growth:

To achieve economies of scale (internal and external):

Explanation: Economies of scale refer to the cost advantages that companies experience when they increase their level of production. Internal economies are achieved within the company, while external economies occur due to industry expansion.

Increased market power over customers and suppliers:

Explanation: Growth can enhance a business’s bargaining power over customers and suppliers, allowing it to negotiate better terms and conditions.

Increased market share and brand recognition:

Explanation: Growing businesses can capture a larger share of the market and enhance their brand recognition, which can foster customer loyalty and attract more customers.

Increased profitability:

Explanation: Growth often leads to increased profitability as businesses can benefit from economies of scale and potentially higher market share.

1. b) Problems arising from growth:

Diseconomies of scale:

Explanation: Diseconomies of scale occur when a company grows so large that the costs per unit increase. It can result from increased bureaucracy and complexity.

Internal communication:

Explanation: As businesses grow, maintaining effective internal communication can become challenging, potentially leading to misunderstandings and inefficiencies.

Overtrading:

Explanation: Overtrading happens when a company expands too quickly without sufficient financial resources, leading to cash flow problems and potential insolvency.

3.2.2 – Mergers and Takeovers

1. a) Reasons for mergers and takeovers:

Explanation: Companies merge or take over others to achieve various objectives such as expanding market share, diversifying products/services, achieving synergies, or eliminating competition.

1. b) Distinction between mergers and takeovers:

Explanation: A merger is a mutual agreement where two companies combine to form a new entity, while a takeover is the acquisition of one company by another, which may be friendly or hostile.

1. c) Horizontal and vertical integration:

Explanation: Horizontal integration involves combining with a company operating in the same industry and at the same stage of production, while vertical integration involves combining with a company at a different stage of production in the same industry.

1. d) Financial risks and rewards:

Explanation: Mergers and takeovers come with financial risks such as overvaluation and integration issues but can also offer rewards like increased profitability and market share.

1. e) Problems of rapid growth:

Explanation: Rapid growth can lead to issues such as operational inefficiencies, cultural clashes, and increased financial risk.

3.2.3 – Organic Growth

1. a) Distinction between inorganic and organic growth:

Explanation: Inorganic growth involves expanding through mergers, acquisitions, or alliances, while organic growth is achieved through the expansion of existing business activities.

1. b) Methods of growing organically:

Explanation: Organic growth can be achieved through strategies such as increasing production capacity, entering new markets, or launching new products.

1. c) Advantages and disadvantages of organic growth:

Explanation: Organic growth offers control and stability but can be slower and require substantial resources. In contrast, inorganic growth can be faster but comes with integration challenges and higher risks.

3.2.4 – Reasons for Staying Small

1. a) Small business survival in competitive markets:

Product differentiation and USPs:

Explanation: Small businesses can survive by offering unique products or services that distinguish them from competitors.

Flexibility in responding to customer needs:

Explanation: Small businesses can quickly adapt to changing customer needs due to their smaller size and less bureaucratic structure.

Customer service:

Explanation: Small businesses can provide personalized customer service, building strong relationships with their customers.

E-commerce:

Explanation: Leveraging e-commerce allows small businesses to reach a wider audience without the need for a physical expansion, helping them compete effectively in the market.