1.6 Growth and Evolution

Question 1

Economies of Scale

Answer 1

• When a firm’s average cost decrease as it increases its scale of production
• The more units produced, the cheaper it is to produce each unit

Question 2

Examples of Economies of scale

Answer 2

1. Purchasing economies
   Bulk-buying discounts – discounts for larger orders
2. Financial economies
   Lower costs of borrowing due to higher trust from banks
3. Managerial economies
   Can hire specialists in each area
4. Marketing economies
   Same marketing campaign over the world so can spread costs over a larger production
5. Technical economies
   Can purchase the best, expensive technology as it is cost-efficient to buy

Question 3

Diseconomies of Scale

Answer 3

When a firm’s average cost increase as it increases its scale of production

Question 4

Examples of diseconomies of scale

Answer 4

1. Communication problems and bureaucracy
   Slow communication and decision making
2. Poor coordination and control
   Harder to manage departments which can be in many places/countries
3. Poorer working relationships
   Overspecialization of labour

Question 5

Internal Growth

Answer 5

Expansion of a business using own capabilities and resources

Question 6

External Growth

Answer 6

Expansion through merging or acquiring other businesses

Question 7

Types of Integration

Answer 7

Horizontal, vertical (foward and backwards), and Conglomerate

Question 8

Horizontal Integration

Answer 8

Integration with firm in same industry and at same stage of production

Question 9

Vertical Integration

Answer 9

Integration with firm in same industry and at different stage of production

Backward:
- Integration with a supplier

Fowards:
- Integration with a customer

Question 10

Conglomerate Integration

Answer 10

• Integration with firm in a different industry
• Companies are irrelevant to each other but merge

Question 11

Benefits of Integration

Answer 11

Horizontal Integration:
Economies of Scale
Reduce competition

Vertical Integration:
Control supply chain
Backwards: Access to key resources
Forwards: Access to consumers and marketing

Conglomerate Integration:
Less market saturation
Spread risk

Question 12

Other external growth methods: AO3

Answer 12

Strategic Alliance
Franchise
Joint Venture

Question 13

Strategic Alliance

Answer 13

Agreement between two firms to commit resources to a mutually beneficial project

Question 14

Franchise

Answer 14

A person/business (franchisee) buys a licence

Question 15

Joint Venture

Answer 15

Two businesses undertake a business project and set up a new business with a new legal identity
Company splits:
- Risk
- Control
- Capital

Question 16

Globalisation

Answer 16

The growing integration and interdependence of the world’s economies

Question 17

Multinational Company

Answer 17

A company that operates in 2+ countries
Have headquarters in two countries

Question 18

The impact of MNC on the host country

Answer 18

Cons:
* Poor publicity (e.g. Labour conditions, sweatshops, pollution)
* Closure of local businesses who can’t compete
* Reduction in local culture
* Depletion of natural resources

Pros
* Investment in local economy
* Job creation
* MNC buys local resources
* Tax revenue for Government
* Training of local staff