Expanding a Business Flashcards
All 23 cards in this deck
What is the difference between organic (internal) growth and external growth?
Organic growth is a business expanding using its own resources; external growth is joining with or buying another business.
What is franchising as a method of growth?
The business sells others the right to trade under its name and business model; the franchisee pays for the new location.
What is outsourcing?
Paying another business to carry out work or produce goods that the business would otherwise do itself.
True or false? A business that expands sales by using e-commerce is growing externally.
False. Selling online uses the business's own resources, so it is organic (internal) growth.
What is a merger?
Two or more businesses join together to form a new business.
What is a takeover?
One business buys control of another business.
A restaurant chain wants outlets in many new towns but has little spare capital. Which method of growth suits it best, and why?
Franchising — the franchisee pays for the new outlet, so the chain grows quickly without large costs of its own.
Give one benefit of growth to a business.
Higher market share, which may allow the business to charge higher prices.
Give one drawback to a business of expanding.
Loss of control, therefore decision making becomes slower.
What are economies of scale?
The fall in average (unit) costs that happens as a business increases its output.
What are purchasing economies of scale?
Buying materials or stock in bulk, so the supplier charges a lower price per unit.
What are technical economies of scale?
Using large-scale or specialist machinery, so the cost of producing each unit falls.
True or false? Economies of scale mean that a business's total costs fall as it produces more.
False. Average (unit) costs fall; total costs normally still rise as output increases.
What are the steps to calculate average unit cost?
e.g. total costs of £800 to produce 200 units- Find total costs: £800
- Divide by output: 800 ÷ 200
- Average unit cost = £4 per unit
A business's average unit cost rises as its output grows. What does this show?
Diseconomies of scale are occurring — the business has grown beyond its most efficient size.
What are diseconomies of scale?
The rise in average (unit) costs that happens when a business grows too large.
How does poor communication cause diseconomies of scale?
With more staff and sites, messages are slower and misunderstood, so mistakes push unit costs up.
How do coordination issues cause diseconomies of scale?
A larger business is harder to organise and control, so work is duplicated and unit costs rise.
How does reduced staff motivation cause diseconomies of scale?
Employees feel less valued in a large business, so productivity falls and unit costs rise.
True or false? If expansion would lower a business's unit costs, it should always go ahead.
False. The extra sales revenue must also cover the extra costs, and cash flow and the risk of diseconomies must be considered.
True or false? As a business keeps growing, it can first gain economies of scale and later suffer diseconomies of scale.
True. Unit costs fall as output rises at first, but beyond a certain size problems such as poor communication push unit costs back up.
A coffee shop chain grows by franchising its outlets. Give one disadvantage of this method to the franchisor.
Loss of control over how each outlet is run; poor standards in one franchise can damage the whole brand's reputation.
Two bus companies grow by merging. Give one disadvantage of growth by merger.
Conflict between the employees and managers of the two businesses, which leads to low morale.