Business Paper 1

• Types of integration

  • Horizontal
  • Forwards vertical
  • Backwards vertical
  • Conglomerate
• Horizontal integration

  • Firm joins with another firm at the same stage of the supply chain (primary, secondary or tertiary)
  • In the same industry
• Reasons for horizontal integration

  • Economies of scale
  • Reduced competition, increased market power, ability to raise prices and profits
• Forwards vertical integration

  • Firm joins with another firm further up the supply chain, in the same industry
• Forwards vertical integration

  • Booker's (wholesaler) joins with Budgens (retailer)
• Reasons for forwards vertical integration

  • Guarantee a point of sale
  • Deny competition access to distribution channels
• Backwards vertical integration

  • Firm joins with another firm further down the supply chain, in the same industry
• Backwards vertical integration

  • Tesco (retailer) joins with Booker's (wholesaler)
• Reasons for backwards vertical integration

  • Guarantee source of raw materials, produce or components
  • Deny competition access to raw materials, produce or components, forcing up their costs
• Conglomerate integration

  • Firm joins with another firm in a completely different industry and/or supply chain phase
• Reasons for conglomerate integration

  • Reduce risk through diversification
  • Access wider array of ideas, expertise and innovation
  • Potential economies of scale if industries are closely related (lateral integration)
• Factors to consider when a business decides where to locate

  • Proximity to raw materials
  • Proximity to employment
  • Proximity to competitors
  • Infrastructure
  • Proximity to target markets
  • Finance
• Proximity to raw materials

  Businesses want to be near their raw materials to reduce costs of transportation
• Proximity to employment

  Businesses may want to be near high-skilled or cheaper labor
• Proximity to competitors

  Businesses may want to be near competitors to benefit from the area's image, or avoid being too close to competitors
• Infrastructure

  Businesses need good transport links, technology infrastructure like high-speed internet to operate effectively
• Proximity to target markets

  Offline businesses want to be near their customers, while online businesses are less concerned about physical location
• Finance

  New businesses with less capital will focus on keeping costs low, while established businesses have more options to invest in higher sales
• Diseconomies of scale


  Once economies of scale have been reached, if the business grows or increases output this will lead to the average cost per unit per thing going up
• Reasons for diseconomies of scale

  • Employee coordination (overcrowding, duplication of tasks)
  • Employee motivation (employees feel less significant, less motivated, less productive, higher waste)
  • Employee communication (more costly, top-down approach demotivates employees)
• Average unit cost =Total costs / Units sold
• Diseconomies of scale

  If you expand too much, your average costs will actually increase as your output increases
• Ways to expand a business

  • Internal expansion (organic growth)
  • External expansion (integration)
• Internal expansion (organic growth)

  1. Use internet platforms (e-commerce)

  2. Open new outlets (shops, factories)

  3. Outsource tasks to third parties
• Pros of e-commerce

  • 24/7 sales
  • Cheaper than physical shop
• Cons of e-commerce

  • Technical issues
  • Need developers to maintain website
  • Risk of hacking
• Pros of opening new outlets

  • Based on market research
  • Low risk
• Cons of opening new outlets

  • Higher costs
  • Need to recruit and train staff
  • Retaining staff
• Pros of outsourcing

  • Lower costs
  • Higher quality
• Cons of outsourcing

  • Loss of control
  • Risk of delays
• External expansion (integration)

  • Merger
  • Takeover
• Merger

  Two firms join together, usually amicably
• Takeover

  One firm buys 51% or more of the shares in another firm, usually in a hostile manner
• Internal expansion

  Cheaper but slower rate of expansion
• External expansion

  More expensive but faster rate of expansion
• Advantages and disadvantages of sole traders 


  Adv : lower start up costs, Owner keeps all profit, Owner has total control, finances can be kept private

  Disadv: Unlimited liability, a lot of responsibility on one person, skills shortage, shortage of capital
• Role of a business plan 


  Identifying markets - helps business think clearly about who it is targeting its products at

  Helps with finances - a bank is more likely to lend a new business money if it is confident it will be repaid

  Identifies resources needed - identify resources such as finance, equipment, additional labour

  Achieving business aims and objectives - setting out aims and objectives with an appropriate timeline gives a best chance of achieving it
• Methods of internal growth 


  Increasing market share : a business might attract new by using advertising and special offers

  Developing new products : a business might expand its range of products to attract new customers

  Gaining new customers : A business may try to attract a completely new target audience
• Types of organisational structure


  • Hierarchical (or tall)
  • Flat
• Hierarchical structure


  • Many layers of management
  • Top-down approach
  • Long chain of command
  • Managers have narrow span of control
  • Relatively small number of subordinates