Explain two ways TT could grow.

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] Internal growth: TT grows its existing operations – often by using retained profits from its existing business – to set up a new factory abroad producing a new toy for children up to the age of 5.
2. [3] Explanation for internal growth (e.g., set up new factory in country Z to expand sales; less risky than takeover).
3. [1] Internal growth: Develop new products – to increase sales.
4. [3] Explanation for new products (e.g., for different age group; increases sales).
5. [1] Internal growth: Entering new markets – e.g. produce products for a different age group.
6. [3] Explanation for new markets (e.g., expanding into country Z).
7. [1] Internal growth: Diversification.
8. [3] Explanation for diversification (e.g., spreads risk).
9. [1] External growth: TT takes over another toy manufacturer - this is horizontal integration where TT takes over a competitor.
10. [3] Explanation for external growth (e.g., take over toy manufacturer in country Z for rapid expansion; higher risk than internal growth).
11. [1] External growth: Mergers.
12. [3] Explanation for mergers (e.g., combine with another company to gain market share).
13. [1] External growth: Vertical integration – takes over a supplier or retailer.
14. [3] Explanation for vertical integration (e.g., secure supply chain or distribution).
15. [1] External growth: Joint ventures.
16. [3] Explanation for joint ventures (e.g., share risks and expertise with local partner in country Z).
17. [1] External growth: Licensing.
18. [3] Explanation for licensing (e.g., allow other companies to produce toys under TT's brand).
19. [3] Purchasing: Bulk buy components – discounts/cheaper prices for bulk purchases - reduces unit costs of components/lower average cost – may be able to lower prices – becomes more competitive – increases sales of toys – revenue increases and reduced unit costs.
20. [3] Technical: Specialist machines can be used – specialisation easier to implement – easier to use in flow production – speeding up the production process and becoming more efficient - unit costs lower as output of toys per worker is higher.
21. [3] Financial: Raise capital more cheaply – lower risk of not repaying debts - banks may offer lower interest rates – lower costs of borrowing for the expansion of the large business than if it was a smaller business.
22. [3] Conclusion (Purchasing): Purchasing economy of scale will have the greatest effect on TTs profit as it produces toys on a large scale so discounts on components will reduce unit costs by a significant amount, increasing gross profit and profit. TT has already benefited from technical economies when it purchased specialist equipment for its flow production line and therefore there may be few additional increases in efficiency and if TT uses internal sources of finance for expansion then financial economies will not benefit TT at all.
23. [3] Conclusion (Technical): Technical economy of scale will have the greatest effect as this will enable TT to expand flow production further and more technologically advanced machines can be purchased, speeding up the production process and increasing productivity by a high amount. There may be significant savings on unit costs, which will allow TT to be more competitive in the new market in country Z. Lower unit costs and increased revenue will probably lead to higher profit.
24. [3] Conclusion (Financial): Financial economy of scale will have the greatest effect as TT plans to expand and will probably need to raise some of the capital by borrowing. This will keep down the costs of expanding, as $10m may need to be borrowed if TT takes over the other company or builds a factory in country Z. TT is already producing on a large scale so the increased benefits from the other economies may be limited leaving financial economies giving the biggest increase in profit.