Question

Exam Style Questions

TelCom owns a phone network and provides phone network services to many
consumers. The business does not manufacture phones and it does not own
retail stores selling them. Senior managers at TelCom are considering a takeover
of either a phone manufacturer or a chain of phone shops. TelCom employs
4000 workers and, last year, recorded total sales of $300 million. In contrast,
the largest manufacturer of mobile phones, PhonTec, has 450 workers and
recorded total sales last year of $1200 million.
a) What is meant by 'takeover'?
[2]
b) Identify two other ways a business might grow apart from takeovers. (2)
c) Identify and explain two reasons why external groups would be
interested in measuring the size of businesses such as TelCom.
[4]
d) Identify and explain two possible reasons why senior managers at
Telcom want to expand the business.
[6]
e) How should TelCom expand - taking over a phone manufacturer or a
chain of shops selling mobile phones? Justify your answer.
[6]

Answer 1

a) What is meant by 'takeover'?

In this context, a takeover means vertical integration, either backwards (buying a supplier, in this case, the phone manufacturer), or forwards (buying a distributor, in this case, the retail store).

b) Identify two other ways a business might grow apart from takeovers.

Businesses can grow by internal expansion: by pouring their own resources into a new business division, a new product, a new sector, and so on.

Businesses can also grow by forming strategic alliances with other companies.

c) Identify and explain two reasons why external groups would be interested in measuring the size of businesses such as TelCom.

Investors, as an external group, are interested in measuring the size of the business in order to determine is value, and decide if investing in the business is a good decision or not.

The government, as an external group, is interested in measuring the size of the business simply to determine how many taxes to impose on it.

d) Identify and explain two possible reasons why senior managers at

Telcom want to expand the business.

They may want to expand the business because they want to increase profits, and larger companies almost always have larger profits than smaller ones.

They also may want to expand the business in order to meet some other corporate strategy goal, like reducing costs, or achieving a specific amount of sales.

e) How should TelCom expand - taking over a phone manufacturer or a

chain of shops selling mobile phones? Justify your answer.

They should do what is most profitable. Apparently, the retail business is less profitable than the mobile manufacturing business, so under this scenario, TelCom should integrate backwards, and buy the manufacturer.