Pearson Edexcel IAL Economics 3.3.1 Types & sizes of businesses Question

Practise how business type, size, growth, mergers and demergers affect firms, workers and consumers using extracts, diagrams and cases.

Exam points

explain organic growth, mergers or demergers using extract evidence and firm context
evaluate growth impacts on businesses, workers and consumers with an appropriate diagram

Covered syllabus points

3.3.1.1a - Types of businesses: • private sector organisations • state-owned enterprises (public 3.3.1.2a - size of businesses: • SMEs (small- and medium-size enterprises) • large corporations 3.3.1.2b - businesses grow: • organic growth • merger/takeover: • forward vertical integration •3.3.1.2c - Advantages and disadvantages of each type of merger/takeover 3.3.1.2d - Constraints on business growth: • size of market • access to finance • owner objectives 3.3.1.2e - Reasons some firms tend to remain small and others grow 3.3.1.2f - Impact of growth of firms on businesses, workers and consumers 3.3.1.2g - Demergers: • reasons for demergers • impact of demergers on businesses, workers and 3.3.1.3a - Different business objectives: objectives • profit maximisation • revenue maximisation 3.3.1.3b - significance of the divorce of ownership from control for business objectives: the 3.3.1.3c - Formulae for different business objectives: • profit maximisation • revenue

[Maximum number: 1]

A Swedish company, Lantmännen, is an agricultural business owned by 25000 farming partners.

Which one of the following is the best description of this type of business?

State-owned enterprise

Joint venture

Conglomerate

Co-operative

[Maximum number: 18]

Sources for use with Section B
The car industry

Figure 1 Percentage market share of car manufacturers in the USA, 2019

Extract A PSA Group and Fiat Chrysler merger

In January 2021 PSA Group and Fiat Chrysler agreed to merge, creating the world’s third largest car manufacturer by volume. The new firm, named Stellantis, includes well-known car brands including Peugeot, Citroen and Vauxhall from PSA Group and Alfa Romeo, Jeep and Lancia from Fiat Chrysler. The ownership of the firm is split evenly between the shareholders of PSA Group and Fiat Chrysler. As a result of this merger, Stellantis owns manufacturing plants all over the world including the Netherlands, the USA and the UK. It has an expected annual turnover of over €170 billion.

This horizontal integration is expected to benefit both firms. Each firm will benefit from cost savings by sharing production expertise and technical knowledge. It is estimated that there will be an annual cost saving of €3.4 billion from purchasing economies of scale. PSA Group has gained access to the American car market, where Fiat Chrysler already has a significant market share, with 3 000 car showrooms across the USA. Following the merger, in Q1 2021 Stellantis experienced a 25% increase in revenue as a result of an increase in car sales in the US market.

Fiat Chrysler will benefit from gaining access to PSA Group’s research and development into electric cars. This is important for the firm because demand for electric cars is increasing globally. PSA Group has developed a range of low-emission vehicles that Fiat Chrysler does not have the technology to produce. Electric cars are also important when moving into foreign markets such as China. Since 2010, the demand for electric cars in China has been rising steadily. In 2020 38% of global sales of electric cars were in China.

The shareholders of Stellantis hope that the firm will be able to compete more effectively in China, the world’s biggest car market. In 2020 PSA Group and Fiat Chrysler had a combined market share of only 1% in the Chinese car market, whereas Chinese car firms had a 40% market share. In addition, a number of other well-established firms are operating in the Chinese car market including Volkswagen, Honda and Toyota. Trying to increase market share in China may prove to be difficult for Stellantis. Good communication and clear management will be essential if Stellantis is to be successful.

Extract B Concerns over factory closures

Trade unions are concerned that Stellantis will close factories to cut costs. Unite, the UK-based trade union negotiating on behalf of the 3 000 Vauxhall employees, has requested a meeting with the head of Stellantis, to prevent possible factory closures. The skilled car workers are highly specialised. Therefore, if these factories were to close, it would be very difficult for the workers to find new jobs without training.

(a)

With reference to Extract A, explain what is meant by 'horizontal integration'.

[ 4 ]

(b)

With reference to the information provided and your own knowledge, discuss the possible impact of the merger between PSA Group and Fiat Chrysler on workers and consumers.

[ 14 ]

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.

Knowledge, Application, Analysis (8 marks) - indicative content

Workers

- If factories close to reduce costs, 3000 Vauxhall workers will lose their jobs making them unemployed and decreasing their standards of living

- Workers are highly skilled, the factory closure could cause occupational immobility of labour in the sector. This may cause long-term unemployment

- The government may need to increase training for these workers to provide more transferable skills

- There may not be many job opportunities for car manufacturing employees. Workers may not want to move to areas with jobs available as a result of geographical immobility of labour

Consumers

- Stellantis may not lower prices in response to cost savings

- If diseconomies of scale arise e.g. from managing a large number of brands, prices may rise

- Development in technology only happens in the production process, quality may not improve

- Increased market power may lead to increased prices

- Choice may reduce as Stellantis reduce the models available

If only one economic agent is considered then limit KAA to Level 2

Accept reverse argument

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 3

7-8

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using relevant examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (6 marks) - indicative content

Workers

- The trade union is in talks with Stellantis and there might not be any factory closures

- Employees might have some transferable skills and find job opportunities in other industries

- If training programmes are available, employees may become employed in the long-run

- If factory closures are limited then the significance may not be as great

- High skilled workers have high productivity and therefore are likely to find employment in other occupations

Consumers

- Increase in consumer surplus if prices fall after the merger and the firm benefits from economies of scale

- Increase choice as firms share research and development into areas such as electric cars; creating new cars for consumers to purchase

- Increase in quality products from the sharing production expertise and technological knowledge

- New cars take a long time to develop and may have little impact in the short-run

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-2

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

3-4

Evidence of evaluation of alternative approaches

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

5-6

Evaluation recognises different viewpoints and/or is critical of the evidence.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

Indicative content

[Maximum number: 20]

In 2022, the Canadian airline WestJet completed a takeover of Sunwing Travel Group, an airline and luxury holiday provider. WestJet's objective was to sell luxury flights and holidays to more destinations.

Evaluate the benefits of growth by takeover for a business in an industry of your choice.

Illustrate your answer with an appropriate diagram(s).

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms.

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Growth by takeover occurs when one firm acquires another

- A takeover may allow a firm to enter new markets e.g. WestJet selling more luxury holidays and flights. This will increase revenue and market share for the firm

- A takeover may enable a firm to achieve economies of scale e.g. purchasing, technical, financial, managerial

Economies of scale occur as output increases from Q to $\mathrm{Q}_{2}$ and long- run average costs fall from C to $\mathrm{C}_{1}$

- The firm may be able to reduce duplication e.g. where they both have a marketing department and so will be able to reduce costs

- The firm may benefit from sharing expertise/research and development skills

- A takeover may result in cost savings if the integration occurs with a supplier (backward vertical integration, fast food chain purchasing a farm) -

- Takeover may create greater control over suppliers if backward integration which could increase barriers to entry in the industry

- A takeover may enable a firm to spread its risk if moving into new markets/diversifying products (conglomerate integration)

- If taking over a firm at a later stage of production (forward vertical integration, car manufacturer integrating with car show rooms), the firm may be able to increase revenue by selling directly to the consumer

- Horizontal takeover would allow the firm to increase market share

- A takeover enables a firm to expand quickly into new markets

- A takeover may increase market power enabling the new firm to increase price/restrict output/ or allow an established firm to expand quickly

NB if no diagram candidate can achieve a maximum of level 3

If no reference to an industry maximum level 3

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause
and/or consequence are evident but they may not be developed fully or
some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

- Takeovers can be expensive, increasing costs and decreasing profits

- Culture clashes may occur between the firms if they were run differently, causing diseconomies of scale

- The larger firm may cause communication problems

- The takeover may cause concern for competition authorities and lead to government intervention

- The firm may enter into new markets where they have little or no expertise

- The firm may grow too fast raising costs and lowering profits

- Many takeovers may end up being unsuccessful, resulting in demergers

Level

Mark

Descriptor

0

No evaluative comments.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

All question bank results loaded

Covered syllabus points

3.3.1 - Types and sizes of businesses question 1

3.3.1 - Types and sizes of businesses question 2

Question (a)

Question (b)

3.3.1 - Types and sizes of businesses question 3