SRJC_H2_ECONS_9757_Q2_MS

2 As globalisation continues, the tearing down of trade barriers has provided some companies opportunities for growth while it has been harmful for others. Accustomed to dominant positions in protected markets, the influx of foreign competition often poses a threat to the survival of local companies. Source: Harvard Business Review (a) Explain the benefits that a firm enjoys when it grows in size. [10] (b) Evaluate the various strategies a firm can adopt to respond to the challenges posed by globalisation. [15] (a) Intro:  Clarify what “size” means to a firm / define : The idea of greater quantity of production or market share must be expressed  Firm’s objective: Benefits to a firm must be expressed in the idea of achieving profit maximisation  Direction statement: Benefits a firm enjoys comes in the form of cost savings from exploiting EOS or from revenue advantages that a firm may gain from being large. TS1: Firms can enjoy cost savings when they grow large through exploiting economies of scale. E1: One source of EOS that firms can enjoy comes from marketing EOS.  When firms are larger, they can enjoy lower average costs from purchasing inputs in bulk.  Larger firms are likely to make up a larger proportion of a supplier’s revenue stream and thus are more important customers than a smaller firm.  These larger firms will then have stronger negotiating power than smaller firms and can negotiate for discounts for bulk purchases of inputs.  The lower price that large firms pay for inputs will allow them to have a lower average cost of production E2: Another source of EOS that firms can enjoy comes from financial EOS  Larger firms are often considered more cr edit-worthy than smaller firms and are able to enjoy lower interest rates on loans.  Larger firms will often have more physical assets that they are able to offer as collateral in negotiating for a loan.  Larger firms also earn greater amounts of revenue and have more stable revenue streams and thus are considered to be more likely to be able to repay the loan.  Since large firms are considered more credit-worthy, banks are willing to offer lower interest rates for loans to large firms since the risk of defaulting on the loan is lower  Large firms are thus able to borrow at cheaper rates whether to purchase capital goods, inputs or even to finance expansion.  The lower costs of repaying loans allow for larger firms to have lower average costs.

TS2: Firms can enjoy revenue advantages when they grow sufficiently large. This can be from domination of the market OR from diversification into multiple markets. E1: When firms grow in size, this might involve the firm expanding into different markets. This can be expanding into different product markets or geographical markets.  This allows the firm’s revenue stream to be more stable in the face of changes.  If demand in a