Cambridge International AS and A Level Business

Worksheet Answers – Chapter 7

Size of business (A Level)
Dale Farms Co (DFC) owns 12 dairy farms. It used to sell all of the milk it produced to cheese manufacturers.
Five years ago it took over a cheese manufacturing company. Two years ago it took over a cattle feed supplying
business. The directors of DFC are considering another takeover to diversify the business.

1 Business expansion achieved by merger with or acquisition of other businesses.

2 Advantages include:
■ An assured outlet for some/all of its dairy products, which helps to reduce risks to the dairy business.
■ This might reduce the marketing costs of trying to sell these dairy products.

Disadvantages include:
■ DFC management has no experience (as far as we can tell) of managing/controlling a cheese manufacturing
business.
■ It does not diversify the business out of dairy or dairy related products – if there are negative health reports
about the consequences of eating these then DFC is still committed to products from this industry.

3 Forward vertical integration – DFC have moved ‘closer’ to the market for dairy-related products.

4 Advantages include:
■ An assured supply of feed for its cattle, which might be important in times of national shortages.
■ Some control over pricing of a major bought-in cost and control over quality too.

Disadvantages include:
■ Takeover does not diversify DFC out of this industry or dairy products. It may be at risk from changes in
consumer tastes away from dairy products.
■ As far as we can tell, DFC managers have no experience in managing/controlling a feed supplying business.
Legal controls might be different for this type of business than for dairy farms.

5 Backward vertical integration – as cattle fed is an example of a bought-in raw material for the dairy farms.

6 Examples of businesses in different industries include:

■ clothing manufacturer
■ car repair workshop.

7 Although offering the benefits of diversification and spreading of business risks there are dangers that synergy
will not be gained due to:
■ lack of management experience in very different industries
■ different cultures and ways in which decision are taken/ethical standards.
This might cause clashes of management styles that could prevent the new larger, diversified business from
being successful.

© Cambridge University Press 2014 Cambridge International AS and A Level Business Worksheet Answers – Chapter 7 1