1.5 Growth & Evolution Flashcards
what is Business growth
growth is one of the metrics used to determine the size of the business
examples of metrics to measure business growth
sales revenue
profit
market share
market capitalisation
employees
reasons why a business might want to grow
- higher sales revenue and potentially higher profit
- higher market share, meaning more power in the market e.g. better placement in shops
- better brand recognition by customers
- economies of scale - increased production should lower costs of production
- more power over suppliers
- sense of achievement for owners
- can invest in research & development - ways in which we can make the business’ product better
Reasons why a business might want to stay small
- easier for the owner to manage
- quicker decision making - less stakeholders involved - less employees
- more personal service to customers - less customers in theory
- growing may require additional investment, which may mean giving up some ownership - could lead to loss of control - might be a family business
the ideal size for a business depends on
objectives of the business
size of the market
level of control wanted
Internal growth
expansion of a business by using it’s resources and not involving other businesses
might be financed through loan capital, share capital, retained profits
- e.g. opening new shops/factories
- e.g. expanding overseas
External Growth
Expansion involving other organisations
e.g.
- mergers and acquisitions
- takeover
- joint venture
- strategic alliance
- franchise
Economies of scale
when a firm’s average cost decreases as it increases its scale of production
as the firm produces more, it becomes more cost efficient
Internal economies of scale
economies of scale resulting from the firm producing more output
Examples of internal economies of scale
purchasing economies
financial economies
managerial economies
marketing economies
technical economies
Purchasing economies
bulk-buying discounts - can negotiate better deals for larger orders
e.g. buying 10kg apples versus buying 10 tonnes of apples
financial economies
larger firms are likely to be trusted more by banks
lower costs of borrowing (lower interest rate)
Managerial economies
can hire specialists in each area - e.g. marketing, finance
rather than having a general manager do everything
marketing economies
can spread the same marketing campaign over more units of sales
technical economies
large firms are more likely to be able to afford to use better machines/technology
can mass produce
External economies of scale
Economies of scale resulting from the whole industry growing in size
examples of external economies of scale
infrastructure improvements
more skilled labour
supplier become more efficient
diseconomies of scale
when average costs go up as output increases
usually from the problems managing too large a business
examples of diseconomies of scale
communication improvements
poor coordination and control
staff morale
infrastructure improvements
e.g. better roads, trains, internet
governments will often improve infrastructure to help a certain industry
more skilled labour
leads to more productive workers
e.g. silicon valley
communication improvements
slow communication and decision making
paperwork, filing, meetings etc
suppliers become more efficient
suppliers grow and gain internal economies of scale
poor coordination and control
harder to manage departments when they are spread out
time zones, different cultures
