1.6 Growth and evolution Flashcards
what are the 5 ways to determine how large a business is
The value of the business - how much they would get if they sold everything
Sales Revenue - the value of all the goods the business sells in a year
Market Share - value of sales a business makes compared to all sales by all businesses
Size of Workforce - <200 - small, 3000+ - large
Capital employed - the value of the firm’s capital investment for the business
why would businesses want to grow (4)
-Lower costs - economies of scale and higher profits
-Wider range of products - increases security since they have more to rely on
-Ensure supplies and outlets - control over the availability of products
-Prevent competitors gaining an advantage - gaining more control of a market will give a firm an advantage over their competitors
what is the definition of economies of scale
Economies of scale refer to lower average costs of production as a firm operates on a larger scale due to gains in production efficiency
e.g. easier and cheaper access to finance. This is a very good competitive advantage because it combines the ability to sell at a low price with a higher profit margin earned per unit sold.
Equation of average cost
AC = TC / Q
calculated by dividing total costs (TC) by the quantity (Q) of output.
two types of average cost
average fixed costs (AFC = TFC / Q)
average variable costs (AVC = TVC / Q)
What is internal economies of scale
economies of scale inside the firm
what are the internal economies of scale (7)
-Technical - buying better equipment, high fixed cost of equipment is spread out over large output thereby reducing cost of production
-Financial - obtaining favourable loan rates, as they are seen as less risky and also get better interest rates
-Managerial - employing specialist staff, higher productivity = less costs
-Specialisation - like managerial but with workforce, expert staff groups are responsible for production process, therefore productivity is higher
-Marketing - large firms benefit from bulk selling because of reduced time and transaction costs, big firms can also use the same advertisement worldwide just in different languages
-Purchasing - buying in bulk lowers average costs and offers discounts
-Risk-bearing - enjoyed by conglomerates, they can spread their fixed costs over large product portfolio.
what is External economies of scale
economies which occur within the industry and are largely beyond an individual firm’s control.
what are the External economies of scales (4)
Technological progress - increases productivity, e.g. internet for e-commerce
Improved transportation networks - ensures prompt delivered, easy access for employees and customers
Skilled labour - which may be found in local area
Regional specialisation - a particular location has a better reputation for producing a certain good or service.
Definition of diseconomies of scale
Diseconomies of scale are the result of higher unit costs as a firm continues to increase in size and loses control, coordination and communication
What are the internal diseconomies of scale (5)
Lack of control and coordination - decision make longer, sense of alienation between business sectors
Poorer working relationships - separation of managers and workers, damages communication flow and morale of staff, thereby productivity
Disadvantages of specialisation - workers become bored with repetitiveness, causes slack
Bureaucracy - takes longer for decision making, makes communication more difficult
Complacency
Lack of flexibility - e.g. it may not be possible to change production quickly
External diseconomies of scale (3)
Too many large business in a certain area increases market rents
Businesses might have to increase wages and financial rewards to beat competition for employees
Traffic congestion - deliveries are likely to be delayed due to overcrowding
Advantages of large Businesses (5)
Brand recognition : Familiarity leads to ability to sell on a larger market
Brand reputation : The larger the more trusted
Value-added services : The larger the wider range of services available
Lower price : Price discounts due to economies of scale
Greater choice : More product choice
Customer loyalty: Customers are more likely to remain loyal
Advantages of small Businesses
Cost control : Growth requires and costs money
Financial risk : Large businesses face large risk, small business have control
Government aid : Grants and subsidies are offered to small businesses to help them start
Local monopoly power : Being the only business in a remote area, less likely to encounter large global businesses
Personalised services : Small firms have time to devote to individual customers
Flexibility : More adaptive to change
Small market size. : Not likely to attract competition from big players due to small market
Internal growth (organic growth) definition
occurs when a business grows using its own capabilities and resources to increase the scale of its operation and sales revenue
