2.1: Businesses & growth Flashcards
Why would a business want to grow?
Turnover and profits increase.
Costs per unit often decrease as output increases.
Large firms can gain a competitive advantage - can reduce prices or improve profit margins
Describe economies of scale.
Include many ways in which long run increases in capacity and output can reduce average costs.
When do internal economies of scale arise?
When a business invests in larger-scale production.
Describe technical economies.
Expensive specialist machines are used, they do not require as much labour.
However, these machines are only worthwhile if they are kept busy.
Particularly in manufacturing, construction and transport.
Describe marketing economies.
As output grows, fixed costs of advertising spread over wider target market
Managerial economies
Allow bigger businesses to use specialist managers with particular skills
Financial economies
Bigger businesses may secure better terms when negotiating loans and finance - likely to be less risky
Risk-bearing economies
Bigger businesses diversify or supply more than one market
Spreads risks as business not reliant on just one product or market
Bulk buying
Larger business can negotiate lower input prices
Avergae cost per unit reduced
External economies of scale
Reduce production costs for all businesses in an industry
CoR about external enconomies
EoS lead to falling costs and falling prices
Products become more affordable
We all have more purchsing power
A mass market dvelops as more people are able to afford the product
Standards of living rise
Monopoly power
Business with biggest market share is likely to have a degree of monopoly power
May be able to influence either price or output
Consumers may have to pay a higher price than they would if market was competitive
Monopsony power
Businesses that are big buyers of supplies likely to have some monopsony power
Will be able to dictate prices and terms to smalll suppliers
Drives down input costs and increases profitability
Minimum efficient scale
Lowest level of output at which costs are being minimised
Reasons for diseconomies of scale
As organisation grows, effective communication becomes harder
Managing a larger organisation becomes progressively harder as it expands
Expansion can lead to skills shortages - will try to recruit more skilled employees but costly training needed
New technologies can reduce MES
Smaller businesses may be better at adapting quickly to changes in dynamic markets
Corporate culture
Set of important assumptions that are shared by people working in aparticular business + influence ways in which decisions are taken there
Strong culture
Staff more loyal
Staff turnover reduced
Good communications exist
Productivity higher
Motivation higher = greater flexibility
Weak culture
Employees do not believeinit
Production and motivation low
Capable staff may move on
Poor performance
Organic growth
Expansion of business without takeovers and mergers
Firm grows from within, using its own resources
Comes from expanding output and sales
Inorganic growth
Firm grows by joining with another firm - takeover/merger
Quicker but can be less successful than organic growth
Inorganic + Organic growth
Whole industries become oligopolies - few large competing firms
Merger
Joining of two or more firms into a single business with approval of shareholders and management concerned
2 firms may retain separate identities
Takeover
One firm makes a bid for another firm and secures over 50% of shares
Increased efficiency through inorganic growth
Economies of scale = falling average costs
Sharing overheads - no need for 2 head offices etc - rationalisation
Reasons for inorganic growth
Reducing competition - more power to adjust pricing, output and marketing tactics. Takes one competitor out of market
Access to assets, patents and brand names
Able to access new segment of market - ethical reasons etc
Defensive reasons - stand up to a larger market leader
Synergy
When two businesses are combined and together are able to increase efficiency and grow faster or make more profit than they could have if they has stayed separate
Horizontal integration
Two businesses in same industry have joined together
eg: 2 supermarkets
Vertical integration
2 businesses merge from same industry but different stages of production process or supply chain
eg: cotton farm and cloth factory
Conglomerate integration
2 businesses that have nothing in common join together
Forward vertical integration
Manufacturer moving into distribution
Backward vertical integration
Moving backwards ( i.e farming etc)
Product innovatoion
A completely new or improved product or service is created
Often result of new technologies
Often about smal changes to existing products to improve performance and customer satisfaction
Process innovation
New or improved production methods used, enhancing efficiency and reducing costs
eg: improving distribution channels
Product life cycle
Different stages a product passes through
Development impact on cash flow
High levels of investment and no sales mean that cash flow is all negative
Development impact on marketing mix
Maybe some limited promotion to alert reatailers and consumers before launch
Introduction impact on cash flow
Still negative as low initial sales do not outweigh high costs of intial launch and promotion
Introduction impact on marketing mix
Heavy promotion to create awareness
Competitior-based prices may increase market share
Premimum prices for new product in high demand
Growth impact on cash flow
Sales pick up, promotional costs still high but cash flow positive
Growth impact on marketing mix
Promotion may change to emphasise brand loyalty
Prices may rise to premium level
Prices may fall to match competiton and secure mass market
Maturity impact on cash flow
Maximised as sales begin to peak
Average costs begin to fall as any economies of scales are reached
Maturity impact on marketing mix
Promotion may ease as brand becomes established with occasional bursts to maintain sales
Decline impact on cash flow
Sales will fall but cash flow may remain positive as average costs are also low
Decline impact on marketing mix
Little promotion
Price likely to fall to maintain some sales until product reaches end of its life.
Extension strategies
Ways ti increase sales by re-launching product with a new image or by aiming it at a different market segment
Digital economy
An economy built on digital technologies
Structural change
A reallocation of resources
Where demand is falling, some producers will exit the market
Where demand is rising new entrants will set up businesses to meet demand
Micromarketing
Opposite of mass marketing
Businessses target small groups of consumers via social media with personalised reccomendations or promotions
The long tail
Micromarketing created many new niche markets
No physical restraints - size of shop etc
Retailers can offer very specialist products and services + hits
Revenue from niche markets may outweigh revenue from hits
Digital economy impact on markets and firms
Costs, prices, profit and loans - Can reduce costs by choosing a low cost location = undercut high street stores with lower prices. small businesses can adveritce online
Creative destruction - eBooks etc
How small firms compete
Product differentiation
Flexibility and receptive to consumer needs
Customer service
Targeting niche markts
Comp adv through rlationships with stakeholders
