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
