3.2 Flashcards
what are 4 objectives of growth + definitions
- economies of scale = costs decrease as output increases
- market power = gaining more influence in the market
- market share = gaining more share in the market
- profitability = higher profit margins
what are 3 problems with growth + definitions
diseconomies of scale = unit costs increase due to vast expansion
internal communication = will become difficult with more staff
overtrading = overspending in search of growth
What are the 2 methods of inorganic growth
mergers - 2 businesses joining into one to form a new company
takeovers - one business purchasing another
Whats the difference between vertical and horizontal integration
vertical = merger or takeover from businesses at different stages of the supply chain
horizontal = merger or takeover from businesses at the same stage of the supply chain
What is organic growth and how can it be achieved
organic growth = growth done through the businesses own expansion
- launch new product
- launch new market
What are the benefits of a business staying small
- reduced risk of overheads
- product differentiation/USP
- flexibility in responding to customer needs
- customer service
average cost per unit formula
total costs of production in period/ total output in period
purchasing economies of scale
Buying in greater
quantities usually
results in a lower price
(bulk-buying).
technical economies of scale
Use of specialist
equipment or processes
to boost productivity.
manegerial economies of scale
Specialist managers can
be employed to help
reduce unit costs and
boost efficiency
signs that a business may be overtrading
- High revenue growth but very low gross and operating profit margins (compared with key
competitors ) - Persistent use of a bank overdraft facility
- Significant increases in the payables days and receivables days ratios
- Significant increase in the current ratio
- Very low inventory turnover ratio
- Low levels of capacity utilisation (alongside high levels of investment in capacity)
economies of scale
arise when unit costs fall as output increases
unit costs formula
total production costs/total output
marketing economies of scale
spreading a fixed marketing spend over a larger range of products markets and customers
financal economies of scale
larger firms benefit from having access to more and cheaper finance
risk bearing economies of scale
larger firms benefit from having a wider, more diverse product range
external economies of scale
arise from the indutry as a whole which happens when a number of large firms locate near each other
benefits from external economies of scale
- labour due to the exisiting local workforce.
- area will build up a good rep
- firms will recieve support from the local council and national goverment e.g motorways will be built
external economies of scale can lead to
- higher profit margins a unit costs are cheaper
- more funds for investment or giving shareholders larger dividents
diseconomies of scale
as the business grows they may exand the scale of production beyond the minium efficient scale. average costs per unit start to rise as production rises
why could costs rise
- miscommunication
- increased layers of hierarchy
- poor co ordination
- lack of control
- poor employee motivation
reasons for inorganic growth
- increase market share
- acquire new skills
- access economies of scale
- secure better distribution
- aquire intangable assets
- spread risk by diversifying
- overcome barriers to entry to target markets
