3.2 Flashcards
What is business growth?
The point at which a business needs to expand and seeks options to generate more profits.
What are objectives of growth?
1) To achieve economies of scale (internal and external)
2) Increased market power over customers and suppliers
3) Increased market share and brand recognition
4) Increased profitability
What is achieving economies of scale?
> Where growth enables a business to benefit from EOS with a huge impact on the cost of production.
If production is less expensive because average costs have fallen then this can increase the profit margins of the business or they can choose to reduce prices to gain more market share.
What are benefits of achieving EOS?
> As a business grows in size it will be able to gain competitive advantages by having;
-More funds to buy stock, so being able to get better deals by buying in bulk.
-Having more power
-More funds to pay for specialist staff.
-Having a better reputation so banks are willing to lend.
What are EOS and average costs?
> EOS occur when unit costs or average costs fall as a result as in increase in the level of output of the business.
The more they make, the cheaper it gets per item.
What is the benefit of bulk buying/ purchasing economies?
> Need to order larger quantities of production inputs.
The order value increases, a business obtains more bargaining power with suppliers.
It may be able to obtain discounts and lower prices for the raw materials.
What are technical economies of scale?
> Businesses with large-scale production can use more advanced machinery.
May include using mass production techniques, which are a more efficient form of production.
Fixed costs of purchasing machinery spread over higher levels of output.
What are the benefits of managerial towards EOS?
> As a business grows larger, they will take on specialist staff for some more technical roles.
A larger business may hire their own accountancy staff, where as a smaller business cannot do that.
What are the benefits of Financial EOS?
> Small businesses find it hard to obtain finance or cost of finance is quite often high.
Small business perceived as being riskier than larger businesses that have developed a good track record.
Larger firms find it easier to find potential lenders and to raise money at lower interest rates.
What is increases market power over customers and suppliers?
> Want to grow maybe to reduce the power of supplier and customers.
The short-medium term objective which flows from the term objective of the busses to increase profitability.
limit power of customer to reduce competition.
Reduce power of suppliers
what is increased market share and brand recognition?
> In dynamic and competitive markets, businesses may seek to achieve increased market share.
Other businesses may seek to buy other businesses in the same industry in order to acquire recognised brands.
What is increased profitability?
> Many businesses seek to grow and expand to increase their profitability.
This means they increase their output production becomes cheaper per unit and the whole business becomes more profitable because costs are reduced.
What are the problems with profitability?
1)Diseconomies of scale
2)Internal communication
3)Overtaking
What is Diseconomies of scale?
> As the business grows, they may expand the scale of production beyond the minimum efficient scale.
At this point, the average costs per unit starts to rise as production rises.
What is Internal DEOS?
Communication, co-ordination, motivation.
What is external DEOS?
Overcrowding in industrialised areas, traffic congestion, price of land and labour rises.
what is overtaking?
> Where a business accepts more orders than it can cope with
This can result in cash flow problems
What is internal communication?
> As the size of the workforce increases, there will be less face-to-face communication.
Takes a long time for messages to get through as there are many layers of management.
Less effective communication;
-Means mistakes made
-means more wastage
-Therefore higher average unit.
What is the definition of a merger?
> A legal deal to bring two businesses under one board of directors.
The businesses are usually the same size and the name is normally changed
What is the definition of a takeover?
> also known as an acquisition
This is a large deal where one larger business purchases a smaller one
If the deal is unwanted by the management or board of directors then this is a “Hostile takeover-over”
