3.2 Flashcards
Why do businesses want to grow?
Increase profits
Achieve EOS
Increase market power
Increase market share and brand recognition
What are EOS?
When unit costs fall as output increases
How to calculate average cost per unit?
Total production costs in period/ total output in period
How EOS can provide a competitive advantage?
EOS is a key aim for businesses that wish to position themselves as low cost operators
What are internal EOS?
Arise from the increased output of the business itself
What are external EOS?
Occur within an industry i.e all competitors benefit
Types of internal EOS
Purchasing
Technical
Managerial
Purchasing EOS
Buying in greater quantities usually results in a lower price (bulk buying)
Technical EOS
Use of specialist equipment or processes to boost productivity
Managerial EOS
Specialist managers can be employed to help reduce unit costs and boost efficiency
Examples of external EOS
- having many specialist suppliers close by
- pool of skilled labour to choose from
- access for research and development facilities
Diseconomies of scale
No guarantee that unit costs will fall as the scale of a business’ operation rises
Examples of DEOS
- control- problems in monitoring productivity and work quality, increasing wastage
- co operation- workers in large firms may develop a sense of alienation and loss of morale
- negative effects of internal politica
What is overtrading?
When a business expands too quickly without having the financial resources to support such a quick expansion
How overtrading links to business failure?
If suitable sources of finance are not obtained, overtrading can lead to business failure
Overtrading can occur even if a business is profitable- issues of working capital and cash flow
Symptoms that a business might be overtrading
- high revenue growth but very low gross and operating profit margins
- increase in current ratio
- very low inventory turnover ratio
- low levels of capacity utilisation
How can businesses manage the risk of overtrading?
- reducing inventory levels
- scaling back the pace of revenue growth until profit margins and cash reserves have improved
- leasing rather than buying capital equipment
Objectives of small businesses
- survival
- revenue maximisation
- profit maximisation
- cost efficiency and scale
- customer service
Why stay small?
- product differentiation and USPS
- flexibility in meeting customer needs
- deliver high standard of customer service
- exploit opportunities from e-commerce
Staying small: product differentiation USPs
- help differentiate against larger competitors
- customer perception may be an expectation of a better product from a business Yh at fares
- more scope for adding value through the provision of specialist expertise
Staying small: flexibility in meeting customer needs
- talk to their customers regularly
- communicate in the customers language which give the impression to the customer that they are more in tune with their needs
What is organic growth?
Involves expansion from within a business
E.g:
Expanding product range
What is external growth?
Mergers and takeovers
What is a takeover?
Involves one business acquiring control of another business
