3.2 business growth Flashcards
Define business growth
The point at which a business needs to expand and seeks options to generate more profits
Why might a business want to grow
To become more recognised
To start selling in new markets
Gain a larger audience
Be more attractive to shareholders
Generate more profit
Meet increases in demand
Spread risk
What are the objectives of growth
To achieve economies of scale
Increases market power over customers and suppliers -> porters five forces
Increased market share and brand recognition
Increased profitability
When does economies of scale occur
When unit costs or average costs fall as a result of an increase in output of the business
The more they make the cheaper it gets per item
If production is less expensive as 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 the internal economies of scale (7)
- technical economies of scale
- purchasing economies
- managerial economies of scale
- financial economies of scale
- risk bearing economies from diversification
- network economies
- the marketing economies
Explain about technical economies of scale
I.e benefits of containerisation
A way in which a business can achieve economies of scale through large scale production so we can use more or more advanced technology -> increases productivity and output -> lower unit costs
Another way is the bigger a business gets, they usually have more funds for research and development -> new advanced technology -> further reduce unit costs
If businesses are mass producing they can use containerisation-> reduces unit costs
Explain about purchasing economies
Eg bulk buy
The bigger the business, the more bargaining power -> likely to get discounts for bulk buying
Links to porters 5 forces
Explain about managerial economies of scale
Using specialised staff
The bigger the business, the more able to take on specialist staff e.g accountant
As they’re specialists, they tend to be more efficient -> less wastage, lower unit costs
Explain about financial economies of scale
The bigger the business, the more able they are to negotiate terms on better finance -> longer pay back, lower interest rates
The bigger businesses are perceived to be less risky
Explain risk bearing economies from diversification
Diversifying spreads risk + fixed costs over more products -> reduces unit costs
Explain about network economies
Builds networks between supplies and customers
About being able to negotiate better terms
The bigger the business, the better able to negotiate discounts, better trade credit agreements, purchase bigger orders-> reduces unit costs
Explain the marketing economies
The business is able to spread the costs of marketing over more products
Bigger businesses can do this easier
The more products-> lower unit costs
Once businesses get so big they don’t need to advertise individual products, just the corporate name
What’s external economies of scale and what are they
Come about through what happens in the industry. Requires no investment from your business
- development of r+d facilities in local universities that several businesses in an area can benefit from
- spending by a local authority on improving the transport network for a local town/ city
- relocation of components suppliers and other support businesses close to the main centre of manufacturing are also an external cost saving
Explain development of r+d facilities in local universities that several businesses in an area can benefit from
The business may employ these people -> less training -> costs go down
Explain spending by a local authority on improving the transport network for a local town/ city
May reduce transport costs -> employees can get to work easier -> less absenteeism and easier to transport supplies and goods
Explain relocation of component supplies and other support businesses close to the main centre of manufacturing are an external cost saving
Don’t have to spend as much on transportation of supplies
Using local businesses -> may get a better price
Saves costs
Eg Nissan and other car part manufactures in Sunderland
Explain the objective of increased market power over customers and suppliers
Powerful suppliers-> can charge high prices, decreased trade credit terms -> can negatively impact cash flow
Powerful customers-> low prices , high quality -> raises costs and lowers revenue
Powerful customers come about because of limited choice in the market
A short to medium term objective which flows from the longer term
Explain the objective of increased market share and brand recognition
In dynamic and competitive markets, businesses may seek to grow to achieve increased market share
Other businesses may seek to buy other businesses in the same industry in order to acquire recognised brands
Explain the objective of increased profitability
Many businesses seek to grow and expand their profitability
This means as they increase their output, production becomes cheaper per unit (EofS) and the whole business becomes more profitable as costs are reduced
Measuring profitability: gross profit margin, operating profit margin, net profit margin
What’s profitability
How efficiently the business is able to change their revenue into profit
What are the problems of business growth
Diseconomies of scale
Internal communication
Over trading
They can be overcome it’s just how you manage them
Explain about 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
Internal and external
What’s internal DEOS
To do with communication, coordination, motivation
What’s external DEOS
To do with overcrowding in industrial areas, traffic congestion, price of land and labour rises
