3.2 Objectives and Growth Flashcards
Economies of Scale
Economies of scale are when unit costs or average costs fall as a
result as an increase in the level of output of the business.
Types of Economies of Scale
Purchasing
Technical: Businesses with large-scale production can use more
advanced machinery
Specialisation: Businesses can afford specialist managers
Financial- lower interest rates
Marketing- spread cost of marketing over wide range of products
Risk bearing
Objective of growth: Bargaining power of suppliers
Limit power of suppliers by looking for new suppliers, economies of scale, have power over suppliers, etc.
Objective of growth: Bargaining power of customers
Make it too expensive for a customer to switch, become more price competitive, invest in R&D to provide best product, etc.
Other objectives for growth
Increased market share and brand recognition
Increased profitability
Problems with growth: Lack of Motivation
Workers in large companies may feel demotivated- little say
Increases absenteeism and lateness- reduction in prod
- lower output
- increased unit costs
Problems with growth: Lack of coordination
With growth and new staff, everything needs to be coordinated
Resources need to be controlled so operations can run smoothly
Workers need monitoring- added costs (Managers)
Problems with growth: Internal communication impact
Less face to face communication
Takes long time to get through layers of management
Less effective communication
- mistakes
- wastage
- higher avg unit costs
Problems with growth: Overtrading
When a business takes on more than it can handle
Taking on a large order means they cannot take on other orders
Organic Growth
Business grown within itself without a merger or a takeover
Done through:
- increasing product range
- Opening more branches
- Taking on more staff
Inorganic Growth
Means the business has grown by buying its way into being larger by:
- Merger
- Takeover
- Joint Venture
Methods of Organic Growth
New product launches
Opening new stores
Expanding to foreign market
Expansion of the workforce
Advantages of Organic Growth
Avoid risks from merging with another business
Cheaper than merging
Retain Culture
Can be planned
Higher production- lower avg costs
More influence comes with more market share
Disadvantages of organic growth
High risk- opening lots of stores and taking thousands of new staff
Long period before roi
Growth limited
New markets can be dangerous to enter without knowledge
Two types of takeovers
Friendly; A business may be struggling with cash flow
problems and invite a takeover from a stronger business
Hostile; The board of directors will try an
resist the takeover, but if another business gets 51% shares they can takeover management and control
