3.2.1 Business Growth

Question 1

Growth

Answer 1

An increase in size or status.

Question 2

Objectives of growth

Answer 2

• To achieve economies of scale (internal and external).
• Increased market share.
• Increased profitability.
• Increased brand recognition.
• Increased market power over customers and suppliers.

Question 3

Economies of scale

Answer 3

Factors that cause average cost per unit to fall as output increases.

Question 4

Types of internal economies of scale

Answer 4

• Purchasing
• Technical
• Managerial
• Marketing
• Network
• Financial

Question 5

Purchasing economies of scale

Answer 5

Buying in greater quantities usually results in a lower price.

Question 6

Technical economies of scale

Answer 6

Use of specialist equipment or processes to boost productivity.

Question 7

Managerial economies of scale

Answer 7

Specialist managers can be employed to help reduce unit costs and boost efficiency.

Question 8

Marketing economies of scale

Answer 8

Spread a fixed marketing spend over a larger range of products, markets and customers.

Question 9

Network economies of scale

Answer 9

Adding extra customers or users to a network that is already established e..g mobile phones.

Question 10

Financial economies of scale

Answer 10

Larger firms benefit from access to more and cheaper finance.

Question 11

External economies of scale

Answer 11

Occurs when a firm benefits from lower unit costs as a result of the whole industry growing in size.

Question 12

Examples of external economies of scale

Answer 12

• Growth of industry - training and education focused on that industry.
• Better transport and communication systems.
• The government might lower taxes for the business.
• Introduction of new technology to lower costs.
• Support businesses grow and develop.

Question 13

Problems arising from growth

Answer 13

1. Diseconomies of scale
2. Internal communication
3. Overtrading

Question 14

Diseconomies of scale

Answer 14

Factors that cause average cost per unit to increase as output increases.

Question 15

Examples of diseconomies of scale

Answer 15

• Co-ordination/control = problems in monitoring productivity and work quality, increasing wastage of resources.
• Motivation = workers may develop a sense of alienation and loss of morale.
• Communication
• Negative effects of internal politics - information over-load, unrealistic expectations amongst managers and cultural clashes between senior people with inflated egos.

Question 16

Overtrading

Answer 16

When a business expands too quickly without having the financial resources to support such a quick expansion.

Question 17

When is overtrading most likely to happen?

Answer 17

• Growth is achieved by making significant capital investment in product or operations capacity before revenues are generated.
• Sales are made on credit and customers take too long to settle amounts owed.
• Significant growth in inventories is required in order to trade from the expanding capacity.
• Long term contract requires a business to incur substantial costs before payments are made by customers.

Question 18

How to manage the risk of overtrading?

Answer 18

• Reduce inventory levels.
• Scale back pace of growth until profit margins and cash reserves have improved.
• Leasing rather than buying capital equipment.
• Obtaining better payment terms from suppliers.
• Enforcing better payment terms with customers.