3.2.1 Growth Flashcards
What is business growth?
• Business growth is the point at which a business needs to expand and seeks options to generate more profits
What are the objectives of growth?
- to achieve economies of scale (internal and external)
- increased market power over customers and suppliers
- increased market share and brand recognition
- increased profitability
How does growth achieve economies of scale?
• Growth enables a business to benefit from economies of scale 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 the benefits of economies of scale?
• The idea that as a business grows in size it will be able to gain competitive advantage in a number of ways;
• By having more funds to buy stock, so being able to get better deals by buying in bulk
• By having more power
• By having more funds to pay for specialist staff
• By having a better reputation so banks are more willing to lend
How does economies of scale and average cost correlate ?
• The more they make the cheaper it gets per item.
• ANY EOS question should be about how increasing output means a business can lower its average costs. They are like shoes – you need both to be comfortable.
What is financial economics of scales?
Large firms can benefit from cheaper loans and wider sources of cheap finance (investment from shareholders)
What is marketing economies of scale?
- The advantages that large firms get in relation to buying and selling. Large firms can attract specialist buyers who don’t waste money buying stock that will not sell.
- They also have specialist sellers/marketing staff who ensure that goods will sell. Big firms benefit significantly from being able to “buy in bulk”
What is a technical economies of scale?
- These are the advantages that large firms have when it comes to the production process.
- Large firms can employ specialist labour and capital which stimulates productivity and reduces average costs
What is managerial economies of scale?
Large firms have the money/resources to attract the most productive/efficient/specialist managers who make the most effective business decisions and increase efficiency over time
What is Risk - Bearing economies of scale?
-Large firms benefit from having wider, more diversified product range.
- This means that they are better able to withstand the risk of a fall in demand for one good or service
What is increased market power over customers and suppliers?
• Another objective of a business wanting to grow maybe to reduce the power of suppliers and customers
• This is the short to medium term objective which flows from the longer term objective of the business to increase profitability
Increased market share and brand recognition?
• In dynamic and competitive markets, businesses may seek to grow to achieve increased market share – for example the supermarket industry in the UK (see next slide) is very driven by market share
• Other businesses may seek to buy other businesses in the same industry in order to acquire recognised brands
Why is increased profitability a objective?
• Many businesses seek to grow and expand to increase their profitability
• This means as they increase their output production becomes cheaper per unit (Economies of Scale) and the whole business becomes more profitable because costs are reduced
What are peoples arising from growth?
1.diseconomies of scale
2.internal communication
3. overtrading
Why is diseconomies of scale a problem?
• At this point the average costs per unit starts to RISE as production RISES
• Internal DEOS; communication, co-ordination, motivation
• External DEOS; overcrowding in industrial areas, traffic congestion, price of land and labour rises
