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
• There are lots of reasons that a business will want to grow and expand, some may be specific to the owners and some to the industry, the four that your exam board would like you to know about are:
- to achieve economies of scale (internal and external)
- increased market power over customers and suppliers
- increased market share and brand recognition
- increased profitability
What is the objective of growth to 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
• We call this economies of scale (EOS)
What are financial economies of scale
Large firms can benefit from cheaper loans and wider sources of cheap finance (investment from shareholders)
What are marketing economies of scale
• Every part of marketing has a cost.
• As a business gets larger, it is able to spread the cost of marketing over a wider range of products and sales – cutting the average marketing cost per unit.
• So for example a larger business may have an extensive portfolio or products but may choose to just market the corporate brand name e.g. Nestle not KitKat
What are technical economies of scale
• Businesses with large-scale production can use more advanced machinery (or use existing machinery more efficiently).
• This may include using mass production techniques, which are a more efficient form of production. Fixed costs of purchasing machinery spread over higher levels of output.
• A larger firm can also afford to invest more in research and development.
What are managerial economies of scale
• Small businesses find it hard to obtain finance or the cost of the finance is often quite high.
• Small businesses are perceived as being riskier than larger businesses that have developed a good track record.
• Larger firms therefore find it easier to find potential lenders and to raise money at lower interest rates
What are 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 the objective to grow 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
What is the objective to grow 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
What is the objective to grow for increased profitability
• 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 problems arise from growth
1.diseconomies of scale
2.internal communication
3. overtrading
4. Lack of coordination and motivation
What is diseconomies of scale
• As the business grows they may expand the scale of production beyond the minimum efficient scale (see next slide)
• 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
What is lack of motivation / coordination
• Workers in large companies may feel demotivated – with little say in their working life
• This can lead to powerlessness and alienation
• Means increased absenteeism and lateness
• Reduction in productivity
• Lower output per worker
• Means increased unit costs
• As a company grows and takes on new staff, makes new products buys new premises all of this needs to be coordinated
• All resources need to be controlled so that operations can run smoothly
• Workers may need monitoring which can add to costs
• May need more managers which increases average cost per unit
