3.2.1-Growth Flashcards
What is Business a Growth?
The point at which businesses need to expand and seek options to generate more profits
What are the Objectives of Growth?
1) Achieve economies of scale
2) Increased market power over customers and suppliers
3) Increased market share and brand recognition
4) Increased profitability
Objective 1: Achieving Economies of Scale
Why would a business want to grow, why not just stay the same?
- Growth enables a business to benefit from economies of scale with a huge positive 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
Benefits of economies of scale
• 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
What are economies of scale and average costs?
EOS occur when unit costs or average costs fall as a result as an increase in the level of output of the business.
increasing output means a business can lower its average costs.
Total cost of production formula
Variable Cost x Output + Full Cost
Cost per Unit Formula
Total Cost / Output
Financial Economies of Scale
Large firms can benefit from cheaper loans and wider sources of cheap finance (investment from shareholders)
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”
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
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
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
How does Bulk Buying affect Economies of Scale
As the order value increases, a business obtains more bargaining power with suppliers.
Obective 2: 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
Objective 3: Increase 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
- Other businesses may seek to buy other businesses in the same industry in order to acquire recognised brands
