3.2.1 Growth Flashcards
What reasons are there as to why businesses grow?
- Increase profitabililty
- The desire for strong market power over its competitors
- Desire to reduce costs by benefitting from economies of scale
- Increased market share & brand recognition
What is meant by economies of scale?
- Occurs when an increased scale of output results in a lower cost per unit
EOS- help large firms to lower their costs of production beyond what small firms can achieve
What is meant by diseconomies of scale?
- As a firm continues increasing it’s output it will reach a point where its average costs will start to increase
- It is the negative effect of growing too big
What are the disadvantages of diseconomies of scale?
- As unit costs rise in dseconomies of scale business is unable to charge lower prices- be less competitive & therefore market position= decrease in market share
3 C’s
- Less control
- Less Communication
- Less Coordination
Within economies of scale why do average costs fall as quantitiy increases?
- You can negotiate better deals as you buy more of them- bulk buy
- Specialisation & specialised equipment- as you produce more workers may become skilled & you can buy better equipment which is more efficient at reducing costs
- The better equipment & more skilled workforce will lead to greater efficiency & productivity for the business which in turn will lead to lower unit costs
- AAR of lower costs- businesses can charge lower prices-competitve advantage
How can increased market power over customers & suppliers help a business grow?
- Larger firms typically have more influence in negotiations
- They can dictate terms to suppliers leading to lower costs
- Can also implement strategies that give them an advantage over small competitors - which can help in maintaining customer loyalty & reducing price sensitivity
How can increase market share & brand recognition help a business grow?
- Growth leads to higher market share which can enahance brand recognition
- A larger prescence in the market can attract more customers & reinforce brand loyalty
How can increased profitability help a business to grow?
- Higher sales volume can lead to greater revenues whilst lower costs improve margins
- This can proivde funds for further investment, innovation or dividends to shareholders
What are internal economies of scale?
- Occur as a result of the growth in the scale of production within the firm
- The firm can benefit from lower average costs generated by factors from inside the business
(most ecos are internal)
e.g. machinery because in a large business the costs are spread over more with the amount the business is producing in comparison to a small
What are external economies of scale?
- Occurs when there is an increase in the size of the industry in which the firm operates
- The firms can benefit from lower average costs generate by factors outside the business.
What types of internal economies of scale are there?
- Financial economies
- Managerial economies
- Marketing economies
- Purchasing economies
- Technical economies
- Risk bearing economies
What are financial economies?
- Large firms often recieve lower interest rates on loans than smaller firms as they are percieved less risky
- A cheaper loan lowers the cost per unit (average cost)
What are managerial economies?
- Occurs when large firms can employ specialist managers who are more efficient at certain tasks & this efficiency lowers the average cost (AC)
- Managers in small firms often have to fulfil multiple roles & are less specialised
What are marketing economies?
- Large firms spread cost of advertising over a large number of sales and this reduces the AC
- They can also reuse marketing materials in different geographic regions which further lowers the AC
What are purchasing economies?
- Occur when larger firms buy raw materials in greater volumes & recieve a bulk purchase discount which lowers the AC
What are technical economies?
- Occur as a firm can use its machinery at a higher level of capacity due to the increased output thereby spreading the cost of the machinery over more units & lowering the AC
What are risk bearing economies?
- Occur when a firm can spread the risk of failure by increasing its numbers of products i.e greater product diversification - less failure lowers AC
e.g. a large record company can more easily bear the risk of a ‘flop’ than a smaller record label.
What sources of external economies of scale are there?
- Geographical Cluster
- Transport links
- Skilled labour
- Favourable legislation
What is geographic cluster?
- As an industry grows, ancillary firms move closer to major manufacturers to cut costs & generate more business
This lowers the AC e.g. car manufacturers in Sunderland rely on the service of over 2,500 ancillary firms
What are transport links?
- Improved transport links develop around growing industries to help get people to work & to improve the transport logistics
- This lowers the AC
What is skilled labour?
- Specialising for specific roles in the business- specialization leads to increased productivity and economic growth.
- An increase in skilled labour can lower the cost of skilled labour, thereby lowering the AC
- The larger the geographic cluster, the larger the pool of skilled labour
What is favourable legislation?
- This often generates significant reductions in AC as governments support certain industries to achieve their wider objectives
What are the 3 problems arising from Growth?
- Diseconomies of Scale
- Internal communication
- Overtrading
How can diseconomies of scale cause problems with growth?
- Occurs when a company grows too large, making it difficult to manage and control its operations.
- 3 C’s
- Lack of control
- Lack of coordination
- Lack of communication
How can internal communication cause problems with growth?
- Rapid growth may strain communication channels or result in miscommunication, conflicting priorities & lack of coordination.
- This may result in delays, errors, missed opportunities & impact on employee motivation/morale
How can overtrading cause problems with growth?
- Occurs when a company takes on more business than it can handle, leading to a strain on its resources or inability to meet its financial obligations (lack of liquidity).
- This may cause cash flow problems or decreased customer satisfaction.
E.g A company that expands too quickly may struggle to hire & train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers
