3.2.1 Growth

Question 1

6 reasons to grow?

Answer 1

1. Desire to have a larger businesses
2. Desire for higher market share + profitability
3. Desire for stronger market power (monopoly)
4. Desire to reduce costs through EoS
5. Desire to diversify products
6. Desire to access more finance

Question 2

What’s the difference between profit and profitability?

Answer 2

Profit is the absolute amount of money a company makes, while profitability is a measure of how efficiently a company generates profit relative to its revenue or initial investment. (Expressed as a %)

Question 3

What is meant by internal economies of scale?

Answer 3

Where increasing scale of output lowers cost per unit (average costs)

Question 4

What are the 6 external economies of scale

Answer 4

1. Managerial (hiring specialists)
2. Bulk buying
3. Capital (having capital production)
4. Marketing (spread advertising costs over more products)
5. Financial (bigger firms get cheaper loans and better finance deals)
6. Risk bearing (diversifying)

Question 5

What is meant by diseconomies of scale?

Answer 5

When a firm continues to increase its output and average costs (cost per unit) starts increasing

Question 6

What are 4 possible sources of external economies of scale?

Answer 6

1. A business moving closer to an ancillary firm (e.g tire company to car manufacturer)
2. Improved transport links (helps logistics)
3. Increase in skilled labour (good geographic cluster)
4. Favourable legislation (get grants)

Question 7

What are 3 problems arising from growth?

Answer 7

1. Diseconomies of scale (hard to control operations)
2. Strained communications (delays, errors)
3. Overtrading (taking on more than it can handle, leading to resource strain or inability to meet its financial obligations -lack of liquidity)