3.2.1 growth

Question 1

define Internal economies of scale

Answer 1

• the advantages enjoyed by a business as it increases the scale of its current operations leading to a fall in unit costs

Question 2

Lower unit costs are very important in making a business more competitive. They will allow a business to:

Answer 2

Reduce prices, therefore selling more, whilst keeping the same profit margin
Or
Maintain the same price and earn more profit per unit on the product

Question 3

Internal economies of scale include

Answer 3

technical
-The benefits enjoyed when a business is able to spend more on larger and more efficient machinery leading to a fall in average costs
-Fixed costs are spread over a greater level of output.
Increased competitiveness.
Increased efficiency.
Can spend more money on scientific research and technical development.

purchasing

• The benefits enjoyed when a business is able to negotiate greater discounts with suppliers for bulk buying leading to a fall in average costs.
• Increases the buying power of the business (Porter’s five forces).

managerial

• The benefits enjoyed when a business can employ specialist personnel leading to a fall in average costs.
• The business can employ internal specialists such as an accountant or have its own HR department rather than use the services of external organisations

Question 4

external economies are

Answer 4

External economies are when a business enjoys lower unit costs as a result of external factors such as a growth in the industry and geographical clustering within an industry.

Question 5

External economies of scale include:

Answer 5

expertise
-The benefits enjoyed when a region or country becomes renowned for a particular industry leading to more highly skilled workers, improved training and greater talent pool leading to a fall in unit costs.
-Local universities and training organisations offer specialist courses.
Ease of recruitment.
Expertise of employees.

cooperation
- Greater cooperation between businesses within the same industry and region resulting in greater efficiencies
-Network groups.
Joint projects such as funding research and development.
Shared expertise

support services
-The benefits enjoyed when ancillary services that specialise in a particular industry locate near to the industry.
-Specialist services such as banking, insurance, waste management.
Small businesses supplying to the industry e.g. a component manufacturer.

Question 6

Other objectives of growth include

Answer 6

Increase market power over customers and suppliers

• Brand loyalty
• Barriers to entry
• Stronger negotiating power
• Secure raw materials or outlets

Increase market share and brand -recognition

• Dominant business
• Saturate the market
• Strong physical and promotional presence

Increased profitability
Lower costs through economies of scale
Ability to charge higher prices
Increased productivity and efficiency

Question 7

define Diseconomies of scale

Answer 7

– the disadvantages suffered as a result of a business increasing the scale of its operations that lead to a rise in unit costs

Question 8

Rising unit costs will make a business less competitive. They may mean that a business will have to

Answer 8

Raise prices, therefore selling less, in an attempt to cover increased average costs
Or
Maintain the same price and earn less profit per unit on the product

Question 9

Diseconomies of scale include

Answer 9

Communication

• Wider span of control
• Longer chain of command
• Greater risk of distortion and -misunderstanding
• Reliance on technology over face to face -communication

Coordination and control
Duplication of resources
Multiple locations, products, functions
Complex organisational structure

Alienation

• Employees become demotivated
• Lack of personal recognition “number not a name”

Internal communication
-Communication is the transferring of information between parties
-To be effective communication must be to the right people, on time and in an understandable format
-Between functions, subsidiaries, head quarters and branches, across sites
-As a business grows communication becomes more complex and more difficult
Relies on a willingness of all parties to share information

Question 10

Overtrading

Answer 10

– a business has expanded too rapidly resulting in it operating at a level beyond its resources leading to potential liquidity problems

Question 11

Problems arising from growth:

Answer 11

diseconomies of scale
internal communication
overtrading

Question 12

Objectives of growth:

Answer 12

to achieve economies of scale (internal and external)
increased market power over customers and suppliers
increased market share and brand recognition
increased profitability