3.2.1 Growth

Question 1

What is growth?

Answer 1

An increase in size or status such as a takeover or merger

Question 2

Why do businesses want to grow?

Answer 2

E.O.S + decreased unit cost
market share
achieve objectives
exploit opportunities
easier recruitment
bigger brand (easier when diversifying)
increased market power

Question 3

What is economies of scale?

Answer 3

factors that cause average unit cost to fall as output increases.

Question 4

What is diseconomies of scale?

Answer 4

factors that cause average unit cost to increase as output increases.

Question 5

What is the minimum efficient scale?

Answer 5

The lowest scale necessary for a business to achieve economies of scale. Usually displayed on a U shaped graph.

Question 6

What happens after the minimum efficient scale?

Answer 6

no further E.O.S benefits = diseconomies of scale

Question 7

What happens if there is a high or low MES (Minimum efficient scale)

Answer 7

If high MES = high barriers to entry

If low MES = low barriers to entry

Question 8

What are internal economies of scale?

Answer 8

when internal growth of a business causes reduced unit cost (firm specific)

Question 9

What are the types of economies of scale?

Answer 9

1) purchasing economies
2) technical
3) managerial
4) marketing
5) network
6) financial

Question 10

Explain internal purchasing economies of scale?

Answer 10

Buying in greater quantitatives usually results in lower price (Bulk-buying)

Question 11

Explain technical economies of scale

Answer 11

The use of specialist equipment or processes to boost productivity.

Question 12

Explain managerial economies of scale

Answer 12

Specialist managers employed which help reduce unit costs and boost efficiency.

Question 13

Explain marketing economies of scale

Answer 13

Spreading a fixed marketing spread over a larger range of products and markets, customers.

Question 14

Explain network economies of scale

Answer 14

adding extra customers or users to an existing network

Question 15

Explain financial economies of scale

Answer 15

larger firms benefit from access to more and cheaper finance. Due to the fact that larger businesses have better credit scores and reliability.

Question 16

What are external economies of scale?

Answer 16

When a firm benefits from lower unit costs as a result of the whole industry growing in size.

Question 17

What are some types of external economies of scale?

Answer 17

1) growth industry, better training and education supporting the industry
2) better transport infrastructure and communication systems
3) government might lower taxes
4) introduction of new technology to lower costs
5) support business growth and development

Question 18

What are the key issues with growth?

Answer 18

• diseconomies of scale
• internal communication (Tall structure, chains of command, motivation, enforcing quality)
• overtrading

Question 19

What are diseconomies of scale?

Answer 19

factors that cause average unit cost to increase as output increases.

Question 20

What are the types of diseconomies of scale?

Answer 20

• coordination/control
• motivation
• communication
• negative effects of internal politics

Question 21

Explain coordination/control diseconomies of scale

Answer 21

monitoring work and quality becomes difficult - must trust middle managers

Question 22

Explain motivation diseconomies of scale

Answer 22

alienation and loss of morale - staff are less motivated as they become a ‘cog in a machine’

Question 23

Explain communication diseconomies of scale

Answer 23

Less opportunity to communicate (e.g. direct communication to the leader)

Question 24

Explain negative effects of internal politics diseconomies of scale

Answer 24

unrealistic expectations, cultural clashes, overload of information

Question 25

What is over-trading?

Answer 25

When a business expands too quickly without having the financial sources to support such as quick expansion

Question 26

When is over-trading most likely to occur?

Answer 26

• growth from capital investments before revenue
• credit sales
• long trade-credit
• long term contracts with costs before payments

Question 27

What are symptoms of overtrading?

Answer 27

• low gross + operating profits
• bank overdrafts
• high current ratio
• low inventory turnover
• low capacity utilisation
• increase in payable days and reduce in receivable days

Question 28

How do businesses reduce the risk of overtrading?

Answer 28

• reducing inventory
• slow pace of revenues
• lease not buying outright
• better contracts with suppliers
• better pricing and payments

Question 29

What challenges are there from internal communications diseconomies of scale?

Answer 29

• dispersed and decentralised
• more formal and less frequent
• senior managers are distant
• taller structure
• less motivation (alienation)