3.2.1 Growth Flashcards
What is growth?
An increase in size or status such as a takeover or merger
Why do businesses want to grow?
E.O.S + decreased unit cost market share achieve objectives exploit opportunities easier recruitment bigger brand (easier when diversifying) increased market power
What is economies of scale?
factors that cause average unit cost to fall as output increases.
What is diseconomies of scale?
factors that cause average unit cost to increase as output increases.
What is the minimum efficient scale?
The lowest scale necessary for a business to achieve economies of scale. Usually displayed on a U shaped graph.
What happens after the minimum efficient scale?
no further E.O.S benefits = diseconomies of scale
What happens if there is a high or low MES (Minimum efficient scale)
If high MES = high barriers to entry
If low MES = low barriers to entry
What are internal economies of scale?
when internal growth of a business causes reduced unit cost (firm specific)
What are the types of economies of scale?
1) purchasing economies
2) technical
3) managerial
4) marketing
5) network
6) financial
Explain internal purchasing economies of scale?
Buying in greater quantitatives usually results in lower price (Bulk-buying)
Explain technical economies of scale
The use of specialist equipment or processes to boost productivity.
Explain managerial economies of scale
Specialist managers employed which help reduce unit costs and boost efficiency.
Explain marketing economies of scale
Spreading a fixed marketing spread over a larger range of products and markets, customers.
Explain network economies of scale
adding extra customers or users to an existing network
Explain financial economies of scale
larger firms benefit from access to more and cheaper finance. Due to the fact that larger businesses have better credit scores and reliability.
What are external economies of scale?
When a firm benefits from lower unit costs as a result of the whole industry growing in size.
What are some types of external economies of scale?
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
What are the key issues with growth?
- diseconomies of scale
- internal communication (Tall structure, chains of command, motivation, enforcing quality)
- overtrading
What are diseconomies of scale?
factors that cause average unit cost to increase as output increases.
What are the types of diseconomies of scale?
- coordination/control
- motivation
- communication
- negative effects of internal politics
Explain coordination/control diseconomies of scale
monitoring work and quality becomes difficult - must trust middle managers
Explain motivation diseconomies of scale
alienation and loss of morale - staff are less motivated as they become a ‘cog in a machine’
Explain communication diseconomies of scale
Less opportunity to communicate (e.g. direct communication to the leader)
Explain negative effects of internal politics diseconomies of scale
unrealistic expectations, cultural clashes, overload of information
What is over-trading?
When a business expands too quickly without having the financial sources to support such as quick expansion
When is over-trading most likely to occur?
- growth from capital investments before revenue
- credit sales
- long trade-credit
- long term contracts with costs before payments
What are symptoms of overtrading?
- low gross + operating profits
- bank overdrafts
- high current ratio
- low inventory turnover
- low capacity utilisation
- increase in payable days and reduce in receivable days
How do businesses reduce the risk of overtrading?
- reducing inventory
- slow pace of revenues
- lease not buying outright
- better contracts with suppliers
- better pricing and payments
What challenges are there from internal communications diseconomies of scale?
- dispersed and decentralised
- more formal and less frequent
- senior managers are distant
- taller structure
- less motivation (alienation)
