3.2.1 Growth Flashcards
Growth
an increase in size or status
General benefits of growth
- to achieve economies of scale
- to increase market power over customers and suppliers
- Increased market share, leading to greater dominance in the market and the ability to influence prices
- Increased brand recognition and therefore status, publicity and added value
- Increased profitability
Key reasons for growth
- increase profits
- achieve economies of scale
- Increase market power
- Increase market share and brand recognition
- grow business and shareholder value
Key reasons for growth - increase profits
-important for businesses whose shares are quoted on the stock market or who are owned by a private equity f
Key reasons for growth - economies of scale
-by growing the scale of output, a business can achieve lower unit costs which can thereby improve a firm’s competitiveness
Key reasons for growth - increase market power
-larger firms may be able to exert greater bargaining power over suppliers and customers in order to gain a competitive advantage
Key reasons for growth - increased market share and brand recognition
-much research points to the link between growing market share and brand recognition with higher profits, so this reason is linked with increasing profits
Key reasons for growth - grow business and shareholder value
-mostly why shareholders adopt a growth strategy. larger businesses are generally more valuable
Economies of scale
factors that cause average cost per unit to fall as output increases
Marketing economies of scale
- discounts from advertisers and distributors
- sales costs are spread over a large national output
- admin costs of selling may be spread
Purchasing economies of scale
- better rates when bought in large quantities
- specialist staff can research the best purchase deals
- admin costs savings in large orders
technical economies of scale
- larger businesses are more efficient as fixed costs of capital investment can be spread
- capital équipement is less wasted
- adopt different production techniques to reduce unit costs
- use mass production techniques so more efficient
- greater use of technology to speed up output and use less staff
managerial/ socialisation economies of scale
- managers specialise in different tasks
- able to employ more specialists rather than outsource
- better quality decision making
- specialisation of these means that better quality decisions are made through degradation
External economies of scale
these are when a firm benefits from lower unit costs as a result of the whole industry growing in size
Benefit of external economies of scale
- growth of industry results in better training and education focusses on that industry
- better transport infrastructure and communications systems
- might have an enterprise zone where governments attract businesses to an area by offering low taxes for the business
- introduction tones technology to lower costs
- support businesses grow and develop (vehicle leasing companies and cleaning companies)
Diseconomies of scale
factors that cause the average costs per unit to increase as output increases
-happens when a business expands beyond an optimum size and becomes less efficient
Diseconomies of scale
- coordination/control
- motivation
- Communication
- Over trading
Diseconomies of scale - coordination and control
- problems in monitoring productivity and work quality, increasing wastage of resources
- branches can become disparate and disconnected from one another
- can result in loss of productivity and so does quality of work which causes costs to rise
- cost to get branches aligned
Diseconomies of scale - motivation
- workers in a large firm may develop a sense of alienation and loss of morale
- as a firm grows, the organisational structure can either get very tall or very wide - disconnected
- spans of control may increase where you lose face to face contact with your line manager -lack of motivation
- productivity falls, costs rise
- business may have to invest in financial incentives or systems to improve motivation = higher costs
Diseconomies of scale - communication
- workers in large firms may have less opportunities to communicate
- language barriers in a global firm
- communication may get distorted and more mistakes made - costs due to wide span of control and tall structure
- may invest into internal infrastructure which requires money
Negative effects of internal politics and what causes this?
- information overload, unrealistic expectations among managers and cultural clashes between senior people with inflated egos
- disconnection between senior and juniors
- interrupts work flow, impacts motivation and morale, effect productivity, causes costs to rise
What is overtrading?
happens when a business expands too quickly without having the financial resources to support such a quick expansion
-cash flow problems from growing too quickly
When os overtrading most likely to happen?
- growth is achieved by making significant capital investment in production or operations capacity before revenues are generated
- sales are made on credit and customers take too long to settle amounts owed
- significant growth in inventories is required in order to trade from the expanding capacity
- a long term contract requires a business to incur substantial costs before payments are made by customers under the contract
How to manage the risk of overtrading?
- reducing inventory levels - will reduce your payments and commitments
- scale back the pace of growth until profit margins and cash revenues have improved
- leasing rather than buying capital equipment - preventing that outlay (smaller monthly payments)
- obtaining better payment terms from suppliers
- enforcing better payment terms with customers
Growth can cause both economies and diseconomies of scale
- if the scale of production increases , average unit costs over most production ranges are likely to fall because the company will benefit from economies of scale
- beyond a point a company will start to find that inefficiencies push average costs up and diseconomies of scale set in.
What is retrenchment?
It allows a business to re-focus on growing a core activity within its operations
How does retrenchment impact HR?
-need to consider workforce planning, redundancy and redeployment
How does retrenchment impact operations?
-it can offer economies of scale through addressing diseconomies of scale
How does retrenchment impact marketing?
-promotional campaigns are likely to be refocussed on the refined business offer which may include selling from a smaller product portfolio
How does retrenchment impact finance?
-the business needs to ensure it is able to fund the short-term increase in the cost of redundancy payments
