5. Growth

Question 1

what does it mean when a business is growing

Answer 1

If a business is growing, it means that it generates more revenue, owns more assets, uses more resources (such as labour and capital) and hopefully makes more profit

Question 2

what does a growing business mean and what are the benefits of business growth

Answer 2

• If a business is growing, it means that it generates more revenue, owns more assets, uses more resources (such as labour and capital) and hopefully makes more profit.
• • Growing businesses experience,

1. lower average costs,
2. increased market power,
3. increased brand recognition
4. increased profitability

Question 3

describe what is happening here

Answer 3

• In Figure 2, a firm is currently producing in a small plant (i.e. a factory) and its short-run costs are SRAC₁, When it produces an output equal to Q_i. its average cost will be AC_i. If it raises production to Q₂, average costs will rise to AC,. This is the result of the law of diminishing returns.
• If the firm expands the scale of its operations (which it can do in the long run), the same level of output can be produced more efficiently. With a bigger plant, represented by SRAC_z, Q₂ can be produced at an average cost of just AC,.
• Long-run average costs fall due to economies of scale. They will continue to do so until the firm has built a plant which minimises long-run average costs (i.e. makes the costs as small as possible). In the diagram, this occurs when a plant shown by SRAC₃ is built.
• This is sometimes called the minimum efficient scale of plant. When output reaches Q* in this plant, long-run average costs cannot be reduced any further through expansion. The business is said to be productively efficient at this point.
• At any output level higher or lower than Cr, the business is productively inefficient because average costs could be lower. For example, if the firm continues to grow, it will experience rising average costs due to diseconomies of scale, as in SRAC, in Figure 2.

Question 4

what is internal economies of scale

Answer 4

Internal economies of scale are the benefits of growth that arise within the firm

Question 5

reasons for internal economies of scale

Answer 5

1. Purchasing and marketing economies
2. Technical economies
3. Technical economies
4. Financial economies
5. Risk-bearing economies

Question 6

what is purchasing marketing economies of scale

Answer 6

Large firms are likely to get better rates when buying raw materials and components (i.e. the parts something is made of) in bulk. In addition, the administration costs involved do not rise in proportion to the size of the order.

Question 7

what is technical economies of scale

Answer 7

• Technical economies arise because larger plants are often more efficient. The capital costs and the running costs of plants do not rise in proportion to their size.
• For example, the capital cost of a double-decker bus will not be twice that of a single- decker bus. This is because the main cost (engine and chassis) does not double when the capacity of the bus doubles. Increased size may mean a doubling of output, but not cost.
• Therefore, the average cost will fall, This is sometimes called the principle of increased dimensions. In addition, the cost of the crew and fuel will not increase in proportion to its size

Question 8

technical EOS: what is indivisibility

Answer 8

indivisibility - the phsycial inability or economic inappropriateness of running a machine or some other piece of equipment at below its optimal operational capacity

Another technical economy is that of indivisibility. Many firms need a particular item of equipment or machinery but fail to make full use of it. A small business may pay $400 for a laptop computer. The cost will be the same whether it is used twice a week by a part-time worker or every day. As the business expands, it will be used more and so the average cost of the machine will fall.

Question 9

how does efficiency occur in technical eos

Answer 9

As the scale of operations expands, the firm may switch to mass-production techniques. Flow production involves breaking down the production process into a very large number of small operations. It allows for greater use of highly specialised machinery. This results in large improvements in efficiency as labour is replaced by capital.

Question 10

what is specialisation and managerial EOS

Answer 10

• A firm can afford to employ specialist managers as it grows. In a small business, one general manager may be responsible for finance, marketing, production and human resources.
• The manager may find the role demanding.
• Efficiency may improve and average costs fall if a business employs specialists in these fields. Specialists would be an indivisibility if they were employed in a small firm

Question 11

what is financial EOS

Answer 11

1. Large firms have advantages when they try to raise finance. They will have a wider variety of sources from which to choose.
2. For example, sole traders cannot sell more shares to raise extra funds, but large public limited companies can.
3. Very large firms will often find it easier to persuade institutions to lend them money. This is because they will have large assets to offer as security.
4. Finally, large firms borrowing very large amounts of money can often gain better interest rates.

Question 12

what is risk bearing EOS

Answer 12

1. As a firm grows it may well diversify (i.e. develop a wider range of products) to reduce risk.
2. For example, the online retailer Amazon has recently diversified into the operation of supermarkets.
3. Large businesses can also reduce risk by carrying out research and development.
4. The development of new products can help firms gain a competitive edge over smaller rivals

Question 13

what is external EOS

Answer 13

External economies of scale are the reductions in costs that any business within an industry might benefit from as the industry grows

Question 14

when is external eos more likely

Answer 14

External economies are more likely to arise if the industry is concentrated (i.e. if there are a large number of firms) in a particular geographic region

Question 15

What are the types of external eos

Answer 15

1. Labour
2. Ancillary and commercial services
3. Co-operation
4. Disintegration

Question 16

External EOS: What is labour + examples

Answer 16

1. The concentration of firms may lead to the build­up of a labour force with the skills required by the industry. Training costs may be reduced if workers have gained skills at another firm in the same industry.
2. Examples - Local schools and colleges, or even local government, may offer training courses which are aimed at the needs of the local industry

Question 17

External EOS: What is Ancillary and commercial services + examples

Answer 17

1. An established industry tends to attract smaller firms that are trying to serve the particular industry’s needs. A wide range of commercial and support services can be offered.
2. Some examples include specialist banking, insurance, marketing, waste disposal, maintenance, cleaning, components and distribution services.

Question 18

External EOS: What is co-operation + examples

Answer 18

1. Firms in the same industry are more likely to co-operate if they are concentrated in the same region. They might work together to fund a research and development centre for the industry.
2. Example - An industry journal (i.e. magazine) might be published so that information can be shared.

Question 19

External EOS: What is disintegration + examples

Answer 19

1. Disintegration occurs when production is broken up so that more specialisation can take place. When an industry is concentrated in an area, firms might specialise in the production of one component. Then, they would transport it to a main assembly plant (i.e. the place where it is put together).
2. For example, in US film production, many different operations were often done by the same organisation based in Hollywood.
3. However, there are now far more specialist businesses, such as editing, casting, make­up, costume design, special effects, filming, props manufacturing, marketing and distribution.

Question 20

what is market power

Answer 20

1. As businesses get bigger they become more dominant (i.e. more powerful). As a result, rivals are left with a smaller market share and some weaker businesses may be forced to close down.

Question 21

Which stakeholders of a bsuiness are affected by increased market power

Answer 21

• If a business is large enough, it may be able to dominate two particular stakeholders: Customers and Suppliers

Question 22

how are customers affected by increased market power

Answer 22

1. A dominant business may be able to charge higher prices if competition in the market is limited.
2. Customers are forced to pay higher prices when there is less choice.
3. Also, there is less need to develop new products if there is a lack of competition in the market. This means that a dominant firm will not have to meet the costs of expensive and risky innovation (i.e. new ideas). As a result, product choice may remain limited for consumers.

Question 23

how are suppliers affected by increased market power of a busiiness

Answer 23

1. Sometimes a business can dominate its suppliers. For example, it may be able to force the costs of materials and commercial services down if it buys large quantities from smaller suppliers.
2. Dominant businesses will be in a good position if their suppliers rely upon them for their custom. For example, a small supplier is vulnerable if it sells all of its output to just one large business. It may have to accept the prices that the customer is prepared to pay.

Question 24

drawback of increased market power

Answer 24

• a business might attract the attention of the authorities if it becomes too dominant. If the dominant business appears to be exploiting consumers or suppliers, there may be an investigation into the industry.

examples:

1. In recent years, energy companies in some countries have been criticised for charging high prices.
2. Some supermarkets have also been accused of ‘bullying suppliers’ (i.e. using their power to hurt the suppliers). For example, suppliers might be threatened with the loss of an order if prices are not reduced.
3. Alternatively, they might be made to wait an unreasonable amount of time for payment.

Question 25

explain what is meant by increased brand recognition

Answer 25

• As a business gets a larger and larger share of the market, customers become more aware of the brand name because they see the brand advertised and offered for sale in more locations.

Question 26

Benefits of increased brand recognition

Answer 26

As the brand becomes stronger, a business may be able to:

1. charge higher prices
2. make the product distinct from those of rivals
3. create customer loyalty
4. achieve greater product recognition
5. develop an image
6. launch new products more easily.
7. A business with a larger market share is also more likely to attract media attention, which helps to promote the company

Question 27

what is meant by increased profitability + example

Answer 27

• Larger businesses tend to make bigger profits than smaller ones. As profits grow, returns to the owners will also grow.
• For example, Arca Continental is a business that manufactures bottles and distributes Coca-Cola³⁾ products throughout Mexico, Central America and the USA. It is the second largest Coca-Cola distributor in South America and the third largest in the world. It has a market value of $11.3 billion.
• Between 2015 and 2016, its revenues grew 17.8 per cent . The benefit to shareholders of this growth was significant. Arca increased its dividend payment to shareholders from MXN1.75 to MXN1.85 per share

Question 28

benefits of increased profitability

Answer 28

1. Additionally, when a company grows, shareholders are likely to see the price of their shares rise. The Arca share price rose from MXN92 to about MXN105 over the calendar year.
2. If a business grows and increases its profitability, it will have more profit for investment and innovation. This will allow the business to develop and launch new products
3. make acquisitions.
4. The business is likely to grow even further if these investments are successful.

Question 29

what is inorganic growth + example

Answer 29

• This type of growth is called external growth or inorganic growth. It involves businesses joining together so that, in theory, they could double in size overnight.
• For example, in 2016 the Barcelona-based start-up Doctoraliae, an online booking platform for healthcare appointments, merged with the Warsaw-based company DocPlanner. Doctoralia has around 9 million monthly users, while DocPlanner has over 8 million. This means that the new organisation will virtually double in size,

Question 30

what is organic growth + example

Answer 30

• In contrast, internal growth or organic growth occurs when a business grows naturally by selling more of its output using its own resources.
• For example, many to European football clubs have experienced some solid organic growth over the last 10 years or more German club Bayern Munich has seen its revenues grow from around €166 million in 2003-04 to over €640 million in 2015-16.
• Clubs have grown by increasing the capacity of their stadiums and attracting new sources of revenue such as income from TV rights, hospitality and other commercial activities.

Question 31

explain the two main differences between organic and inorganic growth

Answer 31

1. Speed is one of the key differences between the two growth strategies, Inorganic growth is much faster. it is possible to instantly double in size as a result of joining with another business. Organic growth is normally much slower. It takes time to develop and grow a business using its own resources.
2. Another difference is the potential risk involved in the two different strategies. It could be argued that organic growth is a safer strategy because owners expand their businesses by developing their current expertise. They may be growing by ‘doing more of the same’, There is not much risk involved in this strategy. In contrast, growing through mergers or acquisitions has risk attached. This is because the process of integrating when two organisations are brought together can create problems. For example, there could be differences between the working cultures that might result in conflict, delays and instability.