7.4 Benefits of Business Growth Flashcards
Benefits: Profits can rise allowing for greater dynamic efficiency
As a business grows in size, producing and selling more output, profits can rise allowing for greater dynamic efficiency. Such profit can then be reinvested back into the company in the form of technology advances, innovative new products and R&D. This is hugely beneficial for consumers who will receive brand new, better quality products over time - perhaps being able to purchase products that do not yet exist. Prices could be lower over time if technology advances reduces costs for businesses, which are then passed on to consumers. The choice available to consumers would increase too.
Benefits: Experience greater economies of scale
Growth can allow a business to experience greater economies of scale, reducing average costs to then reduce prices and gain market share ahead of rivals who do not benefit from the same economies of scale. This could be very important in industries where large incumbent firms experience significant economies of scale and are therefore much more price competitive.
Benefits: Flood the market with product or stores
Through growth, businesses can flood the market with products or stores in developing the brand and establishing their presence. In a highly competitive market with several big players, this strategy can allow a business to gain brand loyalty and a strong reputation amongst consumers, developing a robust customer base. If successful, market share will increase whilst potentially also resulting in monopoly power.
Benefits: New market opportunities
Businesses may be looking to tap into new market opportunities through growth overseas. Countries with large populations and rising income growth encourage businesses to expand and increase their global market presence. By locating directly and growing in these locations, firms have the greatest chance to access a large number of new potential customers and gain global market share.
Benefits: Divorce between ownership and control
The divorce between ownership and control may make business growth an objective pursued by managers who are looking to maximise their benefits at work. Managers may be able to justify higher salaries, large offices and other perks in the job using impressive sales quantity figures as justification of how successful they have been in growing the business.
Con: Diseconomies of scale
Problems/Evaluation of Business Growth - Reasons for Firms to Remain Sma
Businesses can be productively inefficient if they become too large and suffer from diseconomies of scale. This occurs when output takes place where average costs are rising, due to problems with communication, coordination, control and/or motivation where productivity is reduced due to the excessive size of the firm. As a consequence consumers suffer from higher prices and lower consumer surplus than if the firm was smaller and benefiting from lower average costs.
Con: New regulations
Problems/Evaluation of Business Growth - Reasons for Firms to Remain Sma
With business growth, new regulations can come into force and existing regulations can prove more difficult to achieve. Environmental standards may apply, new accountancy procedures expected, compulsory insurance enacted, more bureaucracy may come in and with greater workforces, new labour regulations can apply. As a consequence, firms have to be prepared to adapt to a change in the business environment or be subject to punishments if these regulations are not adhered to. Profit margins may be squeezed if regulations are costly or businesses may choose to stay small where such regulations don’t apply.
Con: Financial difficulty
Problems/Evaluation of Business Growth - Reasons for Firms to Remain Sma
Businesses may get into more financial difficulty as they grow and expand inorganically. This is because loans and therefore debt may have been taken to finance expansion or institutions may not be willing to lend to facilitate capital investment or fulfillments of bureaucratic procedures. As a consequence, a business may only be able to grow organically, be forced to remain small or excessive debt will be built up creating balance sheet instability and problems with accessing finance in the future. Furthermore if the business attempts to payoff debts by cost cutting or implementing risky pricing decisions, consumer loyalty could be harmed creating long term damage to profitability and reputation for the firm.
Con: Regulatory authorities
Problems/Evaluation of Business Growth - Reasons for Firms to Remain Sma
Excessive business growth could result in investigation by regulatory authorities. This is because very high profits may be due to monopoly or collusive pricing beyond marginal cost (consumer exploitation), signalling regulatory bodies to intervene. This is normally against business interests given resultant forced price reductions, selling of stores to promote competition, improvements in working conditions, using greener machinery or greater reinvestment, which increases costs of production for businesses.
Con: Lower standards
Business growth may come at the cost of lower standards. This is because with greater production and workforce sizes, it can become harder to carefully monitor customer service and product standards, quality, social responsibility, environmental impact and worker health and safety. Therefore businesses, if not on top of these elements, may lose brand loyalty and part of an established customer base whilst suffering reputational damage compared to smaller firms who can stay on top of quality and standards, providing a more personal and consistent service.
