8. Problems arising from growth

Question 1

Describe this diseconomies of scale graph

Question 2

what is internal diseconomies of scale

Answer 2

• Internal diseconomies of scale are the rising costs caused by excessive growth in the business.

Question 3

what are the types of internal diseconomies of scale

Answer 3

1. poor communication
2. control and coordination
3. poor worker motivation
4. technical diseconomies
5. bureaucracy

Question 4

internal DEOS: Poor communication

Answer 4

1. Very large firms often suffer from poor communication. The flow of information between individual employees, departments, divisions or between head office and subsidiaries becomes more difficult to manage when a firm is very large. This is because the chain of command in such organisations may be long. There may be many layers of management in the hierarchical structure (i.e. one that is organised into levels of importance from top to bottom). Both internal and external communication might be affected.
2. In a very large organisation it is possible to lose touch with customers and as a result a business may fail to identify changes in customer needs.
3. Also, large businesses often employ automatic telephone answering services which keep customers waiting, direct them to inappropriate departments or fail to provide a swift solution. Many customers find these answering systems annoying.

Question 5

internal DEOS: Control and coordination + real world example

Answer 5

1. The control and co-ordination of large businesses is also demanding. Thousands of employees, large amounts of resources and many different operational locations all mean added responsibility and more supervision. In many cases, businesses have to employ a larger number of managers and supervisors to maintain adequate control. This can result in rising costs.
2. There have been examples where it has been challenging for senior managers in big companies to be in complete control of such a huge quantity of resources spread out all over the world, For example, Volkswagen (VW)®, the giant car manufacturer which employs around 600 000 people worldwide, had problems in 2015. It was discovered that many cars had been fitted with a ‘defeat device’ to help it pass certain environmental tests. However, when the cars returned to the road, the emissions levels rose again. It is possible that VW had grown too big and unmanageable. It was claimed that the CEO of VW did not know about this activity. In such a large organisation this might be true.

Question 6

internal DEOS: :Poor worker motivation

Answer 6

1. Motivation may suffer as individual workers become a minor part of the total workforce. For example, in an organisation that employs thousands of people globally, each individual worker may feel unimportant. This may lead to an attitude of wanting to `do the absolute minimum’. There may be higher levels of staff turnover, increased absence and poor time-keeping, which will raise labour costs.
2. There may also be poor relations between management and the workforce in a very large organisation. For example, managers might lose touch with the needs of employees. As a result, conflicts may occur and trying to resolve them may cost money.

Question 7

internal DEOS: Technical diseconomies

Answer 7

1. Plants, machinery and equipment will usually have an optimum (i.e. most efficient) capacity. If these resources are overused, they are likely to become inefficient. For example, in the agricultural industry, if a tractor is overworked the engine may run ‘too hot’, causing it to stop working properly. This might reduce its output or result in a breakdown which will cost money to repair.
2. Another example is in the chemical industry, where construction problems often mean that two smaller plants are more cost-effective than one very large one. If a business employs one huge plant and a breakdown occurs production will stop. With two smaller plants, production can continue even if one breaks down.

Question 8

internal DEOS: Bureaucracy

Answer 8

1. If a business becomes too bureaucratic, it means that too many resources are used in administration. Too much time may be spent filling in forms or writing reports.
2. Also, decision making may be too slow and communication channels too long, If resources are wasted in administration, average costs will start to rise

Question 9

what is external diseconomies of scale

Answer 9

External diseconomies of scale: External diseconomies occur when an industry grows too big (rather than the individual firm)

Question 10

Reasons external EOS

Answer 10

1. Rapid growth
2. Industry growing in the same geographical location

Question 11

external DEOS: Rapid growth + real world example

Answer 11

1. Rapid growth in an industry can result in the price of production factors rising sharply, This is because growing demand for them drives up the price.
2. For example. the construction industry in Japan has grown as the country develops the infrastructure (e.g. transport networks, water and power supplies) needed to stage the 2020 Olympics. This has driven up the wages paid to construction workers, resulting in all businesses in the Japanese construction industry facing rising labour costs as output expands.

Question 12

external DEOS: Growing in the same geographical area

Answer 12

1. External diseconomies are perhaps most likely to occur when an industry grows in the same geographical location. The price of land, labour, services and materials might rise as firms compete with each other in the same area for a limited amount of resources.
2. Also, congestion (i.e, too much traffic) in the area might lead to inefficiency, as delays are caused to deliveries and employees travelling to work.

Question 13

What is internal communication

Answer 13

1. Internal communication is the exchange of messages and the flow of information inside a business; for example, between individual workers or between departments.

Question 14

problems of internal communication when a business grows too big

Answer 14

1. Distortion of information
2. Resource duplication
3. Competition between departments

Question 15

Problems with internal communication as business grows: Resource duplication

Answer 15

1. Sometimes resources might be wasted due to a lack of effective communication, One problem that might occur is the duplication of resources. This is where two or more identical activities or projects are being followed in the same organisation at the same time.
2. For example, a division of a company in Germany may be writing a new complaints procedure policy. If another division, say the Indonesian division, is doing exactly the same, resources will be wasted. Better communication would ensure that only one new complaints procedure policy is produced

Question 16

Problems with internal communication as business grows: Distortion of information

Answer 16

1. If a business grows too big, there could be a problem with internal communication. This is because the number of layers in the management structure are also likely to grow. As a result, channels of communication get longer and the scope for error in sharing messages increases. Distortions to information may occur (i.e. changes that make the information no longer correct) as it is passed through the managerial hierarchy. At worst, this could lead to misunderstandings and arguments between workers and managers, Such arguments use up resources. Any cost resulting from a misunderstanding or argument will reduce productivity.

Question 17

Problems with internal communication as business grows: Competition between departments

Question 18

how can we reduce problems with internal communication as a business grows too big + eval

Answer 18

1. With the rapid development in information and communication technology (ICT), some of these problems may have been reduced. For example, any number of people can be copied into an email so that important messages can be shared instantly to thousands of people all over the world, The use of video conferencing might also help internal communication, where members of staff in different geographical locations can communicate face to face.
2. However, it might also be argued that IT has brought a whole new set of communication problems. For example, communications can be seriously affected when IT systems fail.

Question 19

what is overtrading

Answer 19

a situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast

Question 20

who does overtrading most likely result in

Answer 20

1. This is more likely to affect young, rapidly growing businesses.

Question 21

Reasons for overtrading

Answer 21

1. business does not have enough capital
2. offers too much trade credit
3. operating with small profit margins

Question 22

reasons for overtrading: does not have enough capital

Answer 22

It is fairly common for a new business to be undercapitalised. This means that it has started trading with insufficient capital. It does not have enough cash to buy the resources needed to meet the growing orders

Question 23

reasons for overtrading; offers too much trade credit to customers

Answer 23

It may be tempting for a new business to allow its customers 90 or 120 days’ trade credit, However, this means that the business has to wait that length of time, or more, to be paid. During this time it will be short of cash to buy the resources needed to meet new orders

Question 24

reasons for overtrading: is operating with small profit margins

Answer 24

In order to make an impact in the market, a new business may offer its products at lower prices. However, with lower prices (and therefore lower profit margins), it may not generate enough profit to fund the growing volume of business.