business growth Flashcards
reasons why businesses grow?
- owners, shareholders and managers desire to run a large business and high market share & profitability
- desire for market power
- to benefit from economies of scale
- to be able to diversify products
what are economies of scale?
when an increase in scale of output leads to a decrease in average costs per unit
what are the two types of economies of scale?
internal & external
what are internal EOS?
when growth in the scale of production is within the business
what are external EOS?
when there is an increase in the size of the industry in which the firm the firm operates
what is financial EOS (internal)?
large firms often receive lower interest rates on loans than smaller firms, as they are perceived as less risky, this lowers costs
what is managerial EOS (internal)?
large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost
what is marketing EOS (internal)?
large firms spread the cost of advertising over a large number of sales and this reduces the AC
what is purchasing EOS (internal)?
large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the AC
what is technical EOS (internal)?
spreading the cost of the machinery over more units & lowering the AC
what is risk bearing EOS (internal)?
large firms can spread the risk of failure by increasing its numbers of products, e.g greater product diversification - less failure lowers AC
what is geographical cluster EOS (external)?
as an industry grows, firms can move closer to manufacturers to cut costs
what are transport links EOS (external)?
helps more people get to work improving productivity and business operations such as shipping
what is skilled labour EOS (external)?
increases in skilled labour, reduces costs
what are problems arising from rapid growth?
diseconomies of scale, communication, overtrading
what are diseconomies of scale?
when a company grows too large and cost per units increase, as there is a lack of control
what are communication problems from growing too large?
miscommunication, conflicts in objectives, lack of coordination
what is overtrading?
when a company takes on more than in can handle, putting strains on resources and liquidity
