Business growth Flashcards
What are benefits of a growing business?
As a business grows it gains two major advantages over its smaller rivals. Large firms have more influence over market price. They’re big enough to be price setters. Large firms also often enjoy economies of scale. This means that a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales.
What are economies of scale?
Economies of scale are a major source of competitive advantage for large firms.
What are methods of expansion?
A business can grow in size through:
Internal (organic) growth - the business grows by hiring more staff and equipment to increase its output.
External growth - where a business merges with or takes over another organisation. Combining two firms increases the scale of operation.
Franchising - where a business leases its idea to franchisees. This allows new branches to open across the country and internationally.
What are advantages of expanding?
Better facilities
More customers
More revenue
What are disadvantages of expanding?
Larger debts
More competition
Not enough demand
Whys expansion risky?
Owners can face a dilemma in deciding whether to expand. Expansion is risky. There’s always the chance that any expansion plans can fail and result in losses rather than profit. Owners are then worse off than before the growth of the business.
The risk of expansion means that some owners are reluctant to chance funds. They opt instead to stay small and earn a relatively risk-free profit.
Whats the problem with avoiding business growth?
There is potentially a major drawback to avoiding growth. Small businesses can be at a cost disadvantage compared to their larger rivals enjoying economies of scale. As small firms cannot compete with the low prices set by their larger rivals, they have to compete on service or quality.
