Business Growth

Question 1

In what ways can business growth be measured?

Answer 1

Levels of revenue, levels of profit, overall value, market share and total volume (no. of unit sold).

Question 2

Define ECONOMIES OF SCALE

Answer 2

Economies of scale arise when unit costs fall as output increases. Output increased through an increase in the scale of production which can be achieved through growth.

Question 3

Define INTERNAL ECONOMIES OF SCALE

Answer 3

Internal economies of scale is when unit costs of an individual business fall as it increases in size.

Question 4

Define EXTERNAL ECONOMIES OF SCALE

Answer 4

External economies of scale is when unit costs across an entire industry fall as that whole industry increases in size.

Question 5

What are the types of internal economies of scale?

Answer 5

Technical - the benefits enjoyed when a business is able to spend more on larger and more efficient machinery.
Purchasing - the benefits enjoyed when a business is able to negotiate greater discounts with suppliers for bulk buying.
Managerial - the benefits enjoyed when a business can employ specialist personnel.
These all lead to a fall in average unit costs.

Question 6

What are the types of external economies of scale?

Answer 6

Expertise - the benefits enjoyed when a region or country becomes renowned for a particular industry , leading to more highly skilled workers, improved training and a larger talent pool.
Cooperation - greater cooperation between businesses within the same industry and region, which results in greater efficiency.
Support services - the benefits enjoyed when ancillary services that specialise in a particular industry locate near to the industry.
These all lead to a fall in average unit costs.

Question 7

How does business growth affect power?

Answer 7

1. Larger businesses have greater power over customers as they can:
   - Charge higher prices
   - Increase brand loyalty, leading to more repeat customers.
2. Larger businesses have greater power over suppliers as they can:
   - Negotiate more strongly, so lower costs for raw materials are more likely.
   - Secure raw materials or outlets.

Question 8

How does business growth affect market share?

Answer 8

A larger business will have increased market share, giving them brand recognition, which allows them to:

• Charge higher prices
• Saturate the market with their products
• Increase customer loyalty
• Have a strong physical and promotional presence
• Launch new products more easily.

Question 9

How does business growth affect profitability?

Answer 9

A large business’ profitability is affected by:
- Lower costs (through economies of scale)
- Their ability to charge higher prices
- Increased productivity and efficiency
This could lead to a virtuous circle, in which greater profits lead to more investment and innovation. A larger business is expected to have a higher level of profitability.

Question 10

What are possible problems arising from business growth?

Answer 10

• Diseconomies of scale
• Communication problems
• Overtrading

Question 11

Define DISECONOMIES OF SCALE

Answer 11

Diseconomies of scale are the disadvantages suffered as a result of a business increasing the scale of its operations that lead to a rise in unit costs.

Question 12

How may diseconomies of scale be caused?

Answer 12

1. Communication - widened span of control, longer chain of command, greater risk of distorted messages and misunderstanding, too much technology.
2. Coordination and control - duplication of resources, multiple locations, multiple products, multiple functions, complex organisational structure.
3. Alienation - employees become demotivated, lack of personal recognition, risk of ‘number not a name’.

Question 13

Define COMMUNICATION

Answer 13

Communication is the transferal of information to the right people, at the right time, in a understandable format.

Question 14

Define OVERTRADING

Answer 14

Overtrading is when a business tries to grow too fast without sufficient resources to find the expansion. The business may use up their cash too quickly and run the risk of becoming insolvent.

Question 15

How may overtrading be caused?

Answer 15

• They do not have enough capital to start with.
• They offer too much trade credit to entice customers
• They operate with slim profit margins to start with

Question 16

Define ORGANIC GROWTH

Answer 16

Organic growth occurs when a business expands in size by opening new stores, branches, functions or plants. It is an expansion of the business’ own operations. Relatively low risk.

Question 17

Define INORGANIC GROWTH

Answer 17

Inorganic growth occurs when a business expands in size by either merging with or taking over another business. The business is able to rapidly expand as it is taking over already established businesses. High risk, particularly if the two businesses are incompatible.

Question 18

What are the methods for organic growth?

Answer 18

1. New products - extending the existing product range or widening the target market. (product development)
2. New markets - opening new outlets across existing markets and expanding into other countries (market development)
3. New routes to market - multichannel distribution and increasing the type and location of stores.
4. Franchising - adapting the business model to allow for quicker growth through franchises.
5. Diversification - bringing out new products in new markets.

Question 19

What are the advantages of organic growth?

Answer 19

• Less risky and more ‘steady’
• Avoids conflict
• Funded with retained profit
• Greater consistency
• Maintain clear business focus
• Less threat of bran dilution
• Retained control

Question 20

What are the disadvantages of organic growth?

Answer 20

• Missed opportunities from acquisitions.
• Lack of shared expertise
• Lack of competiveness due to lack of economies of scale.
• Pressure on leaders
• Dissatisfaction from shareholders as growth may be more limited, leading to less profits and therefore lower dividends.

Question 21

Define a SME

Answer 21

A small and medium sized enterprise (SME) is defined by the number of employees, turnover and net worth shown on a balance sheet.

Question 22

What are the reasons for staying small?

Answer 22

• Owner’s preference
• Niche market means small or no scope for growth
• Business objective may be profit satisficing
• May prefer to offer personal service
• May want to keep control
• Less admin and procedures
• May be a traditionally small business

Question 23

What are the 4 ways that smaller businesses compete with larger ones?

Answer 23

1. Product differentiation and USPs - unique product, higher level of trust for customers, higher quality, ‘quirkiness’.
2. Flexibility in responding to customer needs - closer relationship between business and customer, bespoke products from job production, greater decision making control.
3. Customer service - more personal, long term relationships, local or specialist knowledge.
4. E-commerce - low cost start-up, able to reach a wide audience and target niche markets, global market places (eBay, Amazon)

Question 24

What are possible objectives for growth?

Answer 24

• To achieve economies of scale (internal and external)
• Increased market power over suppliers and consumers
• Increased market share an brand recognition
• Increased profitability

Question 25

What are the advantages of inorganic growth?

Answer 25

• potential for synergies - the combined efforts of the two companies will achieve more than the two companies acting independently.
• shared expertise
• allows for rapid and significant expansion

Question 26

What are the disadvantages of inorganic growth?

Answer 26

• costs of possible mergers or takeovers
• loss of control
• stakeholder conflict
• potential culture clashes
• possible government intervention (if the businesses merging are particularly large).