ch 8 Flashcards
What problems arise from Growth
Internal Diseconomies of Scale
External Diseconomies of Scale
Internal Communication
Overtrading
How is Diseconomies of Scale defined?
Rising long-run average costs as a business expands beyond its minimum efficient scale.
What are the problems that arise from Internal Diseconomies of Scale if a business grows?
-Communication becomes complicated and co-ordination of large firm, with multiple departments, is more difficult.
-Control and co-ordination is demanding, managing thousands of employees and £bn budgets requires more supervision.
-Motivation can be damaged as individuals see themselves as minor in the overall structure of the organisation.
-Technical issues can arise where multiple plants needed due to the differing products being made
What are the problems with External Diseconomies of Scale if a business grows?
-Over crowding of similar industry in a certain area may lead to reduction in resource availability.
-The price of land, labour, services and materials increase as firms compete for resources
-Congestion can also lead to delays in workers arriving or products being distributed
What are the problems with Internal Communication if a business grows?
-As businesses grow, internal communication can become an issue, as messages need to be disseminated across an increased number of people.
Whilst ICT has resolved some of these issues (email), its difficult to convey full meaning without a face to face meeting.
-Resources could be wasted due to ineffective communication. Also, duplication of work or work being missed due to misunderstanding.
-Departments can “silo”, where integration with other areas becomes limited, reducing efficiency and leading to missed opportunities.
When does overtrading occur?
-Businesses do not have sufficient capital. If they do not have enough cash to buy the resources needed to meet the growing orders
-A business offers too much trade credit, this means that the business has to wait that length of of time, or more, to be paid. During this time it will be short of cash to buy the resources needed to meet new order
-A business operates with slim profit margins, in order to make an impact in the market, a new business may offer its products at lower prices. However, with lower prices and subsequent lower profit margins, it may not generate enough profit to fund the growing volume of business
What problems can arise from Overtrading if a business grows?
-If a business grows too quickly there is the potential for it to suffer from overtrading. This is more likely to happen in young, rapidly growing businesses.
-Over trading occurs when a business tries to fund large volume of new business without sufficient resources. This can lead to cash flow issues.
define overtrading
is a stitauion where a business does not have enough cash to support its production becouse going to fast
