Growth

Question 1

What are the key reasons for Growth?

Answer 1

• Increasing profits
• Achieve economies of scale
• Increase marketing power
• Increased brand recognition
• Increase market share
• Grow business and shareholder value

Question 2

Why would businesses set Increasing Profits as a Growth Objective?

Answer 2

• Key objective for many firms, particularly those whose whares are quoted on the stock market or who are owned by private equity

Question 3

Why would a business set Achieving Economies of Scale as a Growth Objective?

Answer 3

• Growing scale of output can lad to lower costs = Improved competitiveness

Question 4

Why would a business set Increasing market power as a Growth Objective?

Answer 4

• Larger firms can exert greater bargaining power over suppliers / customers = Competitive advantage

Question 5

Why would a business set Increased Brand Recognition and Market Share as a Growth Objective?

Answer 5

• Much research points to the link between growing market share and brand recognition with higher profits, so this reason is linked with increasing profits

Question 6

Why would a business set the Growth of Business and Shareholder Value as a Growth Objective?

Answer 6

• Larger businesses are more valuable
• Ultimately the main reason why so many firms adopt a growth strategy

Question 7

Why do businesses choose to grow?

Answer 7

• Limited liability
• Increased market share
• Brand recognition
• Increase profits
• Economies of Scale
• Expansion
• Protection
• Diversify
• Increase profitability

Question 8

What is the formula for calculating Unit Costs?

Answer 8

Total production costs in a period / Total output in a period (units)

Question 9

What are Internal Economies of Scale?

Answer 9

• Increased output of the business itself

Question 10

What are External Economies of Scale?

Answer 10

• Occur within the industry: All competitors benefit

Question 11

What are diseconomies of scale?

Answer 11

• When a company grows so big that unit costs increase

Question 12

What are examples of diseconomies of scale?

Answer 12

• Waste / inefficiency in large organisations
• Regulatory costs
• Risk aversion

Question 13

What is overtrading?

Answer 13

• Overtrading happens when a business grows too quickly without having the financial resources to support such an expansion.

Question 14

How can overtrading lead to business failure?

Answer 14

• If sustainable sources of finance are not obtained

Question 15

What is overtrading an issue of?

Answer 15

• Working capital and Cash Flow

Question 16

When is overtrading most likely to happen?

Answer 16

• When growth is achieved by making significant capital investment in production or operations capacity before revenues are generated.
• Sales are made on credit and customers take too long to settle amounts owed.

Question 17

What are potential symptoms of overtrading?

Answer 17

• High revenue growth but low profit margins
• Very low inventory turnover ratio
• Significant increase in current ratio
• Low levels of capacity utilisation.

Question 18

How can overtrading risk be managed?

Answer 18

• Reducing inventory levels
• Leasing rather than buying capital equipment
• Scaling back the pace of revenue growth until profit margins and cash revenues have improved

Question 19

Why would businesses choose to stay small?

Answer 19

• Product differentiation and USPs
• Flexibility in meeting customer needs
• Deliver high standard of customer service
• Exploit opportunities for e-commerce