Growth

Question 1

Define the term business growth.

Answer 1

Business growth is the point at which a business needs to expand and seeks options to generate more profits

Question 2

What the the objectives of business growth?

Answer 2

There are lots of reasons that a business will want to grow and expand, some may be specific to the owners and some to the industry:

• to achieve economies of scale (internal and external)
• increased market power over customers and suppliers
• increased market share and brand recognition
• increased profitability

Question 3

Explain achieving economies of scale as an objective of business growth.

Answer 3

Growth enables a business to benefit from economies of scale with a huge impact on the cost of production

If production is less expensive because average costs have fallen then this can increase the profit margins of the business OR they can choose to reduce prices to gain more market share

Question 4

What are the benefits of economies of scale.

Answer 4

The idea that as a business grows in size it will be able to gain competitive advantage in a number of ways:

• By having more funds to buy stock, so being able to get better deals by buying in bulk
• By having more power
• By having more funds to pay for specialist staff
• By having a better reputation so banks are more willing to lend

Question 5

Explain economies of scale and average costs.

Answer 5

Economies of scale occur when unit costs or average costs fall as a result as an increase in the level of output of the business.

The more they make the cheaper it gets per item.

Increasing output means a business can lower its average costs.

Question 6

What are financial economies of scale?

Answer 6

Large firms can benefit from cheaper loans and wider sources of cheap finance (investment from shareholders)

Question 7

What are marketing economies of scale?

Answer 7

The advantages that large firms get in relation to buying and selling. Large firms can attract specialist buyers who don’t waste money buying stock that will not sell. They also have specialist sellers/marketing staff who ensure that goods will sell. Big firms benefit significantly from being able to “buy in bulk”

Question 8

What are technical economies of scale?

Answer 8

These are the advantages that large firms have when it comes to the production process. Large firms can employ specialist labour and capital which stimulates productivity and reduces average costs

Question 9

What are managerial economies of scale?

Answer 9

Large firms have the money/resources to attract the most productive/efficient/specialist managers who make the most effective business decisions and increase efficiency over time

Question 10

What are risk-bearing economies of scale?

Answer 10

Large firms benefit from having wider, more diversified product range. This means that they are better able to withstand the risk of a fall in demand for one good or service.

Question 11

Explain bulk buying/purchasing economies.

Answer 11

As businesses grow they need to order larger quantities of production inputs.

As the order value increases, a business obtains more bargaining power with suppliers.

It may be able to obtain discounts and lower prices for the raw materials.

Question 12

Explain increased market power over customers and suppliers as an objective of growth.

Answer 12

Another objective of a business wanting to grow maybe to reduce the power of suppliers and customers
This is the short to medium term objective which flows from the longer term objective of the business to increase profitability

Question 13

Explain increased market share and brand recognition as an objective of growth.

Answer 13

In dynamic and competitive markets, businesses may seek to grow to achieve increased market share – for example the supermarket industry in the UK (see next slide) is very driven by market share

Other businesses may seek to buy other businesses in the same industry in order to acquire recognised brands

Question 14

Explain increased profitability as an objective of growth.

Answer 14

Many businesses seek to grow and expand to increase their profitability
This means as they increase their output production becomes cheaper per unit (Economies of Scale) and the whole business becomes more profitable because costs are reduced

Question 15

Explain the difference between profit and profitability.

Answer 15

Profit is a number found at the bottom of the statement of account and can be calculated by subtracting total costs from total revenue.

Profitability is a measurement of efficiency and shows how the business has performed with its investments

Profitability is about the inputs required to generate profit.

Question 16

List the different problems arising from growth.

Answer 16

diseconomies of scale
internal communication
overtrading

Question 17

Explain diseconomies of scale as a problem arising from growth.

Answer 17

As the business grows they may expand the scale of production beyond the minimum efficient scale

At this point the average costs per unit starts to RISE as production RISES

Internal DEOS; communication, co-ordination, motivation

External DEOS; overcrowding in industrial areas, traffic congestion, price of land and labour rises

Question 18

Explain lack of motivation through diseconomies of scale.

Answer 18

Workers in large companies may feel demotivated – with little say in their working life

This can lead to powerlessness and alienation

Means increased absenteeism and lateness:
- Reduction in productivity
Lower output per worker
Means increased unit costs

Question 19

Explain lack of co-ordination through diseconomies of scale.

Answer 19

As a company grows and takes on new staff, makes new products buys new premises all of this needs to be coordinated

All resources need to be controlled so that operations can run smoothly

Workers may need monitoring which can add to costs

May need more managers which increases average cost per unit

Question 20

Explain overtrading as a problem arising from growth.

Answer 20

Overtrading is where a business accepts more orders than it can cope with

This can result in cash flow problems

For example if the business accepts a large order which will not be paid by the customer until the end of 3 months time, then they will not be able to fulfil further large orders if they come in as they will have no cash to buy stock with

Question 21

Explain internal communication as a problem arising from growth.

Answer 21

As the size of the workforce increases there will be less face-to-face communication

Takes a long time for messages to get through as there are many layers of management

Less effective communication:

• Means mistakes made
• Means more wastage
• Therefore higher average unit costs