Growth Flashcards
Define the term business growth.
Business growth is the point at which a business needs to expand and seeks options to generate more profits
What the the objectives of business growth?
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
Explain achieving economies of scale as an objective of business growth.
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
What are the benefits of economies of scale.
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
Explain economies of scale and average costs.
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.
What are financial economies of scale?
Large firms can benefit from cheaper loans and wider sources of cheap finance (investment from shareholders)
What are marketing economies of scale?
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”
What are technical economies of scale?
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
What are managerial economies of scale?
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
What are risk-bearing economies of scale?
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.
Explain bulk buying/purchasing economies.
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.
Explain increased market power over customers and suppliers as an objective of growth.
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
Explain increased market share and brand recognition as an objective of growth.
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
Explain increased profitability as an objective of growth.
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
Explain the difference between profit and profitability.
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.
List the different problems arising from growth.
diseconomies of scale
internal communication
overtrading
Explain diseconomies of scale as a problem arising from growth.
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
Explain lack of motivation through diseconomies of scale.
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
Explain lack of co-ordination through diseconomies of scale.
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
Explain overtrading as a problem arising from growth.
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
Explain internal communication as a problem arising from growth.
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
