Objectives of growth Flashcards
Economies of scale
Cost advantages that companies gain due to their scale of operation, and is usually measured by the amount of output produced.
Internal economies of scale
Cost reductions experienced by a single business as it grows
They occur for a number of reasons:
Purchasing and marketing economies- large firms are likely to get better rates when buying raw materials and components in bulk
Technical economies- the capital costs and running costs of plants do not rise in proportion to their size. eg. a small business may spend $400 on a laptop and the cost will remain the same whether its used one or twice a weak. As the company expands the laptop will be used more therefore the average cost of the laptop will fall as output rises
Specialisation and managerial economies- a firm can afford to employ specialist managers as it grows. One manager being in charge of finance, marketing, hr, production etc.. might seem demanding therefore having specialists will increase efficiency and average cost will fall due to indivisibility
Financial economies- large firms have advantages in raising finance as they have a lot of variety from which to choose. Large plc companies can sell more shares. They can also easily persuade institutions to lend them money
Risk-breaking economies- as a firm grows it may diversify (develop a wider range of products) to reduce risks, which they can also do by investing in research and development. This can help them gain a competitive edge over rivals
External economies of scale
Cost reductions experienced by all businesses as the industry grows (more likely to arise if industry in concentrated/ has a large number of firms)
They occur for a number of reasons:
Labour- the concentration of firms may lead to the build up of a labour force with the skills required by the industry. Training costs may be reduced if they already gained skills at previous firm from same industry. Local government or colleges may offer training courses aimed at the needs of the local industry
Ancillary and commercial services- an established industry tends to attract smaller firms that are trying to serve a particular industry’s needs. This means a wide range of commercial and support services (like insurance, marketing, maintenance, specialist banking, distribution services etc..) can be offered
Co-operation- firms in the same industry are more likley to co-operate if they are concentrated in the same region. They might work together to fund a research and development centre for the industry
Disintegration- occurs when production is broken up so that more specialisation can take place. When an industry is concentrated in an area, firms might specialise in the production of one component.
Increased market power
As businesses get bigger they become more powerful and often leave rivals with smaller market shares. If a business is large enough it may be able to dominate two particular stakeholders:
Customers- a dominant business may be able to charge higher prices if competition in the market is limited. Customers are forced to pay higher prices as there are no substitutes. Due to little competition, there will be no need to invest in risky innovation to develop products
Suppliers- a business may be able to force the costs of materials down if it buys it in large quantities. If the business’ supplier only rely upon them for their custom, it may need to accept the prices that the business is willing to pay
However, if it becomes too dominant and appears to be exploiting consumers and suppliers, the business might attract authorities and there may be investigations carried out which could damage its reputation
Increased market share and brand recognition
As a businesses grow, their share of the market is also likely to grow, making them likely to benefit from greater brand recognition as their large market share makes them more seen by customers (in advertisements and sales)
As the brand becomes stronger a business might be able to:
Charge higher prices
Make their products distinct from those of rivals
Obtain customer/brand loyalty
Develop and image
Launch new products more easily
A larger market share means they are more likely to attract media attention which helps to promote the country
Increased profitability
One of the main objectives of growth is to generate more profit
Larger businesses tend to make more profits.
As profits grow, returns to the owners will also grow
If a business grows and increases its profitability it will have more profit for investment and innovation. This will allow the business to develop and launch new products and make acquisitions.
