Theme 3 - 3.2.1 - Business Growth Flashcards
What is business growth ?
Business growth is the point at which a business needs to expand and seeks options to generate more profits
Every business wants to expand - even charities so that they can expand and help more people with cancer
What are the 4 reasons that a business would want to expand ?
1) to achieve economies of scale (internal and external )
2)) increased market power over customers and suppliers
3) increased market share and brand recognition
4) increased profitability
Why would a business want to expand in order to achieve economies of scale ?
Growth enables a business to benefit from economies of scale with a huge impact on the cost of production
When a business expands then it can buy its materials in bulk and then the materials would therefore cost less and so they can get increased profit for each item they sell because if to make a car for example you buy the tires in bulk and therefore they come out cheaper so then your paying less to make the car but your still charging the same price so you have more profit - OR you can decrease the price of the final product in order 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 a competitive advantage in a number of ways:
- By having more funds to buy stock, so they can buy in bulk and then get better deals
- By having more power
- By having more funds to pay specialist staff - causes them to work for you instead of someone else and increase motivation better product etc etc
- By having a better reputation so banks are more willing to lend
We call this economies of scale
What is the definition of economies of scale ?
Economies of scale or EOS occur when unit costs or average costs fall as a result of an increase in the level of output from the business - as if you are selling bikes and you need to sell 100 bikes that month then you have to buy 100 bike frames from the supplier but if in the next month you want to sell 1000 bikes then you have to buy 1000 bike frames from the supplier but because you are buying more bike frames they might discount the price so for the level of output the prices of making the product might decrease - EOS
What are EOS Qs about ?
It should be about how increasing output - means a business can lower its average costs
What is technical economies of scale ?
Businesses with large scale production can use more advanced machinery - this may include using mass production - then obviously when buying the machines they are very expensive but these costs will be spread over the higher levels of output - because obviously if you have better machinery then the products will be made faster and this means higher level of output and so it will be better in the long term then for example paying salaries for people to build you cars - so you wont pay salaries again but you will have a high first cost for the machinery
Whats managerial ?
As a business grows larger they need to take on more specialist staff for some of the more technical roles
So by being a larger business you have more money to hire your own staff such as accountancy staff and smaller businesses would have to outsource this stuff
What are financial economies of scale ?
Smaller businesses find it hard to obtain finance or the cost of finance is often quite high - for example a loan
The bank is more likely to give the bigger business the bigger loan and with lower interest etc because the smaller business are perceived as a riskier option so by having a large business with a good track record - you can get bigger loans - can raise more finance and get it at smaller interest rates
What is marketing economies of scale ?
