3.2.1: Growth

growth

growth

• growing business = more revenue, more assets, more resources, more profits

  • increased market share, launch new products, sell into wider range of markets

• growing business = attractive benefits

  • lower unit costs

  • higher revenue

  • better profile

  • larger market share

objectives of growth

• economies of scale

• increased market power

• increased market share and branding

• increased profitability

economies of scale

• size of business impacts average cost of production

• range of output over which averae costs fall as output rises

  • gives larger businesses a competitive edge

• law of diminishing returns

  • if the firm expands scale of operations the same level of output can be produced efficiently

  • long run average costs fall

• minimum efficient scale

internal economies of scale

benefits of growth that arise within the firm

• purchasing and marketing economies

• technical economies

• specialisation and managerial economies

• financial economies

• risk-bearing economies

purchasing and marketing economies

• large firms get better rates when buying raw materials in bulk

• admin costs don’t rise

• marketing economies

technical economies

• arise because larger plants are more efficient

• capital costs and running costs don’t rise in proportion to size

• increased size = doubled output, not cost, falling average cost (principle of increased dimensions)

• indivisibility - firms need a particular item but fail to fully use it

  • same cost whether item is used 2x a week or daily

  • business expands - used more, average cost falls

• expanding firms switch to mass-production techniques

  • flow production breaks down production process into a very large number of small operations

  • helps greater use of specialised machinery

    • large improvements in efficiency as labour is replaced by capital

    • businesses employ a variety of machines with different capacities

    • slow machine = increased production time

  • law of multiples

    • employing more slower machines to match the capacity of faster machines

    • firms finding a balanced team of machines so operations run at fall capacity

specialisation and managerial economies

• firms can employ specialist managers as they grow

• efficiency improves

• average costs fall if specialists are employed

• specialists in small firms are an indivisibility

financial economies

• large firms have advantages when trying to raise finance

  • wider variety of sources i.e. shares

  • can easily persuade institutions to lend them money

    • large assets for security

  • gain better interest rates

risk-bearing economies

• as firms grow they diversify to reduce risk

• large businesses reduce risk by carrying out R&D

• development of new products helps firms gain a competitive edge over smaller rivals

external economies of scale

• reduction in costs that a business within an industry might benefit from as the industry grows

• arise if the industry is concentrated in a geographic region

  • labour

  • ancillary and commercial services

  • co-operation

  • disintegration

labour

• concentration of firms leads to the build-up of a labour force with the skills required in the industry

• skilled labour from another firm in the same industry = reduced training cost

• free courses from local industry

ancillary and commercial services

• established industries attract smaller firms

• wide range of commercial and support services

• i.e. specialist banking, insurance, marketing, waste disposal, maintenance, cleaning, components and distribution services

co-operation

firms in the same industry are more likely to co-operate if concentrated in the same region

disintegration

• occurs when production is broken up

• more specialisation can take place

• firms specialise in production of one component when an industry area is concentrated and transport it to a main assembly plant

increased market power

• as businesses get bigger they become more dominant

• rivals are left with smaller market share and weaker businesses may be forced to close down

• if a business is large enough it can dominate customers and suppliers

• business too dominant = attracts attention of authority

• dominant businesses appearing to exploit customers or suppliers can lead to investigations

increased market power - customers

• dominant businesses can charge higher prices if competition in the market is limited

• customers pay higher prices when they have less choice

• less need to develop products

• low costs of risky innovation

• limited product choice

increased market power - suppliers

• a business can dominate its suppliers and force to lower cost of materials and commercial services when purchasing in large quantities

• essential if suppliers rely on them for custom

increased market share and brand recognition

• as businesses grow, their market share grows and gives them more power and advantages

• greater brand recognition =

  • higher prices

  • distinct products

  • customer loyalty

  • greater product recognition

  • image

  • easy new launch

• attracts media attention to help with promotion

increased profitability

• large businesses make more profit

• as companies grow the prices of shares rise

• increased profitability = profit for investment and innovation

• allows business to develop new products and make acquisitions

the distinction between inorganic and organic growth

1. external/inorganic growth

   • mergers and takeovers

   • businesses joining over double overnight

   • faster

   • integration of 2 organisations can be high-risk

2. internal/organic growth

   • business grows naturally be selling output using its own resources

   • safer strategy due to expansion using current expertise