Economies of Scale and Business Growth

Flashcards covering key concepts and definitions related to economies of scale and business growth.

Economies of Scale

The reduction in the average cost of each unit as a business grows.

Internal Economies of Scale

Growth benefits from within the business

Bulk Buying

A purchasing strategy where businesses buy large quantities to receive discounts.

Marketing Economies of Scale

Larger businesses can spread advertising costs over a larger sales volume.

Financial Economies of Scale

Larger firms are seen as less risky, allowing them to secure lower interest rates.

Managerial Economies of Scale

Larger firms can hire specialist managers to operate more efficiently.

Technical Economies of Scale

Larger businesses can afford advanced technology and production techniques.

Risk Bearing Economies of Scale

Larger firms can diversify their products and reduce dependence on a single product.

External Economies of Scale

Benefits that accrue to all firms in an industry as the industry grows.

Concentration of Labour Skills

As industries grow, there is better access to skilled labor due to local training facilities.

Ancillary Services

Support services that grow in number as an industry expands.

Cooperation in Industries

Firms in a large industry may collaborate to share knowledge and reduce costs.

Disintegration

Larger industries develop specialized firms that focus on single components.

Diseconomies of Scale

The point where the cost per unit starts to increase as the company grows too large.

Organic Growth

Business growth through increasing its existing operations.

Inorganic Growth

Business growth through mergers or takeovers.

Overtrading

A situation where a business takes on too much work and cannot sustain cash flow.

Short-term costs

Initial expenses that occur during the growth phase of a business.

Disadvantage of Economies of Scale: Communication Problems

Communication Problems: As a business grows, communication can become slower, less direct, and less effective, leading to misunderstandings and inefficiencies.

Disadvantage of Economies of Scale: Coordination Difficulties

Coordination Difficulties: Managing and coordinating a very large number of employees and departments becomes more complex, potentially leading to conflicting objectives or duplicated efforts.

Disadvantage of Economies of Scale: Loss of Motivation/Alienation

Loss of Motivation/Alienation: In large organizations, individual employees may feel less valued or less connected to the overall goals, potentially leading to decreased productivity and job satisfaction.

Disadvantage of Economies of Scale: Bureaucracy

Bureaucracy: Larger firms often develop more layers of management and administrative procedures, which can slow down decision-making and reduce flexibility.

Advantage of Economies of Scale: Market Power

Larger firms gain significant market power, enabling them to negotiate lower prices from suppliers and potentially charge higher prices to customers due to reduced competition.

Advantage of Economies of Scale: Market Share and Brand Loyalty

With increased market share and strong brand recognition, larger businesses can foster greater customer loyalty, which may allow them to charge premium prices.

Advantage of Economies of Scale: Enhanced Profitability

When economies of scale are achieved, the average cost per unit is lowered, directly leading to increased profit margins and overall higher profitability for the firm.

Advantage of Economies of Scale: Research and Development (R&D) Advantage

Larger and more profitable firms can allocate more resources to research and development, fostering innovation that provides a competitive edge and supports sustained business growth.