AO1 - Demonstrate knowledge and understanding - Define, Describe, Outline, State
AO2 - Demonstrate application and analysis of knowledge and understanding - Analyse, Apply,
Comment, Demonstrate, Distinguish, Explain, Suggest
AO3 - Demonstrate synthesis and evaluation - Compare and contrast, Discuss, Evaluate, Examine,
Justify, Recommend, To what extent
AO4 - Demonstrate a variety of appropriate skills - Annotate, Calculate, Complete, Construct,
Determine, Draw, Identify, Label, Plot, Prepare
1.6 - Growth and Evolution
Economies and Diseconomies of Scale (AO2)
Economies of Scale: enables a business to benefit from lower average costs (per unit) by
increasing the size of its operations. Hence, these are often described as the cost-saving benefits
Diseconomies of Scale: will occur if the firm grows beyond its ability to operate efficiently. This
causes the firm’s average cost of production to rise due to problems such as miscommunication
and poor management.
- The level of output where the average cost of production is at its lowest value is called
the optimal output level (profit is maximized).
- Average cost= total cost/ quality produced
Internal economies of scale: occurs for a particular organization as it grows. These cost savings
are generated within the business by operating on a larger scale.
External Economies Of Scale: occur when a firm’s average cost of production falls as the
industry grows. (all industries benefits)
Internal Economies Of Scale External Economies of Scale
Financial Location
Banks and other lenders charge lower interest to larger businesses for
overdrafts, loans, mortgages
Marketing Infrastructure
Larger business can spend their fixed costs of marketing by promoting
and advertising a greater range of brands and productivity
Managerial Specialist labour
Larger businesses can afford to hire specialist functional managers, thus
improving the organization's efficiency and productivity
Technical
Cost savings by greater use of large-scale mechanical processes and
specialist machinery ( mass production techniques)
, Purchasing
Larger firms can gain huge cost savings by buying vast quantities of
stocks (raw material)
Risk Bearing
Large businesses can bear greater risks than smaller ones due to a greater
product portfolio. Hence, inefficiencies will harm smaller firms to a
greater extent.
Specialization
Larger firms can afford to hire and train specialist workers, thus helping
boos output, productivity and efficiency (cutting average costs of
production)
Internal Diseconomies of scale: occur due to problems within the organization, which cause
productivity to fall and inefficiencies occur
External Diseconomies: outside of the organizations of the organizations raises average costs of
production for all businesses.
The merit of small versus larger organizations (AO3)
Small
- Cheaper to start
- More control
- Privacy
- Personalisation
- Specialise in unprofitable supply
Large
- Benefits from EOS
- Wider range of sources of finances
- Pay higher salaries
- Brand loyalty and recognition
- Less risk to owners
- Selling shares on stock market
The Difference between internal and External Growth (AO2)
External Growth: is the method of expansion that involves a business merging with or taking
over another organization.
Internal Growth: refers to the expansion of an organization’s existing business activities and
operations
Following external growth methods (AO3)
- Mergers and acquisitions
- joint ventures
- Strategic alliances
- Franchising
The role and impact of globalization on the growth and evolution of businesses (AO3)
AO2 - Demonstrate application and analysis of knowledge and understanding - Analyse, Apply,
Comment, Demonstrate, Distinguish, Explain, Suggest
AO3 - Demonstrate synthesis and evaluation - Compare and contrast, Discuss, Evaluate, Examine,
Justify, Recommend, To what extent
AO4 - Demonstrate a variety of appropriate skills - Annotate, Calculate, Complete, Construct,
Determine, Draw, Identify, Label, Plot, Prepare
1.6 - Growth and Evolution
Economies and Diseconomies of Scale (AO2)
Economies of Scale: enables a business to benefit from lower average costs (per unit) by
increasing the size of its operations. Hence, these are often described as the cost-saving benefits
Diseconomies of Scale: will occur if the firm grows beyond its ability to operate efficiently. This
causes the firm’s average cost of production to rise due to problems such as miscommunication
and poor management.
- The level of output where the average cost of production is at its lowest value is called
the optimal output level (profit is maximized).
- Average cost= total cost/ quality produced
Internal economies of scale: occurs for a particular organization as it grows. These cost savings
are generated within the business by operating on a larger scale.
External Economies Of Scale: occur when a firm’s average cost of production falls as the
industry grows. (all industries benefits)
Internal Economies Of Scale External Economies of Scale
Financial Location
Banks and other lenders charge lower interest to larger businesses for
overdrafts, loans, mortgages
Marketing Infrastructure
Larger business can spend their fixed costs of marketing by promoting
and advertising a greater range of brands and productivity
Managerial Specialist labour
Larger businesses can afford to hire specialist functional managers, thus
improving the organization's efficiency and productivity
Technical
Cost savings by greater use of large-scale mechanical processes and
specialist machinery ( mass production techniques)
, Purchasing
Larger firms can gain huge cost savings by buying vast quantities of
stocks (raw material)
Risk Bearing
Large businesses can bear greater risks than smaller ones due to a greater
product portfolio. Hence, inefficiencies will harm smaller firms to a
greater extent.
Specialization
Larger firms can afford to hire and train specialist workers, thus helping
boos output, productivity and efficiency (cutting average costs of
production)
Internal Diseconomies of scale: occur due to problems within the organization, which cause
productivity to fall and inefficiencies occur
External Diseconomies: outside of the organizations of the organizations raises average costs of
production for all businesses.
The merit of small versus larger organizations (AO3)
Small
- Cheaper to start
- More control
- Privacy
- Personalisation
- Specialise in unprofitable supply
Large
- Benefits from EOS
- Wider range of sources of finances
- Pay higher salaries
- Brand loyalty and recognition
- Less risk to owners
- Selling shares on stock market
The Difference between internal and External Growth (AO2)
External Growth: is the method of expansion that involves a business merging with or taking
over another organization.
Internal Growth: refers to the expansion of an organization’s existing business activities and
operations
Following external growth methods (AO3)
- Mergers and acquisitions
- joint ventures
- Strategic alliances
- Franchising
The role and impact of globalization on the growth and evolution of businesses (AO3)
