Describes the benefits of business growth (e.g. economies of scale, increased market power, increased profitability), the problems arising from business growth (e.g. diseconomies of scale, overtrading, poor communication), and organic growth.
Theme 3 Topic 4
Business Growth
Objectives of Growth
To achieve economies of scale
To increase market power over customers and suppliers
To increase market share and brand recognition
To increase profitability
Benefits of Business Growth
Economies of Scale
Economies of Scale – the reductions in average costs enjoyed by a business as output increases
Economies of Scale can be Internal or External:
Internal Economies of Scale – the cost reductions enjoyed by a single business as it grows
Purchasing Economies Buying in greater quantities usually results in a lower price (bulk buying)
Technical Economies Use of specialist equipment or processes to boost productivity
Marketing Economies Spreading a fixed marketing spend over a larger range of products, markets and
customers
Specialisation and As a business grows it can afford to employ specialist managers.in a small business
Managerial the manager may find it difficult to be responsible for all the roles – employing
Economies specialist managers may improve efficiency and reduce average costs
Financial Economies Larger firms benefit from access to more and cheaper finance when they try to
raise it
Risk-Bearing As a business grows it might diversify to reduce the risk – e.g. breweries have
Economies diversified into the provision of food and for their public houses
External Economies of Scale – the cost reductions available to all businesses as the industry grows
Labour The concentration of businesses may lead to the build-up of a labour force
equipped with the skills required in an industry. Training costs may be reduced if
workers have gained skills at another business in the same industry
Ancillary and An established industry tends to attract smaller businesses trying to serve its needs.
Commercial Services A wide range of commercial and support services can be offered e.g. specialist
banking, insurance, waste disposal, etc.
Co-Operation Businesses in the same industry are more likely to co-operate if they are
concentrated in the same region and join forces to fund research and development
centres, etc.
Disintegration Occurs when production is broken up so that more specialisation can take place –
when an industry is in one area, businesses might specialise in the production of
one component and then transport it to a main assembly plant
Increased Market Power
If a business is larger enough it may be able to dominate two particular stakeholders:
Customers
A dominant business can charge higher prices if competition is limited
In the absence of choice customers may have to pay higher prices
Depending on how competitive the market is, there may be less need to develop new products
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