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Business Growth 3.2

Theme 3

What are the objectives of Growth? To achieve economies of scale (internal and external) increased market power over customers and suppliers increased market share and brand recognition increased profitability
State three examples of Internal economies of scale? Technical/Managerial and Purchasing
What are Internal Economies of Scale? The advantages enjoyed by a business as it increases the scale of its current operations leading to a fall in unit costs/Internal economies are when the business grows in size
What are Technical Economies of Scale? The benefits enjoyed when a business is able to spend more on larger and more efficient machinery leading to a fall in average costs.
What are Purchasing Economies of Scale? The benefits enjoyed when a business is able to negotiate greater discounts with suppliers for bulk buying leading to a fall in average costs.
What are Managerial Economies of Scale? The benefits enjoyed when a business can employ specialist personnel leading to a fall in average costs.
Why are lower unit costs important? Lower unit costs are very important in making a business more competitive. 1. Reduce prices, therefore selling more, whilst keeping the same profit margin Or 2. Maintain the same price and earn more profit per unit on the product
State three External Economies of Scale? Expertise/Support Services/Co-operation
What are Expertise Economies of Scale? The benefits enjoyed when a region or country becomes renowned for a particular industry leading to more highly skilled workers, improved training and greater talent pool leading to a fall in unit costs.
What are Support Services Economies of Scale? The benefits enjoyed when ancillary services that specialise in a particular industry locate near to the industry.
What are Co-operation Economies of Scale? Greater cooperation between businesses within the same industry and region resulting in greater efficiencies.
How can a business increase market power over customers and suppliers? Brand loyalty Barriers to entry Stronger negotiating power Secure raw materials or outlets
How can a business Increase market share and brand recognition? Dominant business Saturate the market Strong physical and promotional presence
How can a business Increase profitability? Lower costs through economies of scale Ability to charge higher prices Increased productivity and efficiency
What are diseconomies of scale? The disadvantages suffered as a result of a business increasing the scale of its operations that lead to a rise in unit costs
State three diseconomies of scale? Coordination/Control/Communication/Alienation
Communication can be a disceonomy of scale. What issues can it lead to? Wider span of control Longer chain of command Greater risk of distortion and misunderstanding As a business grows communication becomes more complex and more difficult between functions, subsidiaries, head quarters and branches, across sites
Co-ordination/Control can be a diseconomy of scale. What issues can it lead to? Duplication of resources Complex organisational structure
Alienation is a diseconomy of scale. What issues can it lead to? Employees become demotivated Lack of personal recognition “number not a name”
What is over trading? a business has expanded too rapidly resulting in it operating at a level beyond its resources leading to potential liquidity problems
What are three problems arising from growth? Diseconomies of scale internal communication Overtrading
What is Integration? The bringing together of two or more businesses
What is a merger? When two or more businesses agree to become integrated to form one business under joint ownership
What is a takeover? When one business gains control over another and becomes the owner, can be achieved by buying 51% of the shares
What is horizontal integration? Two businesses at the same stage within a process integrate
What is vertical integration? Two businesses at different stages within a process integrate
What is forward vertical integration? joins with a business at the next stage in the process e.g. manufacturer with a retailer
What is backward vertical integration? joins with a business at an earlier stage in the process e.g. a manufacturer with a supplier of a raw material
What is a conglomerate? Two unrelated businesses integrate
What are the reasons for external growth? Secure supplier Secure outlet Gain foothold Benefit from expertise Brand recognition Synergy
What is synergy? 2 + 2 = 5/That two firms joined together will be able to achieve more than the sum of the two firms operating separately
What are the risks of external growth? Legal and regulatory procedures Cost of integrating the internal operations e.g. changing culture, training, relocation, redundancies Financing of the merger or takeover e.g. debt Research prior to pursuing the acquisition Impact on share value
What are the problems of rapid growth? Overtrading Cultural clashes Gearing Shot termism by shareholders Conflicting messages to customers and other stakeholders Uncertainty within the workforce Loss of control Strain on resources
What is Organic Growth? Occurs when a business expands in size by opening new stores, branches, functions or plants/Can be time consuming but is a relatively low risk strategy
What is Inorganic Growth? Occurs when a business expands in size by either merging with or taking over another business/This allows a business to expand more rapidly as it is buying businesses that are already established
State three methods of growing organically Diversification/New products/New markets/franchising
Explain the benefits of Organic Growth Less risky Avoids conflicts More likely to be funded with retained profit Greater consistency Maintain distinctive capabilities Less threat of brand dilution Can be steady Less loss of control
State the drawbacks of Organic Growth Missed opportunities from acquisitions Potential for growth maybe more limited Lack of shared expertise Lack of competitiveness due to a lack of economies of scale Dissatisfaction from shareholders
State four reasons for Staying small Owner’s preference Niche market Profit satisficing Personal service Keep control Less administration and procedures Tradition
How can flexibility in responding to customer needs help a small business survive in competitive markets? Closer relationship between business and end customer Job production/bespoke products Less formal structure therefore can respond quicker Greater autonomy in decision making
How can customer service help a small business survive in competitive markets? More personal Longer term relationships Pride in service provided Local or specialist knowledge
How can product differentiation/USPs help a small business survive in competitive markets? Trusted by the customers e.g. local butcher v. supermarket Tailor made products e.g. personalised gifts Reputation of a region e.g. Stilton cheese Specialist needs e.g. lactose intolerance Quirkiness e.g. boutique hotels v. corporate giants
Created by: durquhart1
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