What are the key reasons for Growth?
- Increasing profits
- Achieve economies of scale
- Increase marketing power
- Increased brand recognition
- Increase market share
- Grow business and shareholder value
Why would businesses set Increasing Profits as a Growth Objective?
- Key objective for many firms, particularly those whose whares are quoted on the stock market or who are owned by private equity
Why would a business set Achieving Economies of Scale as a Growth Objective?
- Growing scale of output can lad to lower costs = Improved competitiveness
Why would a business set Increasing market power as a Growth Objective?
- Larger firms can exert greater bargaining power over suppliers / customers = Competitive advantage
Why would a business set Increased Brand Recognition and Market Share as a Growth Objective?
- Much research points to the link between growing market share and brand recognition with higher profits, so this reason is linked with increasing profits
Why would a business set the Growth of Business and Shareholder Value as a Growth Objective?
- Larger businesses are more valuable
- Ultimately the main reason why so many firms adopt a growth strategy
Why do businesses choose to grow?
- Limited liability
- Increased market share
- Brand recognition
- Increase profits
- Economies of Scale
- Expansion
- Protection
- Diversify
- Increase profitability
What is the formula for calculating Unit Costs?
Total production costs in a period / Total output in a period (units)
What are Internal Economies of Scale?
- Increased output of the business itself
What are External Economies of Scale?
- Occur within the industry: All competitors benefit
What are diseconomies of scale?
- When a company grows so big that unit costs increase
What are examples of diseconomies of scale?
- Waste / inefficiency in large organisations
- Regulatory costs
- Risk aversion
What is overtrading?
- Overtrading happens when a business grows too quickly without having the financial resources to support such an expansion.
How can overtrading lead to business failure?
- If sustainable sources of finance are not obtained
What is overtrading an issue of?
- Working capital and Cash Flow
When is overtrading most likely to happen?
- When growth is achieved by making significant capital investment in production or operations capacity before revenues are generated.
- Sales are made on credit and customers take too long to settle amounts owed.
What are potential symptoms of overtrading?
- High revenue growth but low profit margins
- Very low inventory turnover ratio
- Significant increase in current ratio
- Low levels of capacity utilisation.
How can overtrading risk be managed?
- Reducing inventory levels
- Leasing rather than buying capital equipment
- Scaling back the pace of revenue growth until profit margins and cash revenues have improved
Why would businesses choose to stay small?
- Product differentiation and USPs
- Flexibility in meeting customer needs
- Deliver high standard of customer service
- Exploit opportunities for e-commerce
