Growth 3.2.1

Question 1

What are the reasons for an objective of Growth?

Answer 1

• To achieve economies of scale
• Increased market power over customers and suppliers
• Increased market share and brand recognition
• Increased profitability

Question 2

What are Economies of Scale?

Answer 2

The advantages enjoyed by a business when unit costs fall as it increases the scale of its existing production or there is growth in the industry.

Question 3

What is Internal Economies of Scale?

Answer 3

The benefits enjoyed by a business due to an increase in the scale of its operations, leading to a fall in unit costs.

Question 4

What is External Economies of Scale?

Answer 4

• External economies of scale are business-enhancing factors that occur outside a company but within the same industry.
• Lower unit costs are very important in making a business more competitive.

Question 5

What are the different types of Internal Economies of Scale?

Answer 5

• Purchasing
• Technical
• Managerial

Question 6

What is Purchasing Economies of Scale?

Answer 6

• The benefits enjoyed when a business is able to negotiate greater discounts with suppliers for bulk buying, leading to a fall in average unit costs.
• It increases the buying power of the business (one of Porter’s Five Forces)

Question 7

What is Technical Economies of Scale?

Answer 7

• The benefits enjoyed when a business is able to spend more on larger and more efficient machinery, leading to a fall in average costs
• Fixed costs are spread over a greater level of output
• Increases Competitiveness
• Increases Efficiency
• Can spend more money on scientific research and technical development

Question 8

What is Managerial Economies of Scale?

Answer 8

• The benefits enjoyed when a business can employ specialist personnel leading to a fall in average costs
• The business can employ internal specialists such as an accountant or have its own HR department rather than use the services of external organisations

Question 9

What are the different types of External Economies of Scale?

Answer 9

• Expertise
• Cooperation
• Support Services

Question 10

What is Expertise Economies of Scale?

Answer 10

• The benefits enjoyed when a region or country becomes renowned for a particular industry leading to more highly skilled workers, improved training and a greater talent pool leading to a fall in unit costs.
• Local universities and training organisations offer specialist courses
• Ease of recruitment
• Expertise of employees

Question 11

What is Cooperation Economies of Scale?

Answer 11

• Greater cooperation between businesses within the same industry and region resulting in greater efficiencies
• Network groups
• Joint projects such as funding research and development
• Shared expertise

Question 12

What is Support Services Economies of Scale?

Answer 12

• The benefits enjoyed when ancillary services that specialise in a particular industry locate close to the industry
• Specialist services such as banking, insurance and waste management
• Small businesses supplying to the industry e.g. component manufacturer

Question 13

What does Increased Market Power over customers and suppliers lead to?

Answer 13

• Brand loyalty as a result of being a widely recognised brand with a heavy presence in the market, will also make the product more inelastic.
• Barriers to entry make it difficult for new businesses to compete therefore reducing competitive rivalry.
• Stronger negotiating power with suppliers leading to purchasing economies of scale and better trade terms aiding cash flow.
• Secure raw materials or outlets through vertical integration making it more difficult for other businesses to compete.

Question 14

What does Increased Market Share and Brand Recognition lead to?

Answer 14

• Dominant business with a reputation as a market leader
• Saturate the market to have a wide geographical spread and balanced product portfolio
• Strong physical and promotional presence making the brand at the forefront of consumers’ awareness

Question 15

What does Increased Profitability lead to?

Answer 15

• Lower costs through economies of scale allowing for higher profit margins, assuming revenues remain unchanged.
• Ability to charge higher prices due to brand loyalty and less competition lowering the price elasticity of demand.
• Increased productivity and efficiency from technical and managerial economics of scale.

Question 16

What are the disadvantages of growth?

Answer 16

• Diseconomies of Scale
• Internal Communication
• Overtrading

Question 17

What is Diseconomies of Scale?

Answer 17

• The disadvantages suffered as a result of a business increasing the scale of its operations that lead to a rise in unit costs.
• Rising unit costs will make a business less competitive. They may mean that a business will have to either raise prices, therefore selling less, in an attempt to cover increased average costs or maintain the same price and earn less profit per unit sold.

Question 18

What are the different types of Diseconomies of Scale?

Answer 18

• Communication
• Coordination
• Alienation

Question 19

What is Communication Diseconomies of Scale?

Answer 19

• As a business grows in size it becomes more difficult to communicate effectively with all employees and external stakeholders. There is therefore an increase in unit costs as additional methods are implemented.

This will lead to:

• A wider span of control
• A longer chain of command
• Greater risk of distortion and misunderstanding
• Reliance on technology over face-to-face communication

Question 20

What is Coordination Diseconomies of Scale?

Answer 20

• It is difficult to coordinate the increased number of employees, customers and suppliers. This can lead to mistakes being made that are costly to correct. Additional procedures may need to be implemented.

This will lead to:

• Duplication of resources
• Multiple locations, products, functions
• Complex organisational structure

Question 21

What is Alienation Diseconomies of Scale?

Answer 21

• As the size of the workforce grows employees may experience a lack of personal recognition. They feel as if they are known as a “number, not a name”. This will lead to demotivation.

This will lead to:

• Lower labour productivity
• Higher labour turnover resulting in higher recruitment and training costs
• Fall in quality

Question 22

What is Internal Communication?

Answer 22

• The transferring of information between interested parties within an organisation.
• Effective communication is important to maintaining good employer/employee relations. As a business grows communication becomes more complex and more difficult leading to diseconomies of scale.

Question 23

What is Overtrading?

Answer 23

When a business has expanded too rapidly resulting in it operating at a level beyond its resources leading to potential liquidity problems. Can also refer to a business where supply is exceeding demand as a result of growth.