3.2.1 - Growth (2)

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  • Growth Objectives
    • 3.2.1 - Growth
      • Economies of Scale
        • As output rises, average unit costs decrease,
        • If output rises, and unit costs decrease, this can allow a rise in profit and therefore increased profit margin, which can allow a business to bring their prices down to competitive and unbeatable figures.
        • External Economies of scale
          • These are the reductions in costs that a business may enjoy as an industry grows.
          • 4 Areas
            • Labour - Concentration of firms may lead to an increase of a skilful labour workforce. Then productivity and efficiency can increase, meaning there are less wastage costs.
            • Commercial services - An established industry attracts smaller firms that are trying to serve it's needs, and a wide range of services can be provided.
            • Co-operation - Firms in the same industry will co-operate together and may fund research and development projects together to grow.
            • Disintegration - Occurs when production is broken-up between different factories in the same industry to get a specialised final product.
      • Diseconomies of scale
        • This happens when a business expands the scale of its operations to far beyond the minimum efficient scale. Average costs start to rise as output rises.
        • Internal dis-economies of scale are caused by the problems of managing larger businesses. such as comunication issues and too many layers in employee hierarchy &  the chain of command.
        • External diesconomies of scale result from overcrowded industries, so things like prioce of land and labour may rise as firms compete for a limited ammount.
      • Overtrading
        • Overtrading happens when a business expands too quickly without having thefinancial resources to support such a quick expansion.
        • Causes
          • Sales are made on credit and customers take too long to settle amounts owed.
        • Symptoms
          • High revenue growth, low profit margins
          • Persistent use of overdrafts and low inventory turnover ratio
          • Significant increases in the payable s days and receivables days ratiosas well as the current ratio
          • Low capacity utilisation
        • Ways to manage overtrading include leasing, scaling back the pace of growth, and reducing inventory levels
    • To Increase Profits
    • Achieve economies of scale, and to lower unit-costs
    • Increase market power over customers and suppliers
    • Increase market share and brand recognition
    • Grow business and shareholder value
  • A long-term contract requires a business to incur substantial costs beforepayments are made by customers under the contract
    • Causes
      • Sales are made on credit and customers take too long to settle amounts owed.


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