Business Growth
- Created by: JeevanNanuwa
- Created on: 16-04-18 15:02
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- Business Growth
- Business size is usually measured by revenue, profit, market share, number of employees or assets
- When a business grows it means these measures are increasing - growth can either be organic or inorganic
- An increase In sales volume and revenue will likely mean bigger profits for the business - these profits can then be reinvested back into the business to stimulate more growth
- Having bigger market share mean that the business has more influence over the market. Businesses with a high market share can use their influence to control prices
- Larger businesses benefit from economies of scale and economies of scope which mean lower unit costs
- Bigger businesses often have a range of products or services, so they can cope better if the market changes
- Economies of Scale
- Economies of scale mean that as the scale of production increases, the cost of producing each item (unit cost) decreases
- Internal Economies of Scale
- Technical - Related to production, Production methods for large volumes are often more efficient. Large businesses can afford to buy better, more advanced machinery, which might mean they need fewer staff, and wage costs will fall
- Managerial - Large businesses can employ managers with specialist skills to manage specific departments. They oversee plans and strategies which can result in work being done more quickly and efficiently
- Purchasing - Discounts. Big businesses can negotiate discounts when buying supplies in large quantities. They can get bigger discounts and longer credit periods than their smaller competitors. They can also borrow money at lower rates of interest than smaller businesses
- Marketing - Marketing costs are usually fixed (no matter how many units are sold), so a business with a large output can spread the cost over more units. A large business can also afford more effective forms of advertising e.e. TV adverts
- External Economies of Scale
- Happen when industries and concentrated in small geographical areas
- Having a large number of suppliers to choose from gives economies of scale. Locating near lots of suppliers means firms can easily negotiate with a range of suppliers, which tends to increase quality and reduce prices
- A good skilled local labour supply makes an industry more efficient. This is most important in industries where training is expensive or takes a long time. For example, software development firms in California's "Silicon Valley" know that plenty of people who are qualified to fill their vacancies already live within driving distance
- Experience Curve
- As a business grows and increases it's sales volume, it will begin to produce more products. Workers will get more experienced and more efficient at making the products, which will cause the cost per unit to decrease
- Experience Curve Diagram
- Economies of Scope
- Economies of scope arise when a business produces multiple products instead of specialising in one
- It's cheaper for one business to produce many products than it is for many businesses to produce one product each
- Economies of scope allow businesses to charge lower prices due to lower unit costs. This gives them a competitive advantage over other businesses and can force rivals out of the market
- Diseconomies of Scale
- Diseconomies of scale make unit costs increase as the scale of production increases. They happen because large firms are harder to manage than small ones
- One of the causes of tiis is that communication can be slow and difficult to get messages to the right people
- Another Reason is that it can be hard to motivate people in a large firm
- Caused by Problems with management.
- Strong leadership, delegation and decentralisation can help prevent this and keep costs down
- Business size is usually measured by revenue, profit, market share, number of employees or assets
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