Theme 2 - Business growth

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  • Created by: becky.65
  • Created on: 19-05-17 13:36
What is the objective of growth?
Business sales, turnover and profit because sales revenue should rise
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Why is business growth good for shareholders?
Because their dividends icrease
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Why is business growth good for employees?
It maintains the number of jobs and opens up promotion opportunities
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Why is business growth good for the management team?
With enhanced market power, there is a lower risk of bankruptcy
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Why might some businesses not want business growth?
It they are small and want to satisfice as they want the business to remain the same size
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What is economy of scale?
A reduction in the average costs brought about by an increase in the size and scale of output
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What are internal economies of scale?
Those that benefit the individual business by cutting production costs
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How may a business react when there is a reduction in average costs?
They may keep the existing price to increase profits so these can be reinvested to generate more growth or they can cut prices and maintain profit levels, so gaining a competitive advantage with increased sales
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When will technical economies arise?
When a growing business makes full use of specialised equipment and machinery
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How can technical economies reduce average costs?
A large business can afford big capital items if their production process is very complex, therefore their high cost is spread over a larger output or companies can increase the size of transportation mechanisms which reduces the average cost
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How does marketing economies occur?
As output grows, the fixed costs of advertising are spread across a wider target market. Costly widespread media become more effective
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What does managerial economies allow bigger business to do?
It allows them to use specialist managers with particular skills to increase output and decrease average costs
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What are financial economies?
Bigger businesses may secure better terms when negotiating loans and finance as they are likely to be less risky
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When do risk-bearing economies occur?
When bigger businesses diversify or supply more than one market. This spreads risks as the business is not just reliant on one market
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What does bulk buying enable a business to do?
A business can negotiate lower input prices, thus average cost per unit can be reduced
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What are external economies of scale?
They reduce production costs for all businesses in the industry
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How do external economies of scale cut costs for all nearby businesses?
By having a labour force with appropriate skills for the industry concerned and a network of local suppliers with specialist skills and research instituted may develop technologies that cut costs for the whole industry
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How can economies of scale result in better living standards?
Economies of scale lead to falling costs and prices so products become more affordable which means consumers have more purchasing power, thus a mass market develops as more people are able to afford the product so standards of living rise
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What is market power?
The extent to which one business can affect what happens in the market
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What is the market leader?
The business who has the most power and some degree of control over prices and marketing straategies
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Why is market power a reason for business growth?
Because the bigger the business, the more power it has
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What is a monopoly power?
The business with the biggest market share, or the only business in market. It may be able to influence price or output
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What is a monopsony power?
Businesses that are big buyers of supplies, or a few businesses that share market power; to some extent they will be able to dictate prices which drives down input costs and increases profits
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What does increasing market share lead to?
Increased turnover, profit and market power
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In a static market, how can businesses increase market share in order to grow?
By developing a competitive advantage through product differentiation, branding, brand loyalty
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What is the minimum efficient scale?
The lowest level of output at which costs are being minimised
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What are the disadvantages of having a large company?
Economies of scale do not last indefinitely
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When might economies of scale stop?
If output continues to grow past the optimum level of production, then diseconomies of scale appear and average costs start to rise
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Why might diseconomies of scale happen?
Effective communication becomes harder as the organisation grows so flows of information can be slow or lost; managing and coordinating a large organisation becomes harder as it expands, expansion leads to skill shortages, small businesses may be bet
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What might some big businesses do to stop diseconomies of scale?
They will restructure by selling part of the business or splitting off
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What is corporate culture?
The set of important assumptions that are shared by people working in a particular business and influence the way in which decisions are taken there
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How can a strong corporate culture prevent diseconomies of scale?
Good managerial skills and good teamwork can combat these problems
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Other cards in this set

Card 2

Front

Why is business growth good for shareholders?

Back

Because their dividends icrease

Card 3

Front

Why is business growth good for employees?

Back

Preview of the front of card 3

Card 4

Front

Why is business growth good for the management team?

Back

Preview of the front of card 4

Card 5

Front

Why might some businesses not want business growth?

Back

Preview of the front of card 5
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