3.2.1 Growth

• Reasons to grow

  • Owners/Shareholders/investors desire to run a large business.
  • Owners/shareholders desire for a high level of market share & profitability.
  • desire for stronger market power over its customers/suppliers.
  • Desire to reduce costs by benefitting from economies of scale.
  • Growth provides opportunities for product diversification.
  • Larger firms often have easier access to finance.
• What are economies of scale?

  • The scale of output generating efficiencies that lower its average costs (cost per unit) of production.
  • Help large firms lower their costs of production beyond what small firms can achieve.
• How does internal eos occur?

  • Occurs  as a result of the growth in the scale of production within the firm.
• External economies of scale occur when there is an increase in the size of the industry in which the firm operates
• Financial Economies (Internal)

  • Large firms - receive lower interest rates on loans than smaller firms, as they are perceived as less risky.
  • A cheaper loan lowers the cost per unit (average cost).
• Managerial Economies (Internal)

  • Occurs when large firms employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost (AC)
  • Managers in small firms often have to fulfil multiple roles and are less specialised
• Marketing Economies (Internal)

  • Large firms spread cost of advertising over large number of sales - reduces the AC.
  • Can also reuse marketing materials in different geographic regions - further lowers the AC.
• Purchasing Economies (Internal)

  • Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the AC.
• Technical Economies (Internal)

  • Occur as firm can use its machinery at higher level of capacity due to increased output = spreading the cost of machinery over more units & lowering AC.
• Risk bearing economies

  • Occur when a firm can spread the risk of failure by increasing its numbers of products, i.e greater product diversification - less failure lowers AC.
• Geographic Cluster (External eos)

  • As industry grows, ancillary firms move closer to major manufacturers to cut costs & generate more business.
  • This lowers the AC
• Transport Links (External eos)

  • Improved transport links develop around growing industries to help get people to work & improve transport logistics.
  • This lowers the AC
• Skilled Labour (External eos)

  • Increase skilled labour - lower cost of skilled labour = lowering the AC.
  • Larger the geographic cluster, larger the pool of skilled labour
• Favourable legislation (External eos)

  • Generates significant reductions in AC as governments support certain industries to achieve their wider objectives 
• • Rapid growth can negatively impact a company's operations and financial performance
• Diseconomies of Scale

  • Occurs when company grows too large = difficult to manage & control operations.
  • May face challenges in coordinating its various departments, managing its workforce, or maintaining quality control
  • Cost per unit ends up increasing as a result of these inefficiencies
• Internal communication

  • Strain communication channels or result in miscommunication, conflicting priorities and lack of coordination.
  • Result in delays, errors, missed opportunities and impact on employee morale
• Overtrading

  • Occurs when company takes on more business than it can handle = strain on its resources or an inability to meet its financial obligations (lack of liquidity)
  • May cause cash flow problems or decreased customer satisfaction
  • E.g . a company that expands too quickly may struggle to hire and train enough staff