business growth

• economies of scale


  are reductions in unit cost caused by the growth of a business
• reasons why firms grow

  • to increase profitability
  • to achieve economies of scale
  • increased market power over customers and suppliers
  • increased market share and brand recognition
• reasons why firms grow - to increase profitability

  growth is likely to mean more customers, more customers can bring more revenue. increased revenue, where each new customer spends more than the cost of servicing them, means more profit. in cases where a business can grow revenues faster than their fixed costs rise, profit margins are likely to increase too.
• reasons why firms grow - to achieve economies of scale

  growth should bring benefits in terms of lower running costs for the firm. typical economies of scale include: purchasing EOS - firm able to negotiate cheaper unit costs for supplies, bulk. managerial EOS able to hire specialist managers to handle particular areas within the business, likely to brig greater expertise to their role, thus reducing unit costs. technical EOS - growth allows to firm to afford to buy specialised machinery and equipment, so reduced unit costs may follow.
• reasons why firms grow - increased market power over customers and suppliers

  growth in size is likely to boost the power that a business has over both customers and suppliers. link to porters 5 forces - the ability to influence factors in your favour is likely to boost a company's overall long-term profitability. power over suppliers as a firm would have become a more significant customer as it increases the quantity of supplies purchased. power over customers as growth led to a reduction in choice available to customers.
• reasons why firms grow - increased market share and brand recognition

  growth that boosts market share will involve taking share from rivals, will boost power over customers. growth will also lead to wider recognition of company's brand. benefits - customers tend to buy brands they recognise, thus increased recognition can lead to further boost in sales as consumers start choosing more recognisable brand. as brand recognition increases, it is possible to make cuts to marketing budgets if awareness-boosting advertising is no longer necessary. this reduces the firms overall operating expenses.
• problems arising from growth

  • diseconomies of scale - poor internal communication, poor employee motivation, poor managerial co-ordination
  • overtrading
• diseconomies of scale 


  are the inefficiencies related to growing as a business that can lead to upward pressure on unit costs.
• overtrading


  occurs when a business experiences cash flow problems as a result of expanding too quickly without sufficient cash in the bank
• problems arising from growth - diseconomies of scale

  growth can make organisations harder to manage, can suffer from - poor internal communication, poor employee motivation, poor managerial co-ordination
• problems arising from growth - diseconomies of scale - poor internal communication

  growth can lead to a worsening of communication within an organisation for several reasons: larger organisations tend to rely on written forms of communication than oral. this can harm the effectiveness of communication. larger organizations need to add more layers of organisational structure to ensure spans of control do not become too wide. this means that messages need to pass through more layers of structure. the effectiveness of communication is affected by the motivation levels of sender and receiver.
• problems arising from growth - diseconomies of scale - poor employee motivation

  as a business grows and personal contact is reduced between staff members and managers, employees can feel a growing sense of alienation. they may feel their work goes unnoticed and may struggle to see how their achievements can impact on the success of the business. the result can be falling motivation levels as a business grows.
• problems arising from growth - diseconomies of scale - poor managerial co-ordination

  as an organisation grows, the boss will struggle to keep an eye on everything. the result may be hiring managers, but these can head off in subtly different directions unless the boss ensures they meet on a regular basis. takes up valuable time and become ignored. controlling more resources will always be tougher in a bigger business. a failure to co-ordinate effectively can cause mistakes and drive up costs.
• problems arising from growth - overtrading

  if a business grows rapidly, its level of cash outflows rises consistently as it expands. as most firms need to wait several weeks/months between spending money on materials or assets before they generate a return, cash inflows only rise to a higher level after that period. this can create a situation where a business is trying to fund a large-scale operation with cash inflows from the smaller organisation it was several weeks/months ago. the result can be cash crisis.
• inorganic vs organic growth

  • inorganic growth means growth the occurs as a result of taking over or merging with another business can take place is a business needs to grow very quickly, looking to eliminate a competitor, poor record of new product deleopment and innovation
  • organic growth is growth which takes place without any merger or takeover activity
• methods of growing organically

  harnessing the power of businesses resources primarily staff and financial resources. staff if culture is developed and they are nurtured can allow a firm to naturally expand it operations following the same blueprint with the same leader the same way, just on a larger scale. organic growth tends to allow the business to finance growth through retained profits, rather than riskier external sources such as loans
• advantages of organic growth

  • the leader's influence stays strong-prevents the need to merge 2 workforces, greater chance of preserving original organizational culture which is likely to be successful as it has put the business in a position to grow.
  • reduction of financial risk- as its slower, less finance likely to be in small batches, can use retained profit, no need to take on debt, steadily grow
  • secure career paths-if business grows more senior management positions will open up that can be filled internally
• disadvantages of organic growth

  • limited speed leading to limited size-may fall behind rivals who are rapidly growing, rivals may achieve economies of scale making it even harder to compete with.
  • failing to fully exploit a short-lived opportunity-a firm the fails to fully expand its capacity before the product enters the decline phase may have missed out on significant levels of sales
  • predictability-often involves doing the same thing in a new place year after year, can prevent staff who are looking for exciting challenges staying with business long term, leading turnover of inovativestaff
• synergies

  are the benefits of two things coming together that could not exist when they are separate, such as economies of scale resulting from merger of two businesses.
• reasons for mergers and take overs

  • growth-ability to increase the size of an organization
  • cost synergies-increased size likely to lead to economies of scale
  • diversification-spread level of risk, reducing reliance on one market or product in case of problems
  • market power-when two firms in the same market come together, likely to increase power over customers, perhaps able to increase prices to boost margins, also increaed power over suppliers
• distinction between mergers and takeovers

  • merger-when two businesses roughly the same size agree to come together to create a brand new single business, where owners share ownership
  • takeover occurs when one business buys over 50% of another businesses shares, thus effectively gaining control.
• types of integration

  • vertical-two companies from different stages of the supply chain. forwards-when a company buys a customer- customers may resent loss of choice. backward-company buys a supplier- tied to one supplier that might not always be best option
  • horizontal-rival in same industry, same stage of supply chain, economies of scale, increased margins -could be confusion over which culture
  • conglomerate- two unrelated businesses, main benefit is not just reliant on one market or product, spreads risk - may distract from og business, failure to understand the unfamiliar market
• takeover decisions and ansoff's matrix

  the matrix allows an analysis to take place of the market and products being sold by the firm being taken over

  horizontal- low risk Ansoff would suggest this is market penetration

  risk levels would rise if the takeover target operates in another country

  or sells products unlike those sold by the buyer

  a combination of new product new market -diversification-represents the riskiest type of takeover

  however, high risk can bring the highest reward
• problems of rapid growth

  inorganic growth sees much more rapid transformation.

  • with new management structures taking place, staff may find themselves working for a new boss
  • staff are likely to make adjustments to operate in new business culture and many will feel uncomfortable
  • customer and suppliers who have a long-standing relationship may be discomforted by the need to deal with somebody else, or a larger less personal organisation
• business objectives and size

  • survival-smaller firms lower fixed costs to cover, but smaller number may mean overdependence on a single product
  • profit maximization-bigger firms likely to generate higher total profits
  • sales maximization
  • market share
  • cost efficiency-diseconomies of scale are likely to arise as a response to growth. smaller firms may be able to identify wastage more easily thus keep keep tight rein on costs
  • employee welfare
  • customer satisfaction
  • social objectives -social enterprises if set up to address local needs will need to stay small
• reasons to stay small

  • product differentiation and USP- porters generic matrix how some small firms can trade successfully in the long term, whilst selling to niche market
  • flexibility in responding to customer needs-small businesses will have greater speed when responding to changes, likely to know about changes sooner due to less layers
  • customer service- delivered by highly motivated staff, where staff are a part of a small close knit workforce
  • e-commerce-ability to reach a global market, allow business to carve out especially niche markets