9.1 - Change in scale

• Growth strategy


  A business might pursue a strategy of growth so that it can reap the rewards that come with being a bigger business
• Large Businesses


  • More Stable than Small Businesses
• Business size


  Usually measured by revenue, profit, market share, number of employees or assets
• A business grows


  These measures (revenue, profit, market share, employees, assets) are increasing
• Growth


  Can be organic or external
• Increase in sales volume and revenue


  Likely means bigger profits for the business
• Bigger profits


  Can then be reinvested back into the business to stimulate more growth
• Bigger market share


  Business has more influence over the market
• Businesses with high market share


  Can use their influence to control prices
• Larger businesses


  • Benefit from economies of scale and economies of scope which means 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


  As the scale of production increases, the cost of producing each item (the unit cost) decreases
• Internal economies of scale


  • Increase efficiency within a firm
• Types of internal economies of scale


  • Technical
  • Managerial
  • Purchasing
  • Marketing
• Technical economies of scale

  Production methods for large volumes are often more efficient
• Economies of Scope


  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


  • A business that already has people and an infrastructure in place will be more efficient at producing an additional product than a new business, specialising in only that product, will be
  • Existing businesses are also able to benefit from brand loyalty - people already know the company's brand, so they are more likely to buy other products that they make
  • Economies of scope allow businesses to charge lower prices due to lower unit costs
• Economies of scope


  Give businesses a competitive advantage over other businesses and can force rivals out of the market
• Diseconomies of Scale


  Unit costs increase as the scale of production increases because large firms are harder to manage than small ones
• Diseconomies of Scale


  • Poor coordination makes a business less efficient, it's hard to coordinate activities between different departments in a big firm
  • Communication is harder in a big business, it can be slow and difficult to get messages to the right people, especially when there are long chains of command
  • It can be hard to motivate people in a large firm, in a small firm managers are in close contact with staff, and it's easier for people to feel like they belong and that they're working towards the same aims
• Diseconomies of scale are caused by problems with management
• Strong leadership, delegation and decentralisation

  Can help prevent diseconomies of scale and keep costs down
• Retrenchment


  A business becoming smaller
• Retrenchment


  • May be necessary for a business to remain profitable
  • Due to diseconomies of scale, declining markets, economic recession or improved competitor performance
• Retrenchment


  1. Cutting jobs

  2. Reducing output

  3. Withdrawing from markets

  4. Splitting the business up (demerging)
• Cutting jobs


  If sales are decreasing, a business will need to decrease its wage bill by cutting jobs
• Reducing output


  If a business is selling fewer units it has to reduce its output and capacity
• Withdrawing from markets


  Businesses might choose to stop selling products in less profitable markets
• Splitting the business up (demerging)


  It's easier to manage and control a smaller business, so a large business might split up into several smaller ones and focus on making each one profitable
• Retrenchment done in lots of little steps over a long time

  Workers may not be too badly affected
• Retrenchment done quickly (e.g. during a recession)


  Significant impact on workers, can lead to decreased productivity which might make the problem even worse
• Technical economies of scale


  • Related to production
  • Production methods for large volumes are often more efficient
  • Large businesses can afford to buy better, more advanced machinery
  • Fewer staff needed
  • Wage costs will fall
• Managerial economies of scale


  • Large businesses can employ managers with specialist skills to manage specific departments
  • They oversee plans and strategies
  • Work being done more quickly and efficiently
• Purchasing economies of scale


  • Discounts when buying supplies in large quantities
  • Bigger discounts and longer credit periods than smaller competitors
  • Can borrow money at lower rates of interest than small businesses
• Marketing economies of scale


  • Marketing costs are usually fixed
  • A business with a large output can spread the cost over more units
  • A large business can afford more effective forms of advertising, e.g. TV adverts
• External economies of scale


  Make a whole industry or area more efficient
• External economies of scale


  • Industries concentrated in small geographical areas
  • Having a large number of suppliers to choose from
  • Locating near lots of suppliers increases quality and reduces prices
  • Good skilled local labour supply makes an industry more efficient
• Experience curve


  The more you do something, the better you get
• Experience curve effect


  1. As a business grows and increases its sales volume, it will begin to produce more products

  2. Workers will get more experienced and more efficient at making the products

  3. Cost per unit decreases
• The production of any goods or services will follow the experience curve