3.2 BUSINESS GROWTH

• economies of scale


  an increase in the scale of output generates efficiencies that lower the average unit costs

  
• diseconomies of scale


  occurs when an increase in the scale of output results in higher average unit costs
• internal economies of scale


  the advantages to a business as it increases the scale of its current operations leading to a fall in unit costs
• technical internal EOS


  - when it is able to spend on larger and more efficient machinery leading to a fall in average costs

  - fixed costs are spread over a greater level of output
• purchasing internal EOS


  - when it is able to negotiate greater discounts with supplier for bulk buying leading to a fall in average costs

  - increases the buying power of the business (porters 5 forces)
• managerial internal EOS


  - when a business can employ specialist personnel leading to a fall in average costs

  - hiring internal specialists rather than outsourcing or offshoring
• expertise external EOS


  - a region is known for a particular industry leading to highly skilled workers and greater talent leading to a fall in unit costs

  - ease of recruitment and expertise of employees
• cooperation external EOS


  - more efficient is there is a greater cooperation between businesses within the same industry

  - shared expertise
• overtrading


  a business has expanded too quickly resulting in it operating at a level beyond its resources leading to potential liquidity problems
• integration


  bringing together two or more businesses
• merger


  when two or more businesses agree to become integrated to form one business under joint ownership
• takeover


  when business gains control over another and becomes the owner
• synergy


  two firms joined together will be able to achieve more than the sum of the two firms operating on their own
• horizontal integration


  acquisition of a firm at the same stage in the production process
• forward vertical integration


  a business joins with another in the next stage of the process (manufacturer and retailer)
• backward vertical integration


  a business joins with another in an earlier stage of the process (manufacturers and supplier)
• conglomerate integration


  2 unrelated businesses integrate
• financial rewards of integration

  - increased market share

  - synergy

  - diversification

  - access to ner markets
• financial risks of integration

  - overpayment of acquisition

  - cultural differences

  - debt
• problems of rapid growth

  - strained cash flow

  - quality control issues

  - culture clashes

  - diseconomies of scale
• organic growth


  occurs when a business expands by opening new stores, branches, functions or plants
• inorganic growth


  occurs when a business expands by either merging with or taking over another business
• methods of organic growth

  - new products

  - new markets

  - new routes to market

  - franchising

  - diversification
• benefits of organic growth

  - less risky: growth is financed by reinvested profits

  - less threat of brand dilution

  - less loss of control
• limitations of organic growth

  - misses opportunities from acquisitions

  - potential for growth is limited

  - lack of shared expertise

  - lack of competitiveness

  - pressure on leaders

  - dissatisfaction from shareholders
• reasons for staying small

  - more personalised experience

  - operating in a niche market can be very profitable

  - benefit from EOS

  - respond quickly in dynamic markets
• strengths of e-commerce


  1. low cost start up

  2. reach a wider audience

  3. niche markets

  4. global market places that are easy for small business to access