Expanding Businesses

• How can the size of a business be measured?

  By its sales, value, or number of employees.
• What is necessary for a business to expand?

  The business needs to increase one or more of its sales, value, or number of employees.
• What are the benefits of expansion for a business?

  • Economies of scale
  • More power in the market
  • Increased status and reputation, facilitating new product launches
  • Staff rewards leading to increased motivation
  • More money
• What are the drawbacks of expansion for a business?

  • Slower decision making and communication due to hierarchy growth
  • Potential distortion of messages
  • Employee demotivation as they may feel less important
  • Increased difficulty in management, especially with multiple locations
• What are the two types of growth a business can experience?

  Internal (organic) growth and external (inorganic) growth.
• What is the term used to describe the reduction in average unit cost as a business grows?

  Economies of scale
• What does the average unit cost of a product do as a business experiences economies of scale?

  It falls
• What is the formula for calculating unit costs?

  Unit costs = total costs ÷ output
• What are diseconomies of scale?

  Diseconomies of scale occur when average unit costs begin to increase.
• How do purchasing economies of scale benefit a business?

  They allow a business to buy in bulk and receive bulk-buy discounts
• Why are diseconomies of scale considered a risk for expanding businesses?

  Because they can lead to increased average unit costs as the business grows.
• What is one major cause of diseconomies of scale related to communication?


  Problems with communication as the firm expands into different locations or internationally.
• If a business purchases 100 products at £12 each, what is the total cost?


  £1,200
• What is internal growth in a business context?


  Internal growth is when a business decides to expand on its own.
• How does communication difficulty contribute to diseconomies of scale?

  It causes decisions to take longer to reach all employees, making operations less efficient.
• If a business purchases 500 products at £7.50 each, what is the total cost?


  £3,750
• What are some methods of internal growth?

  Methods of internal growth include franchising, opening new stores, e-commerce, and outsourcing.
• What does a franchisor receive in return for selling a franchise?

  A fee and royalties
• Who is a franchisee?

  A franchisee is someone who purchases a franchise
• What is one advantage of a franchise for a franchisee?

  It provides lower risk
• How does a franchisor benefit from selling franchises?

  They can expand their business
• What is a disadvantage of a franchise for both franchisees and franchisors?

  Lower levels of profit
• What is a common disadvantage of setting up a franchise?

  Franchises can be expensive to set up and manage
• What is one method a business can use to expand?

  Opening new stores
• What must businesses find when opening new stores?

  A suitable location
• What is e-commerce?

  1. commerce involves selling products online
• What advantage does e-commerce provide businesses?

  A much larger market
• What is a disadvantage of e-commerce?

  It can be expensive to set up and manage
• What type of economies of scale allows a business to purchase more advanced machinery?

  Technical economies of scale
• What does outsourcing allow a business to do?

  Increase its capacity quickly with minimal investment
• What is another cause of diseconomies of scale related to management?

  Coordination issues as managers oversee increasing numbers of employees.
• What is a potential risk of outsourcing?

  The business may lose control over product quality
• What is franchising?

  A franchise is a business that gives the right to another person or business to sell goods or services using its name.
• What are the advantages of internal (organic) growth?

  • A business can maintain its own values
  • Lower risk
  • Higher production benefits from economies of scale and lower average costs
• What are the disadvantages of internal (organic) growth?

  • Return on investment could take a long time
  • Slower growth
  • Growth may be limited and dependent on the reliability of sales forecasts
• How can coordination issues lead to increased unit costs?

  They can reduce staff motivation and lower productivity.
• What does a franchise provide to the franchisee?

  A franchise provides a license to sell goods or services, along with training, marketing, and equipment.
• What happens to unit costs as a firm experiences economies of scale?

  Unit costs fall
• What is the formula for calculating unit costs?

  Unit costs = total costs ÷ output
• What must a new business do to become part of a franchise?

  A new business must pay a fee to join the franchise.