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3.2 BUSINESS GROWTH (OBJECTIVES OF GROWTH: (ECONOMIES OF SCALE - when a…
3.2 BUSINESS GROWTH
OBJECTIVES OF GROWTH:
- ECONOMIES OF SCALE - when a company gets so large, it starts to benefit from growing. e.g. buying in bulk.
INTERNAL - arise from increased output of business itself.
- Purchasing & marketing economies e.g. bulking.
- Technical Economies - more advanced machinery = more effective = more to invest in R&D.
- specialisation and managerial economies = money/resources to employ specialist managers = effective business decisions = more efficient.
- Financial economies = larger firms benefit from cheaper loans & raise finance.
- Risk-bearing economies: bigger firms can spread risk by investing in more products & more markets = diversification.
EXTERNAL - occurs within an industry i.e. all competitors benefit.
- when industry is concentrated in a particular region.
- skilled labour & local training providers = less training.
- specialist services/facilities.
- local suppliers.
INCREASED MARKET POWER
- over customers: to charger higher prices, lack of competitive pressure in market = less need to develop new products.
- over suppliers: force them to lower costs.
INCREASED MARKET SHARE & BRAND RECOGNITION
- charge higher prices
- differentiate product from rivals
- create cutomer loyalty
- enhance product recognition
- develop an image
- launch new products more easily.
:( - overtrading: business accepts more orders than it can cope with > cash flow problems. likely to occur if offering too much trade credit to customers. operating w slim profit margins.
INCREASED PROFITABILITY
- more profit for investment & innovation.
- more for training & recruitment.
REASONS FOR STAYING SMALL
- high quality customer service
- owners' preferences w levels of profits added responsibilities, etc.
- more flexibility & innovation
- more effiecient
- lower costs
- lower barriers to entry - start up costs low.
- small firms can be monopolists: supplies to local members of community that no other competitor does.
PRODUCT DIFFERENTIATION & USP
- higher quality products/services
- non-price competition: ways of attracting customers, e.g. tastes and trends
- brand loyalty
- no perceived substitutes of that product/service.
- more product choices/more specific choices.
FLEXIBILITY in RESPONDING TO CUSTOMER NEEDS:
- adapt to customer orders easily.
- adapt to external changes more quickly.
- dealing w special requests.
done by R&D.
CUSTOMER SERVICE
- more personal service
- convenience for customers.
- communicating quicker.
- building relationships directly.
E-COMMERCE
- online shops
- social media
- information websites/advice sites.
- tutoring/training/mentoring.
- MERGERS - when 2 or more businesses join together and operate as one.
:) - Economies of scale: buying in bulk, financial, technical economies.
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- M&T: INTEGRATION - when businesses join together to form one.
- HORIZONTAL INTEGRATION - occurs when 2 firms that are in exactly the same line of business & same stage of production join together.
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- VERTICAL INTEGRATION - when firms in different stages of production join together.
- FORWARD - where a business joins w another that is in the NEXT stage of production.
- BACKWARD - where a business joins w another that is in PREVIOUS stage of production.
- M&T: FINANCIAL RISKS & REWARDS
- RISKS:
- Regulatory intervention: Competition and Markets Authority (CMA) may order an investigation if takeovver/merger acts against customers interests.
- resistance from employees: redundancies of duplicate staff
- integration costs: complex, expensive & time consuming.
- REWARDS:
- speedy growth: larger market share, lower costs from economies of scale, market power, higher profitability.
- higher remuneration for senior staff: higher salaries, bonuses bc larger market
- rewards to previous
- increased profitability: higher market share
- ORGANIC GRWOTH - growth strategy that involves a business growing gradually using its own resource.
- New Customers: more sales from existing activities. exploiting new distribution channels. building extension/moving to larger premises.
- New Products: innovative & committed to R&D.
- New Markets: geographic expansion overseas = more risk bc unfamiliarity
- New Business Model: developments in tech or social change.
- Franchising: allows other entrepreneurs to trade under name of original business.
:) - less risk = prevents errors bc culture, norms & practices of business already established
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:( - may be too slow for some stakeholders: leading to selling shares & company vulnerable to takeover.
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:( - takes time before exploiting economies of scale: business has to operate w higher costs for longer time = lower profit margins & less competition.
- INORGANIC GROWTH - growth strategy involved 2 or more businesses joining together to form one larger one.
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:) - will be able to exploit economies of scale = lower unit costs = higher profit margins & more competitiveness.
:( - more risky: complications, culture clashes and conflict.
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PROBLEMS WITH GROWTH
- DISECONOMIES OF SCALE - factors which cause the average production cost per unit of a business to increase above the efficient level.
-INTERNAL:
- poor communication -> more mistakes = more waste = higher average unit costs.
- co-ordination = difficult w big companies.
- workers need monitoring = more costs.
- may need more managers = increase unit costs.
- lack of motivation from workers bc they have little say = increased absenteeism/lateness = reduction in productivity, lower output per worker = increasing unit costs.
- loss of management focus.
- EXTERNAL:
- occurs from overcrowding in industrial areas. price of land, labour services, traffic congestion.
M&T: PROBLEMS WITH RAPID GROWTH:
- decreased morale if staff cannot cope w extra work = productivity decreases.
- shortage of cash to meet expansion costs. more work = more income = more pressure.
- management under pressure = less productivity
- quality of products.service decreased = less customer loyalty
- staff turnover = increased heavy workload
- business may not keep in touch w competitors activities.