3.2.1 Growth

Question 1

Growth

Answer 1

an increase in size or status

Question 2

General benefits of growth

Answer 2

• to achieve economies of scale
• to increase market power over customers and suppliers
• Increased market share, leading to greater dominance in the market and the ability to influence prices
• Increased brand recognition and therefore status, publicity and added value
• Increased profitability

Question 3

Key reasons for growth

Answer 3

• increase profits
• achieve economies of scale
• Increase market power
• Increase market share and brand recognition
• grow business and shareholder value

Question 4

Key reasons for growth - increase profits

Answer 4

-important for businesses whose shares are quoted on the stock market or who are owned by a private equity f

Question 5

Key reasons for growth - economies of scale

Answer 5

-by growing the scale of output, a business can achieve lower unit costs which can thereby improve a firm’s competitiveness

Question 6

Key reasons for growth - increase market power

Answer 6

-larger firms may be able to exert greater bargaining power over suppliers and customers in order to gain a competitive advantage

Question 7

Key reasons for growth - increased market share and brand recognition

Answer 7

-much research points to the link between growing market share and brand recognition with higher profits, so this reason is linked with increasing profits

Question 8

Key reasons for growth - grow business and shareholder value

Answer 8

-mostly why shareholders adopt a growth strategy. larger businesses are generally more valuable

Question 9

Economies of scale

Answer 9

factors that cause average cost per unit to fall as output increases

Question 10

Marketing economies of scale

Answer 10

• discounts from advertisers and distributors
• sales costs are spread over a large national output
• admin costs of selling may be spread

Question 11

Purchasing economies of scale

Answer 11

• better rates when bought in large quantities
• specialist staff can research the best purchase deals
• admin costs savings in large orders

Question 12

technical economies of scale

Answer 12

• larger businesses are more efficient as fixed costs of capital investment can be spread
• capital équipement is less wasted
• adopt different production techniques to reduce unit costs
• use mass production techniques so more efficient
• greater use of technology to speed up output and use less staff

Question 13

managerial/ socialisation economies of scale

Answer 13

• managers specialise in different tasks
• able to employ more specialists rather than outsource
• better quality decision making
• specialisation of these means that better quality decisions are made through degradation

Question 14

External economies of scale

Answer 14

these are when a firm benefits from lower unit costs as a result of the whole industry growing in size

Question 15

Benefit of external economies of scale

Answer 15

• growth of industry results in better training and education focusses on that industry
• better transport infrastructure and communications systems
• might have an enterprise zone where governments attract businesses to an area by offering low taxes for the business
• introduction tones technology to lower costs
• support businesses grow and develop (vehicle leasing companies and cleaning companies)

Question 16

Diseconomies of scale

Answer 16

factors that cause the average costs per unit to increase as output increases
-happens when a business expands beyond an optimum size and becomes less efficient

Question 17

Diseconomies of scale

Answer 17

• coordination/control
• motivation
• Communication
• Over trading

Question 18

Diseconomies of scale - coordination and control

Answer 18

• problems in monitoring productivity and work quality, increasing wastage of resources
• branches can become disparate and disconnected from one another
• can result in loss of productivity and so does quality of work which causes costs to rise
• cost to get branches aligned

Question 19

Diseconomies of scale - motivation

Answer 19

• workers in a large firm may develop a sense of alienation and loss of morale
• as a firm grows, the organisational structure can either get very tall or very wide - disconnected
• spans of control may increase where you lose face to face contact with your line manager -lack of motivation
• productivity falls, costs rise
• business may have to invest in financial incentives or systems to improve motivation = higher costs

Question 20

Diseconomies of scale - communication

Answer 20

• workers in large firms may have less opportunities to communicate
• language barriers in a global firm
• communication may get distorted and more mistakes made - costs due to wide span of control and tall structure
• may invest into internal infrastructure which requires money

Question 21

Negative effects of internal politics and what causes this?

Answer 21

• information overload, unrealistic expectations among managers and cultural clashes between senior people with inflated egos
• disconnection between senior and juniors
• interrupts work flow, impacts motivation and morale, effect productivity, causes costs to rise

Question 22

What is overtrading?

Answer 22

happens when a business expands too quickly without having the financial resources to support such a quick expansion
-cash flow problems from growing too quickly

Question 23

When os overtrading most likely to happen?

Answer 23

• growth is achieved by making significant capital investment in production or operations capacity before revenues are generated
• sales are made on credit and customers take too long to settle amounts owed
• significant growth in inventories is required in order to trade from the expanding capacity
• a long term contract requires a business to incur substantial costs before payments are made by customers under the contract

Question 24

How to manage the risk of overtrading?

Answer 24

• reducing inventory levels - will reduce your payments and commitments
• scale back the pace of growth until profit margins and cash revenues have improved
• leasing rather than buying capital equipment - preventing that outlay (smaller monthly payments)
• obtaining better payment terms from suppliers
• enforcing better payment terms with customers

Question 25

Growth can cause both economies and diseconomies of scale

Answer 25

• if the scale of production increases , average unit costs over most production ranges are likely to fall because the company will benefit from economies of scale
• beyond a point a company will start to find that inefficiencies push average costs up and diseconomies of scale set in.

Question 26

What is retrenchment?

Answer 26

It allows a business to re-focus on growing a core activity within its operations

Question 27

How does retrenchment impact HR?

Answer 27

-need to consider workforce planning, redundancy and redeployment

Question 28

How does retrenchment impact operations?

Answer 28

-it can offer economies of scale through addressing diseconomies of scale

Question 29

How does retrenchment impact marketing?

Answer 29

-promotional campaigns are likely to be refocussed on the refined business offer which may include selling from a smaller product portfolio

Question 30

How does retrenchment impact finance?

Answer 30

-the business needs to ensure it is able to fund the short-term increase in the cost of redundancy payments