1 7 Growth And Evolution Outline
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1.1 Nature of business activity
1. Apply the concepts of economies and diseconomies of scale to business decisions.
Economies of scale
Economies of scale refer to the lower average costs of production as a firm operates on a larger scale. o Can help businesses gain a cost advantage over their competitors. Lower average costs mean charging lower prices an earning a higher product margin o Benefits:
Easier and cheaper access to finance
Division of labour and technological economies Internal economies of scale o Internal economies of scale refers to economies of scale that are within the organization's control and occur within the firm. o Technical economies
Use sophisticated machinery in an intensive way mass produce their products
The high fixed costs of their equipment and machinery are spread over the huge scale of output, thereby reducing the average costs of production
Large market demand-benefit from having a large and efficient distribution and transportation arrangement.
Not feasible because of the excess supply produced
Not cost-efficient o Financial economies
As a firm grows in size, it is much easier for that firm to access loan because banks see them as 'low risk'
Struggle to raise external finance
Have to pay higher rates of interest on overdrafts and loans o Managerial economies
Employ specialist to split up manager roles
Increasing specialization can also create benefits of synergy for the business o Specialization economies
Employ more employees to creates division of labour of the workforce o Marketing economies
Benefit form lower average cots by selling in bulk
Benefit from reduced time and transaction costs
Cost of invoicing customers
Global marketing economies
Spread the high cost of advertising across the world
Using same marketing campaign o Monopsony economies
Buying resources in bulks
Lower average cost
Only for businesses with strong buying power o Commercial economies
Buying resources in bulks
Even small companies can do it o Risk-bearing economies
Conglomerates-firms that have a diversified portfolio of products in different markets External economies of scale o External economies of scale refers to economies of scale that are within the industry that the business operates and are largely beyond the control of the business. o Technological progress o Improved transportation and communication networks o More and better trained labour o Regional specialization Diseconomies of scale
Diseconomies of scale are the cost disadvantages of growth o Unit costs are likely to eventually rise as a firm grows in size due to internal factors and external factors Internal diseconomies of scale o Lack control and coordination o Poorer working relationship
1.1 Nature of business activity
Slack amongst the workforce Bureaucracy (polices) increases Complacency External diseconomies of scale o External diseconomies of scale refers to an increase in the average costs of production as a firm grows due to factors beyond its control. o This is often caused by problem associated with too many firms being in the industry o Too many businesses locating in a certain area will result in land becoming more scarce thereby increasing market rents o Traffic congestion o The supply of local labour may also increase dye to the opportunities being offered by rivals located in the same area o Higher wages and financial rewards needed Dealing with diseconomies of scale o Reduce level of output o Introduce measures to remove productive inefficiencies
o o o
2. Evaluate the relative merits of small versus large organizations.
Growth of a business = expansion in size of its operations o Market share o Total revenue o Size of workforce o Profit o Capital employed o Market Value Reason of growth/remain small
Be large Be small
To reap the benefit of economies of scale
Economies of scope
In addition to large organization achieving
Government aid economies of scale they may also benefit from
Local monopoly power economies of scope
Larger market share
Small market size
Image convenience discounts
Barriers to entry
The optimum size for a business will depend on its internal structure, its costs and the size of the market.
The most appropriate size for a business also depends on its aims and objectives.
3. Recommend an appropriate scale of operation for a given situation.
4. Explain the difference between internal and external growth.
grows internally, using its own resources to increase the scale of its operation and sale revenues.
Ways of changing o Change of Price o Advertising and Promotion o Improving production and production o Selling products in different locations o Offering customers preferential credit payment terms o Investing in capital expenditure o Training and Development External Growth grows by collaborating with, buying up or merging with another firm
5. Evaluate joint ventures, strategic alliances, mergers and takeovers as methods of achieving a firm's growth objectives.
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