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1.7 - Growth and Evolution

1.7 - Growth and Evolution

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Published by IB Screwed

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Published by: IB Screwed on Aug 24, 2010
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05/18/2013

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 http://ibscrewed4business.blogspot.com/ 
1.7
 –
Growth and Evolution
Most businesses will seek to grow. This can be measured in sales, revenue, market share,value of capital employed and their number of employees. They want to grow because
 
they can benefit from economies of scale
 
Able to increase power and market standing through greater market share. This canlead to price inelasticity of demand
 
To survive threats against growing competition
 
Spread their risks in different industries and marketsEssentially, the goal to make even more profit.
Economies of Scale
 
 – 
When the average costs of production are lower as the firm operateson a larger scale, due to improved efficiency. Also called increasing returns to scale. It allowsthem to have a competitive cost advantage
Internal Economies of Scale
 
 – 
When this is in the firm
s control
External Economies of Scale
 
 – 
Occur within an industry but are beyond the directcontrol of the firmDiseconomies of Scale
 – 
When the business has rising average costs as they expand beyondthe minimum efficient scale, and become too large.
 
 http://ibscrewed4business.blogspot.com/ 
Economies of Scale
 
 
Internal ExternalTechnical Economies
 – 
Bettermachinery
 Technical Progress
 
 – 
Betterproductivity
Financial Economies
 – 
Borrowing atlower interest rates
 Transport and CommunicationNetworks
 
 – 
Easier and more efficientdeliveries and communication
Managerial Economies
 – 
Specialistmanagers
 Better Trained Labour
 
 – 
Lowerrecruitment costs and higherproductivity
Specialisation Economies
 – 
Division of labour
 
Regional Specialisation
 – 
Higherquality and a good reputation in theparticular area
Marketing Economies
 – 
Sell in bulk toreduce costs
 Monopsony Economies
 – 
Strongerbuying power
 Commercial Economies
 – 
Buyingresource in bulk
 Risk-bearing Economies
 – 
Spreadingcosts through diversification
 
Diseconomies of Scale
Internal External
Lack of Control and Coordination
 
 – 
 Slower communication and decisionmaking
 Too Many Businesses in One Area
 
 – 
 Overcrowded and less available land
Poorer Working Relationships
 
 – 
 Detached management
 Traffic
 – 
Delayed deliveries
Slack
 – 
Employees become bored withrepetitive tasks
 Local Labour Supply
 – 
Higher wagesand reward s to attract them.
Bureaucracy
 
 – 
More time-consuming,less efficient and slower decision-making
 Complacency
 – 
Once the business isalready a leader
 
 
 http://ibscrewed4business.blogspot.com/ 
A business that is experiencing diseconomies of scale needs to take action if they want to beable to compete with other firms. This can be done by
reducing output
or
removingproduction inefficiencies
, depending on which is causing the diseconomy.
Small vs. Large Organisations
The size of the business and their market will affect their
scale of operation
. The size of themarket can be measured by:
 
Market Share
 
Total Revenue
 
Size of the Workforce
 
Profit
 
Capital Employed
 
Market ValueAn increase in one of these factors would indicate that the firm is getting larger.
Benefits of Being Small Benefits of Being Large
 
Cost Control
 
 – 
Better control,communication and coordination
Economies of Scope
 
 – 
cheaper toproduce a range of related products
Financial Risk
 
 – 
Retain power and willnot lose as much
Brand Recognition
 
 – 
Market to awider audience and increase sales
Government Aid
 
 – 
Financial aid such assubsidies are often offered
Image
 
 – 
More trusted based on therecord of reliability
Local Monopoly Power
 
 – 
Can benefit isthey are the only business, for examplein a remote town
Convenience
 
 – 
Can provide a widerrange of facilities to enhance thebuying experience
Personalised Services
 
 – 
More time todevote to customers
Discounts
 
 – 
Can offer discountsbecause they have lower costs
Flexibility
 
 – 
Can adapt to changewithout worrying about stakeholders
Customer Loyalty
 
 – 
Usually the resultof discounts, etc
Small Market Size
 
 – 
Do not attract theattention of large businesses
More Choice
 
 – 
Able to offer morethan smaller firms

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