It All Comes Down to Profits

By Norman James Nehmetallah

Growth of a business can be measured by:
 Market share – firm’s sales as a percentage of
industry’s total sales revenue
 Total revenue – the annual sales of a business
 Size of workforce – the total number of employees
hired by the business
 Profit – the value of a firm’s annual profits
 Capital employed – the amount of capital invested
in a business
 Market value – can be measured by either the
balance sheet valuation or the stock market valuation of
a business
  Benefits of economies of scales
 A larger market share
 Survival tactic against rivals
 To spread risks
However, all of these things essentially, if successfully
managed, result in increased profit! However, those
growing businesses better watch out, because if they
expand too quickly (overtrading) or if their foray into
different markets is marred by inexperience, they expose
themselves to failure and excess risk.
 Economies of scale are: Average lower costs of
production as a firm operates on a larger scale
due to an improvement in productive
efficiency.

 There are two types:

 Internal (within an organization) & External

(outside of an organization)
 Technical economies: Large firms can use
sophisticated machinery in an intensive way to
mass-produce their products.
 Financial economies: Large firms can borrow
massive sums of money at lower rates of
interest than smaller rivals – they are seen as
less risky to financial lenders.
 Managerial economies: Large firms split up
management roles by employing specialist
managers (this involves more money, but
benefits are synergetic)
 Specialization economies: Similar to managerial
economies but results from division of labour of
the workforce, rather than the management.
 Marketing economies: Larger firms can sell in bulk –
reduced time and transactions costs.
 Monopsony economies: Enjoyed by large firms that
have buying power. They have the ability to
demand low prices from their suppliers.
 Risk-bearing economies: Can be enjoyed by
conglomerates (firms that have a diversified
portfolio in different markets). They can spread
their fixed costs (marketing, R&D, etc) over a wide
range of operations.
The firm is larger, so it can take out larger loans
with decreased interest rates:
a. Specialization economies

b. Financial economies

c. Marketing economies

d. Monopsony economics

The answer is “b”, which is Financial economies! Hooray!

What does the word “monopsony” mean?!
a. A market situation in which there is only one
buyer
b. When a firm is large enough to hire more
specialized managers
c. A company or group having exclusive control
over a commodity or service
The answer is “a”, which is a market situation in which there is only
one buyer.
What are the advantages of selling in bulk?
(Hint: marketing economies)
 Technological progress: Increases the productivity of
trading.
 Improved transportation and communication networks:
Help ensure that deliveries arrive on time. Congestion
wastes time. Widespread adoption of common
language and currency can help save money and time.
 More and better trained labour: through gov’t supported
training programmes or reputable educational facilities
 Regional specialization: An area or country may have a
highly regarded and trustworthy reputation for
producing a particular good or service; good location
can also mean a ready supply of local back-up firms
and suppliers who compete by offering the best service
at competitive prices.
 Lack of control and coordination: How might lack
of control and coordination negatively impact a
business? (In terms of employees, costs,
communication and relationships)
 What are some disadvantages of specialized
labour?
 How might complacency affect a business?
 What is bureaucracy and why is it a negative
concept?
 Give one example of how a business can
counter these potential issues.
 Increased market rents: Too many businesses
locating in a certain area = higher fixed costs.
 Traffic congestion: Results from too many
businesses in a certain area = delayed
deliveries  increased transportation costs.
 Higher wages: Supply of local labour may
increase if they are attracted by many rivals
located in the same area  higher wages (to get
best workers)
 How can businesses deal with slacking
workers?
 How can businesses deal with alienation?
 How can businesses deal with inefficiency?
 How can businesses deal with competition?
  Cost control: Large organizations may experience
diseconomies of scale or a dilution of
ownership/control.
 Government aid: Grants and subsidies may be offered to
businesses to reduce start-up costs.
 Financial risk: Costs of running a large business are
huge = high financial risk. Small business owners can
better control the organization and decision making
power.
 Local monopoly power: Small business may enjoy being
only firm in a particular location. Larger businesses
may be unwilling to invest in that area.
 Personalized services: Smaller firms probably have more
time to devote to customers.
Pick one of the businesses below, identify
whether it is a small or large business, and give
one example of an advantage and disadvantage
of its size:
- Dr. Disc

- Google

- Wal-Mart

- Little Caesar’s

- Box Office Video

- The Mongolian Grill