Many businesses consider growth as an important objective, as through growth they aim to achieve; increased sales, turnover and profit. However, different stakeholder groups will have their own opinion of business growth:
- Shareholders want higher dividends (through higher profits)
- Employees hope to maintain the number of jobs and open up promotion opportunities.
- The management team will want increased market power which reduces risks.
- For small business owners, personal satisfaction may be more important, and they may want the business to stay the same size.
- Managers may want to survive in a competitive market as bigger business are more secure
OBJECTIVES OF GROWTH
- To achieve (internal and external) economies of scale
- Increased market power over consumers and producers
- Increased market share and brand recognition
- Increased profitability
Economies of scale
Economy of scale – reduction in the average costs of production brought about by an increase in the size and scale of output. Internal economies of scale benefit the individual business
There are several types of internal economies of scale, they can be remembered using the mnemonic: Really Fun Mums Try Making Delicious Pies
Risk-bearing – large businesses are able to sell a range of products in different markets, if one product/market fails they have others to rely on (they can afford to take risks)
Financial – large businesses are trusted by banks, so are more likely to get loans with lower interest rates as they are deemed lower risk to the bank than smaller businesses
Managerial – large businesses can hire specialist and highly-skilled managers, which improve the sales and productivity of the business, increasing profit margins.
Technological (production) – large businesses can afford machines which produce goods more quickly. Less staff are needed, so unit costs fall, increasing profit.
Marketing – advertising costs are spread across a larger number of products, and an advert for one of their products also promotes the general business e.g. Tesco
Distribution – businesses can afford to use larger vehicles without a major increase in cost e.g. a ten-ton lorry will carry twice as much as a five-ton lorry but will not cost double to buy and run.
Purchasing – they can afford to buy in bulk from supplier so will receive a discount for large orders. Therefore, larger businesses are more trusted by suppliers.
External economies of scale reduce production costs for all businesses in the industry. They do not help businesses compete with each other as internal economies of scale do.
- Roads in a certain area may be improved, so transport costs for local companies will.
- New technologies may be developed which cut costs for the whole industry.
- More training facilities, creating a labour force with appropriate skills
Economies of scale lead to falling costs and prices
Products become more affordable
We all have more purchasing power
A mass market develops as more people can afford the product Standards of living rise
Increasing market power
Market power is the extent to which a single business can affect what happens in the market. Monopoly power is the name given to power over consumers and refers to the influence over either price or output. Monopsony power is the name give to power over suppliers, these firms will be able to dictate prices and terms, to some extent, to small suppliers. These often go hand in hand with each other. When firms have market power they are dominant and secure in the market and are able to manipulate it for their own needs.
Increasing Market Share and Brand Recognition
Market share – percentage of total sales volume in a market captured by a brand, product or company.
Increasing market share leads to higher turnover, in turn causing higher profit and also market power. This often requires a competitive advantage, which comes through product differentiation and branding as these make the product stand out. Brand recognition often leads to higher customer loyalty which creates a reliable customer base. Brands are often also able to charge higher prices (demand becomes more inelastic) due to their higher status e.g. Chanel.
Growing businesses are usually very profitable. Individual businesses may try to increase market share or diversify their product range to increase profit.
Problems arising from Growth
There are many small and medium sized enterprises (SME) which thrive and are growing. Whilst they do not gain the benefits of bigger companies, they also do not suffer as much from the drawbacks of growth. There are three main problems that come from growth:
Diseconomies of Scale:
This occurs because economies of scale do not last indefinitely, the LRAC shown above has a point where increasing levels of production leads to higher costs as more machine repairs are required or workers are tired and therefore less productive. Control and co-ordination are important factors as it becomes harder to organise and monitor the workers as an organisation grows. It is easier for smaller businesses to adapt quickly to dynamic changes in the market, leaving larger companies struggling to catch up.
Effective communication between manager and employee becomes more difficult, causing mistakes to be made. Employees can feel demotivated and alienated as the firms grows as they have less input than in a smaller business, leading to a fall in productivity as they have no passion/connection with the company.
Potential Skills Shortages:
As the firms grows, they will find it harder to recruit skilled employees and may have to offer higher wages to compete with other firms to get scarce employees, as the demand for labour exceeds supply. Firms may also have to train employees themselves which is costly and brings down their profit margins.
These problems often stem from the following:
- Higher regulatory costs for bigger businesses
- Office politics/ industrial relations
- Risk averse in salaried staff (secure with current operating process)
- Waste/ inefficiency in large organisations
Corporate culture – the set of important assumptions that are shared by people working in a particular business and influence the ways in which decisions are made there.
A strong corporate culture and effective leadership in a firm can prevent diseconomies of scale from developing. It can help make the company stronger and more productive.