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3.2.1 Growth

A) Objectives of growth:

  • Economies of scale – As a business grows, their output will increase. As a result of this, there costs will be spread over more items. This is likely to result in a decrease in the average costs of the business. As a result, the businesses profit margins will increase causing an increase in the overall profit the business makes.
  • Increased market power over customers and suppliers – As a business grows it gives them greater market power over customers. This is due to the fact that they have greater market share and therefore it reduces the customer’s choice allowing the firm to charge higher prices. Furthermore, it also helps the business to gain market power over suppliers as most of their sales will now come from one business. This allows the business to get a lower price for their supply’s or the same price but at a higher quality.
  • Increased market share and brand recognition – As market share increases so will sales. As a result of this, more people are likely to recognise the brand of the business. Building up a good brand image will help to reduce the businesses customers PED as well as attract more sales.
  • Increased profitability – Through growth a business will be able to reduce their costs and increase their prices. This increases their profit margins and therefore their overall profitability.

 

B) Problems arising from growth:

  • Diseconomies of scale – As a business grows, their average costs may raise. This is due to the problems of growing such as worse communication and co-ordination.
  • Internal communication – As a business grows they will find it harder to communicate with each other as the hierarchy increases. This will result in businesses being unable to react quickly to changes in the market.
  • Overtrading – When a business tries to grow too quickly they can often end up with liquidity problems. This is due to the fact that most of the business growth will often be done through loans. As a result of this, both their current and non-current liabilities are likely to increase. This will result in a lack of working capital to pay off current liabilities.
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