3.2.1 - Growth (2)
- Created by: keithpettifer325
- Created on: 09-11-18 12:53
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- Growth Objectives
- 3.2.1 - Growth
- Economies of Scale
- As output rises, average unit costs decrease,
- If output rises, and unit costs decrease, this can allow a rise in profit and therefore increased profit margin, which can allow a business to bring their prices down to competitive and unbeatable figures.
- External Economies of scale
- These are the reductions in costs that a business may enjoy as an industry grows.
- 4 Areas
- Labour - Concentration of firms may lead to an increase of a skilful labour workforce. Then productivity and efficiency can increase, meaning there are less wastage costs.
- Commercial services - An established industry attracts smaller firms that are trying to serve it's needs, and a wide range of services can be provided.
- Co-operation - Firms in the same industry will co-operate together and may fund research and development projects together to grow.
- Disintegration - Occurs when production is broken-up between different factories in the same industry to get a specialised final product.
- Diseconomies of scale
- This happens when a business expands the scale of its operations to far beyond the minimum efficient scale. Average costs start to rise as output rises.
- Internal dis-economies of scale are caused by the problems of managing larger businesses. such as comunication issues and too many layers in employee hierarchy & the chain of command.
- External diesconomies of scale result from overcrowded industries, so things like prioce of land and labour may rise as firms compete for a limited ammount.
- Overtrading
- Overtrading happens when a business expands too quickly without having thefinancial resources to support such a quick expansion.
- Causes
- Sales are made on credit and customers take too long to settle amounts owed.
- Symptoms
- High revenue growth, low profit margins
- Persistent use of overdrafts and low inventory turnover ratio
- Significant increases in the payable s days and receivables days ratiosas well as the current ratio
- Low capacity utilisation
- Ways to manage overtrading include leasing, scaling back the pace of growth, and reducing inventory levels
- Economies of Scale
- To Increase Profits
- Achieve economies of scale, and to lower unit-costs
- Increase market power over customers and suppliers
- Increase market share and brand recognition
- Grow business and shareholder value
- 3.2.1 - Growth
- A long-term contract requires a business to incur substantial costs beforepayments are made by customers under the contract
- Causes
- Sales are made on credit and customers take too long to settle amounts owed.
- Causes
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