Summary Chapter 2 - Business Growth: A level edexcel business studies revision summaries
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Course
Business economics
Institution
Bachillerato
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Contents
BUSINESS GROWTH (2)................................................................................................................................1
GROWTH (5)............................................................................................................................................1
ECONOMIES OF SCALE.........................................................................................................................1
ORGANIC GROWTH (6)............................................................................................................................2
INORGANIC GROWTH (7).........................................................................................................................3
HORIZONTAL AND VERTICAL INTEGRATION........................................................................................4
CONGLOMERATES................................................................................................................................4
PROBLEMS ARISING FROM GROWTH (8).................................................................................................4
DISECONOMIES OF SCALE....................................................................................................................4
GROWTH (5)
ECONOMIES OF SCALE *
Economies of scale refers to the phenomenon where
the average costs per unit of output decrease with the
increase in the scale of the output being produced by a
firm.
INTERNAL ECONOMIES OF SCALE
These are the benefits of growth that arise within the
firm.
Purchasing and marketing economies: large
firms are likely to get better rates when buying
raw materials in bulk. Also, as a firm increases
its product range, it’s able to market all its products under its brand/logo; the administration
cost of selling and promoting does not rise in proportion to the size of the sale.
Technical economies: As a firm expands, it’s able to afford better technology and capital
equipment; the more efficient the technology the lower the cost of production will be.
o Another technical economy is that of indivisibility. Many firms need a particular item of
equipment or machinery but fail to make full use of it. As the business expands, it will be
used more and so the average cost of the machine will fall.
o The law of multiples involves finding a balanced team of machines so that when they
operate capacity is balanced.
1
*Minimum efficient scale: the output that minimizes long-run average costs
, Borja Jimenez A-level business
Specialization and managerial economies: As a firm expands, it’s able to afford more specialist
managers in different areas of the business. This helps the firm become more efficient and helps
to decrease their costs of production further with the use of specialist managerial skills.
Financial economies: As a firm gets larger it’s able to access business loans more easily at lower
rates of interest. This is because there is less risk associated with lending the firm money.
Risk-bearing economies: As a firm becomes larger, it’s able to grow their product range. This
allows them to diversify their risk as they are not relying on only one product or service to
generate profits.
EXTERNAL ECONOMIES OF SCALE
These are the reductions in costs that any business within an industry might benefit from as any industry
grows; business-enhancing factors that occur outside a company but within the same industry. These
are more likely to arise if the industry is concentrated.
Labor: the concentration of firms may lead to the build-up of a labor force with the skills
required by the industry. Training costs may be reduced if workers have gained skills elsewhere.
Ancillary and commercial services: An established industry tends to attract smaller firms that are
trying to serve the particular industry’s needs. A wide range of commercial and support services
can be offered.
Co-operation: Firms in the same industry are more likely to co-operate if they are concentrated
in the same region.
Disintegration: This occurs when production is broken up so that more specialization can take
place. When an industry is concentrated in an area, firms might specialize in the production of
one component.
INCREASED BENEFITS OF GROWTH
As businesses get bigger, they become more dominant and powerful
Increased market power
Increased market share and brand recognition
Increased profitability
ORGANIC GROWTH (6)
Organic growth is the growth a company achieves by increasing output and enhancing sales internally.
Methods of growing organically:
New customers: relying on driving sales from existing activities.
New products: growing by developing new products and being innovative.
New markets: finding new markets and distribution channels.
New business model
2
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