Growth (Edexcel A Level Business)

Reasons to Grow

• Many firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)

Reasons why Businesses grow

Explaining Economies of Scale

• As a business grows, it can increase its scale of output generating efficiencies that lower its average costs (cost per unit) of production

  • These efficiencies are called economies of scale

  • Economies of scale help large firms to lower their costs of production beyond what small firms can achieve

• As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase

  • The reasons for the increase in the average costs are called diseconomies of scale

• Internal economies of scale occur as a result of the growth in the scale of production within the firm

Economies of scale occur when average costs decrease with increasing output and diseconomies of scale occur when average costs increase with increasing output

Diagram Analysis

• With relatively low levels of output, the businesses average costs are high

• As the business increases its output, it begins to benefit from economies of scale, which lower the average cost per unit

• At some level of output, a business will not be able to reduce costs any further - this point is called productive efficiency

• Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale

Types of Internal & External Economies

• Internal economies of scale occur as a result of the growth in the scale of production within the business

  • The firm can benefit from lower average costs (AC) generated by factors from inside the business

• External economies of scale occur when there is an increase in the size of the industry in which the firm operates

  • The firm can benefit from lower average costs (AC) generated by factors outside of the business 

Types of Internal Economies of Scale

Sources of External Economies of Scale

Problems Arising from Growth

• Rapid business growth may create challenges that can negatively impact a company's operations and financial performance

• Three of these challenges are diseconomies of scale, internal communication issues, and overtrading

Diseconomies of scale

• Occurs when a company grows too large, making it difficult to manage and control its operations

• It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control

• The cost per unit ends up increasing as a result of these inefficiencies

Internal communication

• Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination

• This may result in delays, errors, missed opportunities and impact on employee morale

Overtrading

• Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity)

• This may cause cash flow problems or decreased customer satisfaction

  • E.g . a company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers