Growing A Business
Large businesses can benefit from economies of scale. This means that a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales. For example, if a large firm can produce a given type of sunglasses for £20 while it costs its smaller rival an average of £30, then the larger firm has a £10 per unit cost advantage. Larger firms can charge lower prices or enjoy a higher profit margin.
Economies of scale are a major source of competitive advantage for large firms.
Three methods of expansion are:
Economies of scale are a major source of competitive advantage for large firms.
Three methods of expansion are:
- Internal (organic) growth - the business grows by hiring more staff and equipment to increase its output.
- External growth - where a business merges with or takes over another organisation. Combining two firms increases the scale of operation.
- Franchising - where a business leases its idea to franchisees. This allows new branches to open across the country and internationally.
Owners can face a dilemma in deciding whether to expand. Expansion is risky. There's always the chance that any expansion plans can fail and result in losses rather than profit. Owners are then worse off than before the growth of the business.
The risk of expansion means that some owners are reluctant to chance funds. They opt instead to stay small and earn a relatively risk-free profit.
There is potentially a major drawback to avoiding growth. Small businesses can be at a cost disadvantage compared to their larger rivals enjoying economies of scale. As small firms cannot compete with the low prices set by their larger rivals, they have to compete on service or quality.
The risk of expansion means that some owners are reluctant to chance funds. They opt instead to stay small and earn a relatively risk-free profit.
There is potentially a major drawback to avoiding growth. Small businesses can be at a cost disadvantage compared to their larger rivals enjoying economies of scale. As small firms cannot compete with the low prices set by their larger rivals, they have to compete on service or quality.