1. Objectives of Growth
3.2 Business growth

2. What you need to know a) Objectives of growth:
to achieve economies of scale (internal and external)
increased market power over customers and
suppliers
increased market share and brand recognition
increased profitability

3. Concept links Growth Profits Revenues Economies of scale
Shareholder value
Market share

4. Key Reasons for Growth GROWTH OBJECTIVE REASON Increasing profits
A key objective for many firms, particularly those whose shares are quoted on stock markets or who are owned by private equity.
Achieve economies of scale
By growing the scale of output, a business can achieve lower unit costs which can thereby improve a firm’s competitiveness.
Increase market power
Larger firms may be able to exert greater bargaining power over suppliers and/or customers in order to gain a competitive advantage
Increase market share and brand recognition
Much research points to the link between growing market share and brand recognition with higher profits, so this reason is linked with increasing profits.
Grow business and shareholder value
Ultimately the main reason why so many firms adopt a growth strategy. Larger businesses are generally more valuable!

5. Economies of Scale

6. A Reminder of How to Calculate Unit Costs
Average cost per unit is calculated using:

7. Example of How Costs Change with Output
Fixed costs are £10,000 and Variable costs are £100 per unit
Output
Fixed
Costs
Total Variable Costs
Total
Cost per Unit
Units 50
100
150
200
250

8. Economies of Scale Illustrated
AC1
AC2 Q1 Q2 Q3

9. Comparing Operational Efficiency (Unit Costs) With Competitors
Looking at the table below, which of the five businesses is the most efficient over the period?
Business
Output
Units
Total Costs
Unit Costs A
10,000
50,000 B
20,000
80,000 C
5,000
30,000 D
25,000
75,000 E
15,000

10. Internal v External Economies of Scale

11. Internal Economies of Scale
Purchasing economies
Buying in greater quantities usually results in a lower price (bulk-buying).
Technical
Use of specialist equipment or processes to boost productivity.
Managerial
Specialist managers can be employed to help reduce unit costs and boost efficiency
Marketing
Spreading a fixed marketing spend over a larger range of products, markets and customers
Network
Adding extra customers or users to a network that is already established (e.g. mobile phones)
Financial
Larger firms benefit from access to more & cheaper finance

12. Purchasing Economies of Scale

13. Technical Economies of Scale

14. Managerial Economies of Scale

15. External Economies of Scale
Arise from the industry as a whole
Often associated with particular geographic areas
Examples