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Growth and Objectives

The document outlines the reasons for business growth, including increasing market share, revenue, and attracting shareholders, while also detailing objectives such as profit maximization and sales volume maximization. It discusses methods of growth, distinguishing between organic growth through innovation and market expansion, and external growth via mergers and acquisitions. Additionally, it highlights the advantages and disadvantages of both growth strategies, along with the concept of satisficing in profit generation.

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wwil8973
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14 views1 page

Growth and Objectives

The document outlines the reasons for business growth, including increasing market share, revenue, and attracting shareholders, while also detailing objectives such as profit maximization and sales volume maximization. It discusses methods of growth, distinguishing between organic growth through innovation and market expansion, and external growth via mergers and acquisitions. Additionally, it highlights the advantages and disadvantages of both growth strategies, along with the concept of satisficing in profit generation.

Uploaded by

wwil8973
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Business Growth and Business Objectives

Why do businesses grow? Objective Formula Details


Profit Output where MR = MC. Below this level of output, MR > MC and so more “marginal profit” could be
• Increase market share / entry barriers. maximisation Output Q1 below earned by increasing output.
• Increase revenue / profit. Above this level of output, MR < MC and so more “marginal profit” could be
earned by decreasing output.
• Attract shareholders (therefore providing more finance for the
firm). Revenue Output where MR = 0. Marginal revenue is the addition to total revenue when an extra unit is sold.
maximisation Output Q2 below When marginal revenue is zero, this means that total revenue does not change
• Achieve economies of scale and falling AC. following the sale of an additional unit – total revenue is maximised.
• Reduce risk by diversifying into different / new sectors.
Sales (volume) Output where AR = AC. A firm maximises its market share when it would start to make an economic
maximisation Output Q3 below loss if it sold any more units. This occurs at the normal profit point, where
average revenue equals average cost. This is the same level of output where Total
How do businesses grow? Revenue = Total Cost
Productive Output where AC is lowest. Productive efficiency is said to be achieved when average product is at its highest;
Organic Growth Efficiency Output Q4 below this correlates with the lowest point on the average cost curve.

Allocative Output where AR = MC. Allocative efficiency occurs when demand equals supply, or when Marginal
• Introducing new product lines, perhaps by innovating.
Efficiency Output Q5 below Utility equals Marginal Cost of production. This ensures that consumer welfare is
• Entering overseas markets. maximised. Marginal Utility is represented by price, which is the same as average
• Selling more of existing product ranges. revenue.

Advantages:
Why do firms want profit?
• Lower risk than external growth e.g. less risk of “culture clash”.
• Easier to finance e.g. use retained profit.
Good source of funds for organic growth;
reward managers and shareholders; indicates
Disadvantages:
market share; source of finance for further
• Can be slow, especially if the firm already has large market investment.
share.
• Depends on the growth of overall market.
What’s wrong with profit maximising?
External Growth
Potential for higher prices therefore reducing
• Mergers / takeovers / acquisitions (vertical, horizontal and consumer surplus; might incentivise more
conglomerate). competition therefore reducing a business’s
Advantages: long-term prospects; could lead to unethical
behaviour.
• Faster than organic growth, allows new products / new markets.
• Can improve supply chains – economies of scale.

Disadvantages:
Satisficing: Earning “enough” profit to keep all business Note: Make sure you can indicate price, profit and total costs
• Many mergers ultimately fail – demergers. stakeholders satisfied. for each of the business objectives!
• Diseconomies of scale.

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