Small businesses that are efficient, creative and are cognizant of changing market trends are poised for growth. Growth impacts on the business organizational structure and the business operations.
The creation of new posts and departments as a result of specialization and expansion will change the organization’s structure. More workers will also be employed resulting in greater specialization or division of labour (more workers will mean that tasks can be subdivided into smaller tasks).
There will also be an increase in the internal communication systems (telephone, mail etc.) to accommodate this expansion. More factory and office space, equipment and furniture will be required to facilitate expansion.
As the business expands it can take advantage of economies of scale. Economies of scale refers to the benefits that firms are able to enjoy because of expansion.
Internal Economies of Scale
This refers to the benefits enjoyed by a firm because of it’s own expansion. These include:
-Technical Economies of Scale – Expanding businesses will need to purchase machinery and equipment to supply the level of output required. With the use of machines productivity will rise and the firm will experience technical savings as unit cost of production will decline.
-Marketing Economies – Expanding businesses can take advantage of bulk buying and receive discounts on raw materials.
-Financial Economies –Larger firms will access loans more easily and at a cheaper interest rate than small firms since they already have established reputations and adequate collateral.
-Managerial Economies –The employment of experts who will specialize in various management functions such as marketing, personnel, accounting and production will increase efficiency and thus output.
External Economies of Scale
External economies refers to the benefits enjoyed by a business because it is part of a well-organized industry and not because of its own expansion. Thus any businesses whether large or small can reap these benefits as long as it is part of an industry enjoying these benefits. Benefits include; government subsidies offered to particular industries, tax holidays and reduced duties on items imported.
Diseconomies of Scale
A diseconomy of scale refers to the disadvantages arising from the expansion, such as:
1. High Advertising Cost: This becomes a diseconomy when the percentage increase in a firm’s advertising cost is much greater than the percentage increase in its revenue.
2.High maintenance cost for machinery and equipment.
3.Increased difficulty in controlling the organization.