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Overcoming the Problems of Rapid Growth | AQA Q6, Paper 3 2018

Level:
A-Level
Board:
AQA

Last updated 27 Oct 2020

Here is a suggested response to the 24-mark "open" question on businesses overcoming the problems of rapid growth in the AQA A-Level Business Paper 3 in 2018.

Rapid business growth is both exciting and challenging. The buzz from seeing sales and profits soar comes with lots of potential problems depending on the type of business and industry involved and the ability of management to identify and overcome those problems.

In Jack’s case, one of the growth-related problems he will need to overcome next year is a potential crisis of leadership (Greiner). In this stage of Greiner’s model, informal communication starts to fail, and a business can quickly become too big for a leader to get involved in everything. Jack is moving from running his hobby business via a website to recruiting and managing quite a large and diverse number of people such as salespeople and marketing specialists. These employees will look to Jack for leadership in terms of things like objectives and how they are monitored and appraised. Jack also wants to spend more time on a variety of tasks such as designs, working with suppliers and managing finances. This suggests that a way for him to overcome the crisis of leadership would be to employ a finance manager who could also help manage the office whilst Jack is away. He might also want to reduce the number of salespeople and instead employ a sales manager with experience or leading a sales team. Lots of other businesses overcome the crisis of leadership in a similar way. For example, a small business that suddenly achieves a rapid rise in sales will usually start to put a more formal organisational structure in place and a simple chain of command. In the case of businesses with a direct salesforce, the common way to overcome the problem of managing a sales team is to add a layer of management between the CEO and salespeople, even though this may increase fixed costs in the short-term.

Another classic problem of rapid growth that businesses need to overcome is “overtrading”. Overtrading happens when a business expands too quickly without having the financial resources to support such a rapid expansion. For example, a manufacturer might invest in too much new capacity resulting in low capacity utilisation and higher unit costs. Similarly, a retailer might open too many new stores leading to poor location choices and loss-making stores. If suitable sources of finance are not obtained, overtrading can lead to business failure. Jack’s business is typical of lots of small businesses that grow quickly by starting to sell through new distribution channels, for example by partnering with large retailers or wholesalers, or by agreeing deals with agents or distributors in different geographical markets. This growth can mean a rapid growth in inventory levels and a higher risk of bad debts if customers go bust. Can businesses overcome the problem of overtrading? The answer has to be yes – if they are well managed! For example, management could use financial ratios to look out for the common symptoms of overtrading – very low and falling inventory turnover and worsening liquidity. Possible actions to overcome these problems and improve the key ratios might include using formal systems of inventory control, negotiating with suppliers to get longer time to pay invoices and scaling back the growth of the business until it has the financial resources to handle any setbacks.

For most businesses, rapid growth is a good problem to have, and in most situations good management is the key to overcoming the problems posed by rapid growth such as leadership and overtrading. Not every fast-growing business will experience such problems, although it would be unusual for rapid growth not to pose challenges for businesses like Jack’s. Small businesses in particular often find it difficult to resist the temptation to take advantage of attractive growth opportunities like the ones Jack has. The lack of finance, a suitable organisational structure and inadequate management information might be reasons why rapid growth creates problems that many businesses struggle to handle initially. However, rapid growth generally creates more opportunities than threats to a business, particularly if it is managed well.

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