Grade Booster student workshops are back in cinemas for 2022. Learn more

Economics

Study Notes

Key Constraints on Business Growth

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Business growth can be constrained in a number of ways.

Regulation

  • Growing businesses winning big market share may come to attention of the competition (anti-trust) authorities leading to increasing regulatory pressure
  • In the UK, the Competition and Markets Authority (CMA) may decide to block a merger between two firms if they find sufficient evidence that the merger/takeover would lead to a substantial lessening of competitive pressure in a market which might subsequently lead to a deterioration of consumer welfare.

Competition

  • In contestable markets, there is always the threat of entry from rival firms; technological change has in many cases had the effect of reducing barriers to entry into markets generating “creative destruction”.
  • Firms that are dominant in an industry but operating inefficiently and charging monopoly prices may find that challengers firmsare able to enter a market and compete away some market share & supernormal profits.

Finance

  • Many small-medium sized enterprises (SMEs) run up against finance constraints including limited access to loans and risks and costs of raising equity in capital markets.
  • In the aftermath of the Global Financial Crisis, commercial banks are more risk-averse when it comes to lending to businesses. In the UK, many small and medium sized enterprises complain that they cannot access loan finance at affordable interest rates. Commercial banks may charge a “risk premium” when lending to SMEs.

Size of the Market

  • Businesses achieving success in local, or niche markets may find limits to scalability. There is simply not enough regular consumer spending. Other businesses successfully leverage their brand image to enter new markets.
  • Niche markets target smaller groups of consumers, they are often highly profitable because suppliers can charge a premium price but have limited opportunities for economies of scale to be exploited.

Additional barriers to the growth of businesses

  1. Human capital weaknesses / skills shortages– e.g. businesses may struggle to recruit the skilled personnel that they need be it in complex financial services or in the construction industry
  2. Bureaucracy and red tape– as businesses grow so too does the legal requirements e.g. auto-enrolment of staff into a pension scheme, filing regular tax returns (including VAT) and meeting health and safety requirements
  3. Cost of recovering late payments– this is a particular problem for many smaller businesses. There was an estimated £6.7 billion worth of late payments for UK businesses in 2017 and this can have a damaging effect on the cash-flow of a business and perhaps threaten their survival.
  4. Insufficient fundsto train employees and money to put aside into innovation / research
  5. High cost of raising fresh funding– commercial banks often charge much higher interest rates to smaller businesses even if they have a proven and viable business model and are generating solid revenues and profits.

Boston House,
214 High Street,
Boston Spa,
West Yorkshire,
LS23 6AD

Tel: +44 0844 800 0085

© 2022 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.