Question

Why is expanding not always a good business decision? Give examples of problems on achieved economics of scale? How can they be overcome? Are they always apparent? Reply in 600 words

Answer 1

A drawback of business expansion is that when a company invests money and other resources to expand, it has less capital available for other business transactions. This makes it especially important that you carefully weigh the market potential of expansion before making the investment. Consider the potential return on investment from each product or new market you could expand into before investing your capital into a path of expansion.Other than this,When business expands, it often spread the risks of doing business and reduce the potential of one product or one poor decision damaging the business.Another risk of business expansion is that you could spread your company's resources and expertise too thin. Often, company leaders think they have to expand if things are going well. However, getting involved in too many markets or products can cause the company to spread its abilities out to the point that it does not perform well in any area. Business expansion only makes sense if your company has adequate people and resources to cover the new area with expertise.

An overcrowding effect within an organization is often the leading cause of problem to achieve economics of scale. This happens when a company grows too quickly, thinking that it can achieve economies of scale in perpetuity. If, for example, a company is able to reduce the per unit cost of its product each time it adds a machine to its warehouse, it might think that maxing out the number of machines is a great way to reduce costs. However, if it takes one person to operate a machine, and 50 machines are added to the warehouse, there is a good chance that these 50 additional employees will get in each other's way and make it harder to produce the same level of output per hour. This increases costs and decreases output.
Operating in multiple markets or in many product areas also allows companies to spread the costs of doing business across more markets or customers. This makes the costs of doing business less on a per-customer basis, which improves the potential to profit by adding new customers.