1.5 Flashcards
Economies of scale
lower average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency
- help businesses gain a competitive cost advantage because lower average costs can mean a combination of lower prices being charged to customers and higher profit margin earned on each item sold.
Average Cost (AC)
cost per unit of output. dividing total costs (TC) by the quantity of output)
AFC (average fixed costs)
AC = TC / Q
AVC (average variable costs)
AVC = TVC / Q
Internal Economies of Scale
EOS that occur within a firm
- Technical economies; using machinery and capital to mass produce products, reducing average cost of production.
- Financial economies; large firms can borrow large sums of money to lower rates of interests.
External economies of scale
cost saving benefits of large-scale operations arising from outside the business due to the favourable location or general growth in the industry .
- Technological progress
- improved transportation networks
- abundance of skilled labour
- regional specialisation
diseconomies of scale
result of a higher unit costs as a firm continues to increase in size, AVG cost of production increases
Internal diseconomies of scale
- lack of coordination as the span of control increases slowing decision making
- Poorer working relationships
- lower productive efficiency
- bureaucracy
External diseconomies of scale
occur once there is an increase in the average cost of production when a firm
- higher rents
- pay higher pay and financial rewards to employees
- traffic congestion
Internal growth
occurs when a business grows organically using its own capabilities and resources to increase the scale of its operations and sales revenue.
can happen through;
- Changing price
- improved promotion
- improving products
- improving availability of products
- Credit
- increased capital expenditure (investment spending)
- improved training and developemtn
Pros and Cons or internal growth
PROS
- better control and coordination
- relatively inexpensive
maintains corporate culture
- less risky
CONS
- Diseconomies of scale
- need to restructure
- dilution of control and ownership due to growth
- Slower growth than external
External growth
occurs through dealings with outside organizations rather than from an increase in the organisation’s own business operations.
- mergers and aquisitions, takeovers, joint ventures, strategic alliances, or franchinesing
Pros and Cons of Extenral growth
PROS
- Quicker than Internal Growth
- Synergies, can benefit from a greater pool of skills, knowledge and the expertise of external parties
- reduced competition -
- economies of scale
- spreading of risks
CONS
- more expensive than internal growth
- Greater risks (inadequate knowledge of new markets and greater uncertainties of eg)
- Regulatiory barriers - aquisitions and mergers can be blocked by governments if the move is deemed to be anti competitive.
- potential diseconomies of scale
- culture clash
generic benefits of external growth
- EcOfSc due to operating on a larger scale
- Lower prices offered to customers
- Brand recognition –> sell to wider market
- brand reputation (more trust)
- Value added services
- Greater choice
- customer loyalty
Mergers and Aquisitions (External Growth Methods)
consolidation or integration of two or more businesses to form a single company. Create synergy creating greater output and improved efficiencies.
Merger takes place when two or more firms agree to create a new company with its own legal identity
Aquisition occurs when a company buys a controlling interest in another firm with the permission and agreement of its board of directors to do so.
Horizontal integration
occurs when there is an amalgamation of the firms operating in the same industry. aquires larger market share rather than growth in industry
Vertical Intergration
businesses that are at different stages of production merge.
forward VI –> considlation of businesses that head towards the final stage of production
Bakcward VI –> MorA of a business towards an earlier stage of production
