1.5 growth and evalution Flashcards
Economies of scale
An increase in output leads toa. decrease in average total cost
- occurs because the more the company produces, it is dividing by a larger number by a fixed cost.
Diseconomies of scale
Increae scale of production of output leads to a increase in avaerge total cost.
- occurs when a firm keeps increasing its scale of output, it will reach a point where its average costs will stat to icrease
External economies of scale
This occurs when organisation
average costs falls as industry grows, hence all frims in industry benefit.
- the firm can benefit from lower average costs by factors outside the business
Source:
- geographical cluster: As industry grows, ancillary frims move closer to major manefactrers to cut cost and generate more business.
- Transport links: Improved transport links developed business growing industries to help people work and improve transport logistics.
- Skillled labour: An increase in skilled labour can lower cost of skilled labour.
-Favoruable legislation: Lowers Average costs BCS gov support certainindustries to achieve wider objectives
Internal economies of scale
Occurs as a result of the growth in the scale of production within the business
- firms benefits from lower AC generated by factors within the business
Types:
- Finianacial economies: Large frims often receive lower interest rates on loans then smaller firms as they are perceived to be less risky.
- Managerial economies: when large firms emplye specialist managers who are more effeicneitn so they lower AC
Marketing economies: Large frims spread the cost of advertising over a large number of sales and this reduces AC
Purchasing economies: When large firms buy raw material in greater quantities and receive bulk purchase discounts.
Technocal economies: Occurs when firm can use machines at higher level of capacity due to increase output thereby spreading costs of the machinery over more units and lowering AC
Risk bearing economies; Spreading risk of failure by increasing number of products.
Internal dieseconomies of scale
occurs due to internal problems of mismaangmetn, causing AC os production to increase as firm grows.
- usually occurs due to problems of mismanagment.
Lack of control and coordination: As frims increases in size manager may lack control and coordination, increasing communication problems, slowing down decisionmaking
Poorer working relationships: In oversized business, there can be detachment from managers and employees working lower down in hierchy, can damage communication and motivation of staff, leading to higher costs.
Lower productive efficiency: Cons of specialization and division of labour can be caused by outstsized firms. Workers can bebored of doing same thing, lowering productivity.
Amount of beurocracy: (excessive administration and paperwork) cam increase as business grows
Complacency: (lack of awareness of genunin risk or deficiencies) with being larger/domiatong market cause many problems.
External diseconomies of scale
Increase in avaerg costs of rpodcution due to factors beyond firms control as frim grows
Higher rent: due to many business located in certain area making that land more scarece.
- adds to the fixed costs to all business in area without crrepsondin increase in output.
Higher pay and financial rewards: Firm has to give higher pay and financial reward due to workers having greater choice from a large number of employees in local area to keep workers or attract new staff.
Traffic congestation: due tot many firms being located in one area, deliveries to be late BCS of overcrowding.
Internal/organic growth
Happens when a bsienss grows organicallt using it capabilities and resources to increase scale ofoperations and sales revenue.
How business grow internally
CHANGING PRICE
- When price is lower there is more dmenad but if good is price inelastic there aren’t a lot of substitutes so frims can raise price and gain more revenue. If it is price elastic then they should raise price.
IMPROVE PROMOTION
- more people will purchase good if they are informed , remainder,or persuade about its benefits.
PRODUCING IMPRVED/BETTER GOODS
- leads to an increase in sakes
SELLING THROUGH GREATER DISTRIBUTION NETWORKERS
- the more available product is more customer ut attracts
INCREASE CAPITAL EXPENDITURE
- In the form of expanding to new locations, or indtridcuing production process and technologies to improve productivity.
IMPORVED TRAINING AND DEVELOPMENT
- employees are said to be frims most important asset. Custimers more likely to buy goods with employees that have knowledge on product.
PRODUCING OVERALL VLAUE FO MONEY
-cusimter odn’t only look at price but quality brand image, costs, and environment consideration.
Evaluation of internal growth
ADVANTAGES
Better control and coordiantion: business is in control where in external can lead to loss of control
Reletivilty inexpensive: Source of internal growth is reatinaied profits, less risk involved as amount of capital tends to be lower.
Maintains corporate culture: There is no problem related to cultural clashes or management styles problems which can occur ith M&A’s
Less risky: Easiest and less risky method, builds on the strength of the firm such as brand value and cosutmer loyalty.
DISADVANTAGES
Diesconomies of scale: Higher AC of production can arise, heirchal structures tend to happen causing communication problems and slower decision making.
NEED TO RESTRUCTURE: If business grows from sole trader to multinatinol company it needs to restructure. THis takes time, effort, and money, such as rtainigni needs. Specilist managers also need to be hired.
DILUTION OF CONTROL AND OWNERSHIP: If the firm changes from partnership to incorporated business, the shareholders will have to share decision making power, which takes longer and conflict may arise.
SLOWER GROWTH
External growth(inorganic)
occurs when busines grows/ evolves by colaborating with, buying, or merging with another organisation.
Growth methods are known as amalgamation or integration
Evaluation Of external growth
ADVANTAGES
QUICKER THEN ORGANIC GROWTH: external resoruces and infiances are sued
SYNERGIES: business benefit from greater pool of skills, knowledge and exepetise of external parties.
REDUCED COMPETITION: it reduces completion and raises frism market share.
ECONOMIES OF SCLAE:helps them gain access to larger markets from operating on larger scale
SPREADING OF RISK: business benefits from diversification, face fewer risks overall from failures in any particular aspect of business operations.
DISADVANTAGES
MORE EXPENSIVE:
GREATER RISK: inadequate knowledge of new markets and greater uncertinties causing greater risk.
REULGATORY BARRIERS: can be blocker by gov if the move is deemed as anti-competiative
POTENTIAL DIESCONOMIES OF SCALE: increased complexities of internal growth can cause ineffiecientcies and hence rise AC
ORGANIZATINOL CULTURE CLASH
Wyas to measure size of busineess(compared to others)
MARKET SHARE: frims sales as a % of industries total revenue share
TOTAL SALES REVENUE: value fo firms annual sales revenue for a given time period (gives idea of size of cutimer base)
SIZE OF WORKFORCE: number of employees hired in given time
PROFIT-VALUE : Profit oer timer period
CAPITOL EMPLOYED: value of firms capital investment as record on its balancesheet grows
an increase in any of this means firm is growing
REASONS TO GROW
ECONOMIES OF SCALE: operaitng in larger scale
LOWER PRICES: larger frims offer lower prices to customer due to eocnomie sof scale.
BRAND RECONGISITON: larger firms benefit from as they can sell worldwide
BRAND REPITUATION: bigger grim more trusted bcs of brand image
Value-added services : Bigger from can offer more services for xutimer.(longer opperting hours etc)
GREATER CHOICE: can provide more choice for custier
CUSTIMER LOYALTY: the above benefits cause for their to be better customer loyalty.
Reasons to stay small
Optimal size of busness depends on its internal structure, finance, and aims and objectives. If firm operates beyond optimal size then diesocnomie of scale will set in.
COST CONTROL: big business can cause diesconomies of scale which can cause higher unit costs.
LOSS OF CONTROL: M&A, takeovers, etc can cause dilutionof ownership and loss of control
FINAINCIAL RISKS: Cost of running globally is higher being small you can manage and control financier better.
GOVORMENT AID: Gov can offer aid and subsidies to smaller businesses to help them start.
LOCAL MONOPLOY POWER: Small business can enjoy being only firm in certain location.
PERSONALISED SERVICE
FLEXIBILITY: larger business have more commitments and can’t change buinsess and be flexible if smth happens
SMALL MARKET SIZE: Big firms might not see necessary to compete with smaller firms allowing them to thrive.
EXTERNAL GROWTH METHODS
MERGERS AND AQUASTIONS
TAKOVERS
STATEGIC ALLIANCES
FRNACHISING
