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Business Management HL > 1.5 growth and evolution > Flashcards

1.5 growth and evolution Flashcards

1
Q

what do economies and diseconomies of scale represent?

A

the advantages and disadvantages of an organization increasing in size.

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2
Q

what are economies of scale?

A

decreasing average costs of production as an organization increases its scale of operation (gets bigger) and improves its efficiency

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3
Q

what are the 7 internal economies of scale

A

financial, marketing, managerial, technical, purchasing, risk-bearing, specialization

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4
Q

Financial

A

Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages because they represent lower risk.

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5
Q

Marketing

A

Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.

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6
Q

Managerial

A

Larger businesses can afford to hire specialist functional managers, thus improving the organization’s efficiency and productivity.

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7
Q

Technical

A

Cost savings by greater use of large-scale mechanical processes and specialist machinery (such as mass production techniques).

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8
Q

purchasing

A

Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).

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9
Q

Risk bearing

A

Large businesses can bear greater risks than smaller firms due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.

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10
Q

Specialization

A

Larger firms can afford to hire and train specialist workers, which help to boost output, productivity, and efficiency (thereby cutting average costs of production)

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11
Q

when do external economies of scale occur

A

when a firm’s average cost of production falls as the industry as a whole (rather than the firm itself) grows. This means that all firms in the industry benefit.

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12
Q

types of external economies

A
  • Specialist research and development facilities in the area
  • relocation of suppliers and other support services to the area
    -New production processes and techniques that improves the efficiency of all firms in the industry.
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13
Q

what are diseconomies of scale

A

occur if the firm grows beyond its ability to operate efficiently. This causes the firm’s average costs of production to rise due to problems such as miscommunication, misunderstandings, and poor (inefficient) management of resources.

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14
Q

what are all the type of internal diseconomies of scale?

A

communication, motivation, administration

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15
Q

what is communication in diseconomies of scale?

A

difficult for managers to communicate with workers as the number of employees and departments increases.

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16
Q

what is motivation in diseconomies of scale?

A

employees can feel more distant from the senior management of the business.

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17
Q

what is administration in diseconomies of scale?

A

increased costs of administration are more likely as business expansion often leads to many departments The number of countries a firm operates in often increases too. This can hinder decision making.

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18
Q

diseconomies of scale

A

when the expansion of output comes with increasing average costs

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19
Q

what are the types of external diseconomies of scale

A

traffic congestion, raw materials increase in price, increasing costs of rent, labor shortages

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20
Q

what are internal diseconomies of scale

A

when issues inside the organization raise the average costs of production

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21
Q

what are traffic congestion and delays in external economies of scale

A

Traffic congestion and delays due to overcrowding in central business districts

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22
Q

what are increasing cost of rent in external economies of scale

A

Increasing costs of rent due to the high demand for land in central business districts

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23
Q

what are labour shortages in external economies of scale

A

Higher costs of labour due to labour shortages in urban areas.

24
Q

what are raw materials in external economies of scale

A

Raw materials are overused and increase in price.

25
Q

what is internal growth

A

Expansion of a business by means of opening new branches, shops or factories, increasing marketing, training staff, or offering new products. This is also known as organic growth. This type of is slow, but it is not very risky.

26
Q

what is external growth

A

Business expansion achieved by means of merging with or taking over another business, from either the same or a different industry. This is also known as inorganic growth. This growth is quick, but can be very risky.

27
Q

how does internal growth occur

A

from increased sales revenues and higher profits, with retained profits being reinvested in the organization.

28
Q

what are the reasons for a business to seek internal growth

A

-To foster brand loyalty
-To maintain ownership and control of the organization
-To avoid the high expenses and risks associated with external growth.

29
Q

organic growth may lead to…

A

diseconomies of scale because the company is too big therefore there’s inefficiency and coordination issues. takes longer

30
Q

when does external growth take place

A

when an organization needs the support of a partner organizations for growth. Mergers and acquisitions are examples of external growth.

31
Q

what are some reasons to why businesses pursue external growth

A

-To grow at a faster pace
-To diversify their product portfolio
-To gain customers in new and existing markets
-To reduce competition in the industry.

32
Q

disadvantages of external growth

A

although its faster than internal growth its more expensive to execute (specially in mergers and acquisitions), requires external sources of finance, difficult to gain the trust of a partner, also diseconomies of scale due to its size

33
Q

what is external growth

A

refers to the expansion and evolution of a business by using third party resources and organizations rather than relying on internal sources and activities.

34
Q

what are the external growth methods

A

Mergers and acquisitions (M&As)
Takeovers
Joint ventures
Strategic alliances
Franchising

35
Q

what is acquisition

A

involves one company buying a controlling interest (majority stake) in another company with the agreement of the directors and shareholders of the target company. This means the buyer purchases enough shares in the target company to own more shares than any other shareholder, leading to a legal change of ownership.

36
Q

what is merger

A

two or more companies agree to form a single, larger company thereby benefiting from operating on a bigger scale. The original business entities in the merger agreement cease to operate in their former legal structure.

37
Q

what is horizontal

A

companies with similar products or services come together

38
Q

what is conglomerate

A

companies in different industries join their forces to broaden their range of services and products. a conglomerate M&A is the riskiest method of external growth

39
Q

what is it called when two or more companies within the same industry conjoin

A

this is a horizontal M&A

40
Q

what is vertical

A

companies at different stages of the supply chain (closer to costumers)

41
Q

what are the three types of mergers and acquisitions

A

vertical, horizontal, and conglomerate

42
Q

what is a takeover

A

involves a company purchasing a controlling interest (majority stake) in another company. takeovers are almost always hostile in nature as they occur against the wishes of the owners of the target company.

43
Q

benefits of M&A and takeovers

A

relatively quick, greater market share, economies of scale, diversify and spread risks

44
Q

drawbacks of M&A and takeovers

A

expensive, loss of control, unsettling to stakeholders, job loss

45
Q

what are joint ventures

A

is an external growth method when two or more businesses decide to work together on a project usually for a specific amount of time.
They share the capital, risks and rewards.
They are never joined as one company

46
Q

what are the reasons for joint ventures

A
  • costs and risks of a new business venture are shared - useful for costs of developing new products
  • different companies might have different strengths and experiences and they, therefor fit well together.
  • they might have their major markets in different countries
47
Q

risks of joint ventures

A
  • styles of management and culture might be so different that the two teams do not blend well together
  • errors and mistakes might lead to one blaming the other
  • the business failure of one of the partners would put the whole project at risk.
48
Q

what is a strategic alliance

A

agreements between firms in which each agrees to commit resources to manage a project together.
It is less formal than a joint venture and it does not involve create a separate legal identity. Strategic alliances are built on trust and a true desire to grow together.

49
Q

advantages of strategic alliance

A
  • sharing of: industry expertise, research and development, financial resources, distribution channels, and the spreading of risks
  • retain their individual corporate identities
  • quicker to set up
50
Q

disadvantages of strategic alliance

A
  • much easier for members to pull out of a strategic alliance, they may be less committed.
  • Many strategic alliances are only short-term agreements.
  • potential of conflict and misunderstandings. Communication problems, divergent corporate cultures and perspectives, and mistrust are key reasons for the failure of many strategic alliances
51
Q

what is needed for strategic alliance to work

A

information sharing and genuine willingness to support other companies is vital. This includes a commitment to a common goal, the exchange of knowledge, and joint company events

52
Q

what is franchising

A

is where a business (a franchisor) sells the rights to produce a good or service under its brand name to another business (a franchisee)

The franchise agreement normally involves an initial purchase cost to the franchisee along with an annual royalty fee.

53
Q

benefits of franchising

A

Less risk - fewer chances of new business failing as an established brand and product are being used.
Advice and training offered by the franchisor.
National advertising paid for by franchisor.
Supplies obtained from established and quality-checked suppliers.
Franchisor agrees not to open another branch in the area

54
Q

drawbacks of franchising

A
  • Share of profits or sales revenue has to be paid to franchisor each year.
  • Initial franchise license fee can be expensive.
  • Local promotions may still have to be paid for by franchisee.
  • No choice of suppliers or supplies to be used.
  • Strict rules over pricing and layout of the outlet reduce owner’s control over own business.
  • Image can be impacted if there are issues with other franchises
55
Q

what methods can be used to measure the size of a business

A

Market share
Gross profit
Profit after interest and tax
Number of customers
Number of employees
Number of retail outlets or stores

56
Q
A

Business Management HL (20 decks)

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