1.5 Growth and Evolution Flashcards
What are Economies of Scale?
it is the cost saving advantages a business faces when it increases production and lowers average cost.
eg: buying in bulk
What are Diseconomies of Scale?
when a business becomes too large or insufficient, average costs begin to rise due to miscommunication or mismanagement
What are internal economies of scale
costs savings that happen within the business as it grows, leading to lower average costs because it can operate more efficiently
what is an advantage of internal economies of scale?
with lower average costs, the business can decrease its prices to gain a competitive advantage and attract customers
What are External Economies of Scale?
cost savings that happen outside the business but within its industry or location, these benefits reduce average costs of all firms within the area, often due to factors such as infrastructure, skilled workers or nearby suppliers
What are Internal diseconomies of Scale
they are problems that happen within the business which cause a decrease in productivity and inefficiencies, this is because of miscommunication and coordination problems in the business.
Bureaucracy also plays a role.
What are External Diseconomies of Scale?
they are problems that occur outside the organization which raises lower average costs for all businesses in the area.
eg: traffic
What does optimal level output mean ?
the level of output where average cost of production is at its lowest value
What is internal growth?
when a business expands using its own resources instead of external methods such as mergers or acquisitions,
this can be done by using retained profit to reinvest into the business or by large business’s selling shares on the public stock market.
Why do businesses use internal growth
- to increase market share
- to maintain full ownership and control
- to maintain brand loyalty and awareness
- to avoid high expenses and risks associated with external growth
What is external growth?
when a business expands by working with other organizations such as mergers, acquisitions and franchising.
this increases growth but usually includes high costs, risks and complexities.
Why do businesses use external growth?
- to grow at a fast pace
- to gain market share
- to gain new customers in new and existing markets
- to reduce competition in the industry
What is a conglomerate mean
it is a diverse company with operations in various markets and industries
What are mergers, acquisitions and takeovers?
- Merger: when 2 businesses join together to make 1 company. (A+ B) = AB
- Acquisition: when a business buys another business. (A buys B) A is now the owner of both.
- Takeover: When a business buys controlling interests/shares of another business, it is usually hostile and done against the owners wishes
What are adv and disadv of M&A
ADV: fast growth:
- exploiting economies of scale = reducing cost through shareholder contributions
- access to new markets
DISADV: high costs
- employee uncertainty: job insecurity
- cultural clashes: différences between businesses
What are adv and disadv of takeovers?
ADV: rapid growth
- control of valuable assets: eg technology and patents
- reduced competition
DISADV: Loss of control: acquired business loses decision making rights
- financial risk: potential debt for buyer
- damaged reputation: a hostile approach can harm the public’s perception on how the business was acquired
What is a Joint Venture?
2 or more organizations agreeing to create a new entity for a limited time, they agree to share resources, risks and profits.
eg: emirates and quanta
What are adv and disadv of Joint venture
ADV: temporary set up: easy to end after project finishes
- Shared resources: combines resources, profits and risks
- lower cost: easer and faster to set up than mergers and acquisitions
DISADV: short life span: most JV fail or are bought by 1 patent
- shared profits: all profits are split between companies
- conflict risk: management disagreements decreases productivity.
What is a strategic alliance?
an alliance between 2 or more organizations working together to benefit from external resources without having to to set up a new entity, they are built on trust and a true desire to grow together.
eg: apple and master card = Apple Pay
What are adv and disadv of strategic alliances?
ADV: shared resources: such as finance and knowledge
- independence: each entity stays separate
- encourages cooperation: reduces competition between partners. increasing profits.
DISADV: lack of commitment: partners may not fully invest
- reputation risk: 1 mistake from a partner can affect the whole alliance
- unequal benefits: one member can gain more than the other, causing dissatisfaction and disagreements.
What is franchising?
it is a type of external growth where one business (franchisor) grants another business(franchisee) licensing rights to use its name, brand, logo and business model in return for a percentage and ongoing royalties.
What are adv and disadv of franchisors?
ADV: faster and easier growth: franchisee funds the growth
- royalties: franchisor ears a % of franchisee’s sales
- motivated partners: franchisees are more driven than hired managers
DISADV: brand risk: 1 bad franchisee could harm franchisors reputation
- monitoring: franchisor must ensure quality checks
- Less profit per unit: franchisee earns all/majority profits
What are adv and disadv of franchisee’s
ADV: proven business model: less risk of failure
- support and training: advice from franchisor
- exploiting economies of scale: less costs due to franchisor bulk buying
DISADV: high costs: fee’s. royalties and setup costs reduce profits
- limited freedom: must follow franchisor rules
- reputation risk: other franchisee’s mistakes may affect you.
How do you measure how big a business is
- No. employees
- No. customers
- sale turnover
- market share
- gross profit
- profit before interest and tax
