1.5 internal and external economies and diseconomies of scale

Question 1

economies of scale

Answer 1

situation where the unit (average) cost of production decreases as the level of output increases

Question 2

unit cost formula

Answer 2

unit cost= total production cost in a period/ units made

Question 3

total cost formula

Answer 3

total cost= fixed cost + (unit period x variable cost per unit)

Question 4

average cost formula

Answer 4

average cost= total cost/ unit made

Question 5

total revenue formula

Answer 5

Total revenue=units sold x price per unit

Question 6

profit formula

Answer 6

total revenue- total cost

Question 7

external economies of scale

Answer 7

Cost saving benefits of large businesses in a region or industry that are not under the control of the business

Question 8

examples of external economies of scale

Answer 8

• inovation: more significant for society
• infastructure- good transportation= increase productivity
• specialisation: companies focus on a particular industry

Question 9

fixed cost

Answer 9

expenses

Question 10

variable cost

Answer 10

specific costs

Question 11

internal economies of scale

Answer 11

are cost reductions that can be achieved inside the company when it expands its output.

Question 12

internal economies of scale examples

Answer 12

They may occur in different ways:
- Purchasing- when a business buys inputs at a lower cost by purchsing larger amounts
- Managerial- when cost of hiring a manager is spread over a larger output or when buinesses are able to hire specialists who are more efficient at completing their work
- Techical- when a large company is able to invest in equipment that makes the business more efficient
- Marketing- cost of markering capampaight in lower
- financial- taking loan

Question 13

diseconomies of scale

Answer 13

The increase in the per-unit production cost as a business grows.

Question 13

internal diseconomies of scale

Answer 13

an increase in average unit cost, usually explained by the difficulty of managing internally large operations.

Question 14

examples of internal diseconomies of scale

Answer 14

managerial issues- difficult to efficiently run a enterprise if it gets too big. lack of coordination, cooperation and efficiency
increase size in workforce- hard to control many people- more managers= more wages
commnication= grow= more complex communication difficult

Question 15

external diseconomies of scale

Answer 15

the increased unit cost of production for a business due to the expansion of the industry in which the business operates

Question 16

advantages of growing a business

Answer 16

• Economies of sale to reduce costs
  
  • New customers and markets reached
  • Influence prices products and services
  • Take more risk and have more stability
    Attract talented employees

Question 17

examples of external diseconomies of scale

Answer 17

limited natural resources: increase deman for resources means they become more expensive
limited infastructure: for use of area menas traffic and slow deliveries
increased regulation: when indjustry expands government imposesmore laws and regulations
pollution- climate change droughts

Question 18

disavantages of growing a business

Answer 18

Disadvantages of growing a business
* Cash flow- might need to tak emany loans
* Unplanned growth may result in worse quality
* More loss of control due to more need to planning and organising
* if a business grows and it does not - recruit additional skilled workers, productivity and motivation of the current staff may fall and employees may decide to leave the business

Question 19

advantages of internal growth

Answer 19

• Internal growth is less expensive
  
  • Less risky since no other party is envolved
  • Better control of the business
    Growth will respect the companies values

Question 20

disadvantages of internal growth

Answer 20

• Internal growth is slower, takes long, only has resources of company
  
  • Cash flow problems- expensive
    Limited- if market is small, wont grow too much

Question 21

strategies for gwoing internally

Answer 21

• Increasing production and gining market shares- selling mor
  
  • Selling to new places and markets
  • Selling new products

Question 22

types of external growth

Answer 22

merger- 2 companies join together to form a new combined comoany
aquisition- company a aquires an ownership interest in B. company A becomes parent company of company b and controls it
joint venture- a new enterprise undertaken jointly by two or more businesses which otherwise hold onto their distinct identities (c)
takeover- company purchases another company without permission of company
strategic allience- compannies work together to get to a objective

Question 23

advantages of external growth

Answer 23

• faster than internal
• potential for economies of scale
• increase talent pool
• competitor may be eliminated

Question 24

disadvantages of external growth

Answer 24

• riskier that internal growth
• hard to realise cost reduction
• culture clash withing organisations
• information and technology can be lost

Question 25

what stakholders are interested in size of organization

Answer 25

• Customers want well known brands for being reputable
  
  • Employees want to get higher salaries in larger businesses with greater career opportunities
  • Managers and directors want big business
  • Shareholders see size of business to organize financial return and measure size in relation to competitors- risk and rewards with investment
  • Government- measure the size of business in order to provide financial and professional assistance to small start-up business and ensure all businesses confirm to tax laws of the country
    Local communities want big businesses that will provide employment + environmental impacts of larger businesses.

Question 26

franchising

Answer 26

form of external growth where franchisee buys the right to the name and business model of franchisor

Question 27

advantages of franchising for franchisor

Answer 27

• Franchising is a faster method of growth than using internal growth.
  
  • It is advantageous for the franchisor to use partner firms to purchase, own and run additional franchised outlets.
  • This means franchising can actually be cheaper than internal methods of growth for the franchisor.
  • Franchisees fund the growth of the franchise as they pay an upfront fee to purchase the franchise license.
  • In addition, the franchisor received royalties, usually calculated as a percentage of the franchisee’s sales revenues.
  • The franchisor benefits from selling the franchise agreement to someone who has been vetted and is more motivated to succeed than salaried managers employed to run a particular store, unit or outlet.
    The franchisor, in its pursuit of growth in other geographical locations, can also again from the franchisee’s local knowledge.

Question 28

disadvantages of franchising for the franchisor

Answer 28

• The franchisor’s corporate image and brand reputation is at risk if a franchisee is negligent and/or incompetent.
  
  • Breaking the franchise agreement with such franchisees can be a both time consuming and costly.
  • Therefore, although not the owner of a franchised outlet, the franchisor still needs to ensure quality standards are met. This means the franchisor may need to closely monitor the operations of their franchisees; after all, their reputation and overall business model is at stake.
  • The franchisee, as the owner of the franchised unit, gets to keep the profits they generate. This would not be the case if the franchise chose to grow organically.
    The franchise method of growth is not applicable to all businesses as they lack the expertise, resource and brand awareness to attract buyers (franchisees).

Question 29

advantages of franchising for franchisee

Answer 29

• The success rate of franchising is very high in most industries. Franchisees gain access to a tried and test business model.
  
  • In many cases, the franchisee benefits from the brand recognition and brand loyalty established by the franchisor.
  • Hence, there are opportunities for the franchisee to earn large profits.
  • Franchisees receive ongoing support and expert advice from the franchisor, such as upskilling training, market research findings, and legal advice.
  • This improves the chances of success for the franchisees.
    They gain from the purchasing economies of scale of the franchisor, rather than facing much higher costs (of inventory, for example) if operating as a sole trader of a much smaller, independent organization.

Question 30

disadvantages of franchising for the franchisee

Answer 30

• Buying a franchise is usually very expensive. Even so, the process of applying for a franchise license is typically complex and time consuming. Even after paying for the start-up costs and running costs of the business, the franchisee must also pay a percentage of its sales revenues to the franchisor as royalty payments. This can cut a franchisee’s profit margins quite substantially.
  
  • The franchisee is constrained by the standards and practices set by the franchisor. The franchisee must follow the franchisor’s established business model, without scope for truly independent decision making or innovation.
    Like the franchisor, each individual franchisee is at risk of a damaged reputation if another franchisee of the business makes a serious blunder.

Question 31

forward vertigal integraton

Answer 31

the external growth method occurs hen one company buy another business that is close to the consumer in the chain production

Question 32

backward vertical integration

Answer 32

a method of external growth that involves a company buying another company that is further away from the consumer in the chain production

Question 33

lateral integration

Answer 33

an external growth methos that involves 2 or more firms in a merger acquisition, or takeover that have a similar operations but do not directly compete with each other.