1.6 Flashcards
Economies of scale and its advantages
Average cost of production decreases as firm operates on a larger scale. (decrease in cost per unit as output increases)
- competitive advantages (charge lower prices)
- makes more efficient
Internal economies of scale all examples (7)
- technical economies
- financial economies
- managerial economies
- purchasing economies
- marketing economies
- risk bearing economies
- specialisation economies
Technical economies
investing in equipment for mass production. Cost of equipment is spread over a higher output
Financial economies
Larger firms get lower interest rates
Managerial economies
Hiring more specialised managers = more productive and efficeint
purchasing economies
bulk buying from suppliers for lower prices
Marketing ecnomies
Brand marketing - promotion cost spread between products
and marketing costs are spread over a larger volume of sales, so marketing cost of 1 unit of output will decrease
Risk-bearing economies
bigger business = bigger product range = spreads risks
Specialisation economies
work force specialisation
external economies of scale
efficiencies business achieves as someone else has expanded
- technological progress (e.g. internet/communication)
- abundance in skilled labour = lower training costs
- shopping malls
- improved transportation networks
Diseconomies of scale and causes
higher cost per unit as output increases
- managerial issues
- poor communication
- too big workforce - overcrowding - salary/wages
- too many businesses in one area
- have to offer higher wages if specialised workers available
Merits of being a big business
- economies of scale
- brand recognition
- provide more choice = easier survival
- market share
merits of being a small business
- less competition
- wont get diseconomies of scale
- easier to control
- can provide personalised services (competitive advantage)
Ways to measure business size
Market share Revenue Size of workforce Profit Capital employed
Internal and external growth
Organic growth: business grows internally, using own resources, e.g. by changing price, better products (less risky but slower but cheaper and more controlled)
External growth: growth via mergers and acquisitions, joint venture, strategic alliance, franchise
Merger and acquisition
When two business become integrated by:
- merger: 2 firms agree to form a new company
- acquisition (takeover): when a company buys a controlling interest in another firm
Types of intergration
- horizontal integration
- backward vertical integration
- forward vertical integration
- conglomeration
- lateral integration
Advantages and disadvantages of mergers and acquisitions
Advantages:
- greater market share (more customers) = survival
- economies of scale
- diversification
- synergy (access)
Disadvantages:
- redundancies
- diseconomies of scale
- loss of control
- costly
Joint venture
2 businesses agree to combine resources for a specific goal over a time period, forming a separate business for this
Advantages and disadvantages of joint ventures
Advantages
- entry to foreign markets
- cheap
- share knowledge
- spread risks and costs
Disadvantages:
- partners rely on each other
- communication
- culture clash
Strategic alliance
2 or more firms cooperate in a business venture for mutual benefit, the firms remain as independent organisations
Advantages and disadvantages of strategic alliances
Advantages:
- share resources and expertise
- gain brand awareness
- synergy
Disadvantages:
- dont get finance and economies of scale
- lacks control and stability due to fluidity of members
Franchising
Agreement between a franchisor selling its rights to franchisees to allow them to sell products under its name in return for a fee and royalty payments
Benefits and drawbacks for franchisor
Benefits:
- quick access to wider markets
- local knowledge and expertise of franchisees
- royalty payments
- rapid growth without risking own money
Limitations
- image suffers if quality not met
- loses some control in day to day running of the business
Benefits and limitations to franchisee
Benefits:
- well known product
- large scale advertising done by franchisor
- stock supply secure
- franchisor can give help (as they want the franchisee to do good)
Limitations:
- expensive
- pay % of revenue to franchisor
- no control over product and supply
Globalisation
refers to the increasing interconnectedness of countries across the world in terms of communication, culture, trade and the movement of people
Reasons for globalisation
- technology
- improved and cheaper transportation networks
- deregulation
- rise in tradeblocs
Trade barriers and trade blocs
Trade barriers: regulatory obstacles that limit trade between countries (tarriffs and quotas)
Trade blocs: agreement between countries to reduce barriers to trade between members
Impacts of globalisation
- increasing competition due to MNCs
- can cause skilled labour to leave as they might go to MNCs due to higher wage offerings
- can sell abroad in foreign markets, economies of scale
- easily import materials that are cheaper and better quality
- more demanding customer expectations due to MNCs, e.g. customer service
Multinational company
Operates in at least 2 countries, head office is in home country
Reasons for more multinationals appearing
- cheaper production overseas
- growing demand in some countries
- to avoid protectionist measures
- spread risks by selling in different countries
Benefits and drawbacks to host country of MNCs
Benefits
- reduced unemployment
- introduce new tech and skills
- economic growth by creating consumption expenditure and boost export earnings = higher living standard
- tax
Drawbacks
- competition = unemployment as local businesses may not survive
- environmental damage
- profits being repatriated = less tax
