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Business > 1.6 > Flashcards

1.6 Flashcards

1
Q

Economies of scale

A

When average costs of a business decrease as output increases. When a business expands and produces greater quantity, fixed costs are spread over a greater quantity of units produces, reducing average costs. Uses growth as an opportunity to decrease average costs.

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2
Q

Diseconomies of Scale

A

When average costs increase as output increases. When a business expands and grows and experiences inefficiencies which cause average costs to increase such as communication issues.

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3
Q

Internal Economies of Scale

A

Technical
Managerial
Financial
Marketing
Purchasing
Risk bearing

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4
Q

Internal Economies of Scale: Technical

A

Bigger units of production can reduce costs because of the law of variable proportions (the increase in varible costs are spread against a set of fixed costs).
E.g. A truck will be cheaper to operate than two or three smaller vehicles.

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5
Q

Internal Economies of Scale: Managerial

A

A bigger business can afford to have managers specialising in one job rather than having to do multiple roles.
E.g. Instead of having a general manager, they can be hired by functions; marketing, finance.

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6
Q

Internal Economies of Scale: Financial

A

Bigger businesses tend to be less risky than smaller businesses.
E.g. Banks are most likely to give loans to big companies rather than sole traders.

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7
Q

Internal Economies of Scale: Marketing

A

Bigger businesses can direct more effective marketing campaigns.
E.g. Large businesses have better advertisement opportunities.

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8
Q

Internal Economies of Scale: Purchasing

A

Big businesses can gain discounts through bulk buying.
E.g. Walmart buys large quantities of food at very low prices from farmers.

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9
Q

Internal Economies of Scale: Risk bearing

A

Big businesses can afford to produce a bigger product range and spreading the risk of one product failing.

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10
Q

External Economies of scale

A

Improved infraestructure
Agglomeration
Research and development
Relocation of component suppliers

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11
Q

External Economies of Scale: Improved infraestructure

A
  • Improved telecommunications makes it easier to communicate globally
  • Improved road networks make it faster to deliver products
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12
Q

External Economies of Scale: Agglomeration

A

When lots of similar businesses locate within close proximity to each other, it makes working together easier.

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13
Q

External Economies of Scale: Research and development

A

Advancements in technology or a particular field mean all firms benefit from this development.

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14
Q

External Economies of Scale: Relocation of component suppliers

A

If suppliers are closer to business, main operation deliveries arrive faster and its cheaper.

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15
Q

Internal Diseconomies of Scale

A

Co-ordination and monitoring difficulties
Communicatin difficulties
Poor worker motivation
Purchasing
Financial
Technical

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16
Q

Internal Diseconomies of Scale: Co-ordination and monitoring difficulties

A

The larger the business the more difficult it is to coordinate stages in production, leading to shortages and wastage.

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17
Q

Internal Diseconomies of Scale: Communication difficulties

A
  • As the business expands, communicating between different departments along the chain of command can be hard.
  • There are more layers in the hierarchy that can distort messages due to a wider span of control for managers (less clear instructions for workers).
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18
Q

Internal Diseconomies of Scale: Poor worker motivation

A
  • Workers can feel more isolated and less appreciated in larger businesses.
  • This can lead to lower employee motivation, damaging output and quality.
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19
Q

Internal Diseconomies of Scale: Purchasing

A

Large businesses often buy too much stock and it may need to be sold off at a loss.

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20
Q

Internal Diseconomies of Scale: Financial

A

Large firms with huge amounts of surplus can make poor investment decisions.

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21
Q

Internal Diseconomies of Scale: Technical

A

An airplane may be too big to land in a smaller airport.

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22
Q

External Diseconomies of Scale

A

Scarcity of land
Increasing rents
Higher recruitment costs
Higher wages
Transportation problems

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23
Q

External Diseconomies of Scales: Scarcity of land

A

Very high demand for businesses to relocate their headquarters to the center of the city.

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24
Q

External Diseconomies of Scales: Increasing rents

A

Too many businesses wishing to locate their offices/factories in a certain area, increasing rent prices.

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25
Q

External Diseconomies of Scales: Higher recruitment cost

A

Since workers have greater choice from a large number of employers in the same area, it may take companies longer to sign new employees.

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26
Q

External Diseconomies of Scales: Higher wages

A

Due to higher demand for quality workers, businesses might be forced to offer increased wages.

27
Q

External Diseconomies of Scales: Transportation problems

A

Traffic congestion results in too many businesses operating in the same area, increasing businesses costs and reducing revenues.

28
Q

Big business advantages

A

Survival
Economies of scale
Higher status
Market leader status
Increased market share

29
Q

Big business advantages: Survival

A

Less likely to be taken over by another business.

30
Q

Big business advantages: Economies of scale

A

Lower costs per unit generally mean greater profit.

31
Q

Big business advantages: Higher status

A

Larger firms have greater status.

32
Q

Big business advantages: Market leader status

A

Market leaders have customer loyalty and a competitive advantage.

33
Q

Big business advantages: Increased market share

A

Large companies have a higher market share and can control the market by determining prices.

34
Q

Small business advantages

A

Competitive advantage
Less competition
Specialisation
Greater motivation

35
Q

Small business advantages: Competitive advantage

A

A personalised service can be offered resulting in greater customer satisfaction.

36
Q

Small business advantages: Less Competition

A

In niche markets there is less competition as large companies don’t see the benefit of being part of a small market segment.

37
Q

Small business advantages: Specialisation

A

Higher prices can be charged due to the speciality of the product.

38
Q

Small business advantages: Greater Motivation

A

Employees may be motivated by the thought that they are valued and matter to the business.

39
Q

Internal Growth

A
  • Opening up new sales outlets
  • Increasing their workforce
  • Developing new products increasing their market share
  • Retaining profits
40
Q

External Growth

A

When firms grow by integrating with another firm.
- Quick and riskier method of growth
- Requires significant external financing
- Can increase market share and decrease competition very quickly
-> Merger and acquisition or takeover
-> Joint Venture
-> Strategic Alliance
-> Franchise

41
Q

Merger

A

Two businesses become integrated by joining together and forming a bigger combined business.

42
Q

Acquisition

A

When one firm takes over another. When the acquisition is unwanted, it is known as a hostile takeover.

43
Q

Types of Integration

A

Backward Vertical
Forward Vertical
Horizontal
Conglomerate/Diversifying

44
Q

Horizontal Integration

A

Two firms producing the same typeof product or service combine:
- Eliminates competition and increases market share
- Raw materials cheaper due to bulk buying
- Achieve economies of scale
- Acquire the assets of other firms
- Becomes more strong and secure for hostile takeovers
- E.g. British Airways and Iberia

45
Q

Backwards Vertical Integration

A

A bussines takes over a supplier:
- Guaranteed source of stock
- Control over supply and distribution of stock
- Profits are higher due to cutting out the middle man
- E.g. BMW and Continental tyres

46
Q

Forward Vertical Integration

A

A business takes over a customer:
- Increases profits as they have a definite customer
- Controls the supply and distribution of its products
- E.g. Pepsi takes over Pizza Hut

47
Q

Conglomerate

A

Businesses operating in different markets merge:
- Reduces the risk of business failure
- Overcome seasonal fluctuations (selling ice-cream or umbrellas)
- Makes business larger and financially secure
- E.g. Intercorp has Interbank, Plaza Vea, Inkafarma, Vivanda

48
Q

M&A Disadvantages

A
  • High legal and consulting fees
  • Culture clash among employees and businesses
  • Duplication of functions (two CEO, two finance departments)
49
Q

Joint Ventures

A

Two businesses agree to combine resources for a specific purpose and a specific period of time:
- A separate business is created with funding by the two parent businesses
- After the period of time is over, the business is dissolved or incorporated into one of the parent businesses
- Sometimes one of the partners can play a dominant role and buy the other partner

50
Q

Joint Ventures Benefits

A
  • Both firms enjoy greater sales but neither loses its legal existence or identity
  • Both firms bring different areas of expertise
51
Q

Joint Ventures Costs

A
  • Effectively a partnership, run the risk of disagreements
  • Sometimes a firm can realise they could have achieved the goal alone
52
Q

Strategic Alliance

A

Similar to joint ventures, they involve businesses collaborating together for a specific goal:
- More than 2 businesses can take part
- No new business is created, is an agreement to work together for mutual benefit
- More fluid and membership can change without destroying the alliance

53
Q

Strategic Alliance Disadvantages

A
  • The more businesses involved, the more challenging coordiation is
  • All firms remain in competition with each other
  • Can lack stability as membership is constantly changing
54
Q

Franchise

A

A business arrangement where one firm pays for the right to trade under the name of another:
- Sells the idea
- Percentage of the profit has to be returned to the franchise

55
Q

Franchiser

A

The business which sells the right to trade using its name to others.

56
Q

Franchiser Advantages

A
  • A quick way to increase market share
  • Can cover wider geographical area
  • Will earn percentage of the franchisees profits each year
  • Risks are shared between the franchiser and franchisee
57
Q

Franchiser Disadvantages

A
  • Reputation depends upon how good the franchisees are
  • Share of the profits are dependant on the ability of individual franchisees
  • Franchiser needs to devote time and resources to support the franchisee
58
Q

Franchisee

A

The person who buys the right to trade using the name of the mother company.

59
Q

Franchisee Advantages

A
  • Reduced risk as business exists and is established
  • Franchiser will offer training and advice
  • No need for individual franchisees to advertise, franchises will do it nationally
60
Q

Franchisee Disadvantages

A
  • Can be expensive to purchase and set up
  • Restricts their actions, no control over menu, prices as they are bound by contracts
  • Part of profit/turnover must be paid to franchiser
  • The franchise agreement only lasts for a limited time period
61
Q

Multinational Companies (MNC)

A

A business that operates in multiple countries.

62
Q

Advantages of MNC host country

A
  • Bring jobs to the area
  • Can lead to the introduction of new management techniques
  • Can lead to new businesses being set up locally
63
Q

Disadvantages of MNC to host country

A
  • Are very powerful and can influence the government of a country
  • They may use up natural resources from the area
  • Can force local firms out of business
  • Profit made goes back to home country

Business (20 decks)

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