1.6 Growth and Evolution Flashcards
Types of costs
Fixed costs - things that don’t change according to output = rent, insurance, utility builds
Variable costs - costs which vary as output changes = supply of raw materials, wages, packaging
total costs = fixed + variable
Average costs = total/ level of output
Economies of scale
as output increases average cost per unit decreases
Internal - by a business operating on a larger scale it can reduce its average cots of production
External - when there is a general growth in an industry or the economy, businesses will benefit from cost savings on a larger scale
Diseconomies of scale
as output increases average costs per unit increase the increase in average unit cost is usually explained by the difficulty of managing large operations
communication becomes more complicated.
supervision results in more costs
Business size
small:
- Cost control
- Financial risk
- Government aid
- Local monopoly power
- Personalized services
- Flexibility
- Small market size
Large businesses - Brand recognition - Brand reputation - Value added services - Lower prices - Greater choice of goods - Customer loyalty economies of scale: larger production = output decreased cost per unit
Measuring business size:
- Market share
- Total revenue
- Size of workforce
- Profit
- Capital employed - shared capital, loan capital and retained profits
growth methods
internal growth - a business grows using its own resources to increase the scale of its operations and sales revenue
Adv: less risky, existing owners and shareholders maintain control,
Disav: can be slow and strong competitors might enter the market, might have limited resources to develop business
external growth - business grows by collaborating with, buying up or merging with another firm
much quicker than organic growth
Adv: often faster,possible elimination of a competitor, potential for economies of scale, might improve access to capital
disav: reduced risk in the event of success, property information and technology can be lost.
External growth
Mergers and acquisitions
- form of external growth that usually results in two firms combining to form a third identity - this company now replaces the two that existed before
Joint Ventures
- involve the creation of a new company by two or more parent companies.
Strategic alliances
- involves two or sometimes more organizations working together to realize a set of common objectives. no new entity is created.
Franchises
- franchise refers to an agreement between a franchiser selling its right to other businesses to allow them to sell products under its name in return for a fee or royalty
Joint ventures
two or more business split the cost risks control and rewards
Adv: increased capital, shared experience, larger target audience
Disav: loss of flexibility, conflict, clash of cultures.
Mergers and acquisitions
Mergers: the new firm will usually benefit from economies of scale and have a larger market share that it operates in
Acquisitions: an acquisition is when a company buys a controlling interest in another firms.
Adv: economies of scale, bigger firms are more efficient, more research and development
Disav: increased market share can lead to monopoly power and higher prices for consumer, a larger firm may experience diseconomies of scale, can be very expensive.
Strategic alliances
Loosest form of external growth - the relationship is defined by contractural agreement
Adv: may help to enhance production capacity or offer knowledge to a a new market, reduce costs and risks by distributing then across members of alliances, can obtain greater economics of scale as production volume can increase
Disav: cultural and language barriers can cause delayed and frustrations, lack of trust
Globalization
refers to the increase interconnectedness of countries across the world in terms of communication, culture, trade, and the movement of people
Multinational companies
corporations that operate in at least two countries, one of which is outside the corporation’s ‘home’ country
impact of globalizations
increased competitiveness increased of difficulty of meeting customer expectations larger customer base economies of scale Broader choice of locations
