1.6 Growth and evolution Flashcards
Economies of scale
Lower average costs of production as a firm operates on a larger scale due to gains in productive efficiency.
Types of economies of scale:
- purchasing economies (bulk-buying economies)
- technical economies
- financial economies
- marketing economies
- managerial economies
Purchasing economies (bulk-buying economies) (economies of scale)
Larger businesses can get discounts when purchasing their inputs through bulk buying as they have a higher bargaining power.
Technical economies (economies of scale)
Increasing the size of the units of production decreases costs.
Financial economies (economies of scale)
Larger firms have an advantage over small firms when it comes to raising finance.
Marketing economies (economies of scale)
Larger firms can have bigger and effective marketing campaigns. They are able to spread their advertising budget over higher output.
Managerial economies (economies of scale)
Managers can specialize in doing one particular job rather than attempting to do several different tasks at the same time – every manager can do better by focusing on an aspect of the business they know the most about/are the most interested in.
Diseconomies of scale
As a business becomes larger, it becomes less efficient, leading to a higher average cost of production.
Internal (organic) growth
Business grows using its own capabilities and resources to increase the scale of its operations and sales revenue.
Organic growth is achieved by:
- changing price
- effective promotion
- producing improved or better products
- sell through a greater distribution network
- offer preferential credit
- increased capital expenditure
- improved training and development
- providing overall value for money
External (inorganic) growth
Growth in an organisation’s operations arises from mergers or takeovers, rather than from an increase in the firm’s own business activity.
Major types of external growth include:
- mergers and acquisitions (M&As)
- joint ventures
- strategic alliances
- franchising
Integration
The joining of two firms.
Merger
Two firms agree to become partners in a larger business.
Acquisition
One firm buys another, either with its approval (voluntary takeover) or without its approval (hostile takeover).
Reasons for mergers and acquisitions:
- greater market share
- reducing business risk
- better control of distribution channels
Horizontal mergers (horizontal integration)
Firms in the same industry and in the same sector merge.
Vertical mergers (vertical integration)
Firms in different sectors merge.
- vertical merge forward - when a firm merges with another further up the production chain
- vertical merge backward - when a firm merges with another further down the production chain
Conglomerate mergers
Integration of firms in different business sectors with a range of activities.
Joint venture
An agreement between two or more organisations to undertake a particular business activity for a limited period of time.
Strategic alliances
Collaborative agreements between two or more firms to pursue a set of agreed goals and to commit resources to achieve these.
Franchising
An agreement where a business (franchisor) sells rights to another business or individual (franchisee), allowing them to use the brand name, logo, trademark and products/services of the franchisor in return for a fixed fee and/or a percentage of the annual sales turnover (royalty).
Globalization
The growing integration and interdependence of the world’s economies.
The impact of globalisation on businesses
- increased level of competition
- meeting customer expectations becomes increasingly more demanding
- increased customer base
- greater choice of location
- external growth opportunities
- increased sources of finance
Multinational Company (MNC)
An organization that operates in two or more countries, with its head office usually based in the home country.
Why become a multinational company (MNC)?
- increased customer base
- cheaper production costs
- able to benefit form economies of scale
- avoiding any protectionist policies that the country might impose
- spreading risks
Advantages of multinational companies on host countries:
- job creation
- tax payments
- technology transfer
- local population gains from a wider choice of goods and services at lower prices
- help build new infrastructure
Disadvantages of multinational companies on host countries:
- natural resources are depleted
- profits are repatriated to the home country
- competitive pressures, domestic firms might be forced into reducing prices to remain competitive
