1.6 Growth & evolution Flashcards
What is economies of scale and how is it achieved?
Reduction in average unit cost due to increase in output
What are fixed costs?
Costs that do not change if output levels change
What are variable costs?
Costs that do change if output levels change
What are average costs?
Total costs/output (or Q)
What is the optimum production?
At the point of lowest average cost
Factors of internal economies of scale?
- Technical - fixed costs better spread or less share of fixed costs vs variable costs
- Managerial - business can afford more managers with specialized skills, instead of a few doing everything
- Financial - risks are better managed
- Marketing - more resources available
- Purchasing - discounts available
Factors of external economies of scale?
*Consumers - More sales means more output
*Employees - benefit from their concentration at some places
Factors of diseconomies of scale?
- Technical - added capacity adds to new fixed costs which may not be good spread in the beginning. (using just small space in a new warehouse)
- Managerial - over-specialized or overqualified
- Financial - larger (end historically successful businesses may overestimate their powers or competences and make poor investments
- Marketing - costlier mistakes
- Purchasing - costlier funds than cost savings from larger stock (which may deteriorate btw)
What is the reason of external economies or diseconomies of scale?
Efficiency (a result of economies) and inefficiency (a result of diseconomies) of scale that happens when someone else has expanded.
What type of businesses may choose not to expand and why?
Businesses offering high-end products or service providers, because of:
*High dependence on owner’s/specific person’s highly specific skills and need of their direct and intensive involvement in production or service offering, such as a private clinic with a well-known doctor; a restaurant with a well-known chef, a popular stylist’s shop etc
*Need to stay close to customers, to understand their ever-changing wants and needs:
Advantages of being a big business?
*Better chances of survival
*Economies of scale (also at managerial level - highly *Specialized skills available)
*Higher status
*Easier to become market leader or gain larger market *Share and claim larger margins
Disadvantage of becoming a big business?
- Poorer decisions possible - The company will need to hire managers from outside, who may not understand or care enough where the value is really created for the customers
- Deriving finance from external sources or selling shares of a company (e.g. listing on a stock exchange as a publicly traded company) may result in lost control over many decisions.
Advantages of being small?
- Closeness and understanding of customers
- Motivation
- Sense of exclusiveness (cachet)
- If the market is niche, competitors may not be interested to enter
What is internal growth?
Also called organic growth, mostly financed from internal sources, means growing slowly but steadily based on current operations:
1. Selling more products or
2. Developing a product range.
What are limitations of internal growth?
- It is slow
- Lack of finance (possible)
Benefits of internal growth?
- Less risky
- Retention of control and focus
Types of external growth?
- M&A - A merger & Acquisition (neutral) or takeover (unwanted, hostile)
- A joint venture
- A strategic alliance
A Franchise
Horizontal integration?
When the added business is in the same industry or in the same chain of production
Vertical integration?
Added business in the earlier (supplier) or later (costumer) stages of the production chain
Backward (vertical) integration?
Added business is from the supplier’s stage in the chain
Forward (vertical) integration?
Added business is from the customers stage in the chain - so the business moves closer to end-customers
Conglomeration?
Also called diversification, when integrated businesses are in unrelated lines.
Benefits of a conglomerate?
- Lower risks
- For seasonal business it a possibility to minimize inactive periods
Limitation of a conglomerate?
- Operating in different industries requires different knowledge and skills. This need may even remain unnoticed by managers
- Loss of focus
What is a joint venture?
Conceptually it is a partnership, though legally may take different forms depending the state of incorporation and the choice of “parents”. In particular, it is:
1. A separate business, created by two or more “parent” companies
2. For a defined/finite time period
3. For a specific goal
What are the options of development of a joint venture after the end of predefined time period?
- Dissolved completely
- Incorporated into one of the “parents”
- Time frame extended
What benefit have the “parents” after the joint venture is dissolved?
A significant transfer/exchange of skills/expertise happens through the combination of different areas of expertise
Disadvantages of a joint venture
- It may be discovered at a later stage, that the company is not getting equal contribution from the partner
- Company could achieve this level of knowledge independently more efficiently
- After separation, some competitive advantage may be lost to the former partner and potential competitor
Strategic alliance vs joint venture
Strategic alliance
1. is formed mostly by more than 2 companies
2. Not a separate entity, but an agreement to work for mutual benefit
3 Members remain independent in their decisions and often continue to compete with each other in the same or other areas.
4. Membership can change without destroying the alliance
Disadvantages of an alliance?
- More partners may lead to the lack of coordination and efficiency
- Without a legal entity, access to finance and economies of scale may be limited
- Competitive advantages may be still lost to competitors
Franchisor vs franchisee
For both it is the fastest way to grow. In addition for
Franchisor :
1. Has a business model/concept (including know-how of production processes, customer and supplier lists, well-developed brands) to sell
2. Oversees/Controls the management of franchisee and quality of output
3. Provides trainings
4. Global advertising
5. May have many franchisees
Franchisee:
1. Has knowledge of local market
2. Pays royalty (continuous, fro sales or otherwise) or other type of remuneration (usually at the start one-time payment for transfer of knowledge and access to brands
3. Obliged to follow guidelines not to harm the reputation of the franchisor
4. Employment and management of staff
5. Law or no costs (only locally) to develop brands
6. Usually have one franchisor
What is a business model?
A way to crate value in economic sense (and in other senses as well). This includes, but is not limited to the know-how/assets in:
1. Purpose
2. Strategies
3. Organisational structure
4. Production processes
5. Infrastructure (building etc)
Disadvantages of franchise
For Franchisor:
1. Lost control of day-to-day decisions
2. Its reputation suffer from unacceptable practices of the franchisee
3. Competitive advantage may be lost if the franchisee later decides to develop own brand.
For franchisee:
1. NO control over global decisions
2. Often no control over suppliers an aother partners in the chain
What is globalization?
- Process by which the world’s regional economies are becoming integrated/interconnected.
- Although there were other historical examples of globalisation (Roman and other empires, silk road etc) , today it is on another level and mainly achieved through trade and economic policies
- Today’s globalization is characterized small number of post-national of extremely large companies, who consider no country as their home or every country their home
Impact of globalization on growth of domestic businesses
- Increased competition forces to more efficiency
- Forces to create greater brand awareness and USP (unique selling points) mainly focusing on local/national origins
- skills transfer
- New business opportunities/units:
*Joint ventures
*Strategic alliances
*Franchises
*Foreign direct investment with local co-owners
*Distribution /import business - New ideas
Drivers of modern globalization?
- Improved ICT (Information and communications technology)
- Removed trade barriers (e.g removed or reduced customs tariffs, bans etc)
- Deregulation of financial markets
- Harmonization of accounting standards
- Encouragement of foreign investment by the government
- Increasing economic and political power of multinationals
What is a multinational?
A company operating or registered in several countries
Disadvantage of globalization for local communities
- Profits are repatriated - foreign companies pay taxes and salaries, but the profits may be totally taken out from the host country
- Local culture or products may suffer or change through the appeal of globally advertised values
- Brain drain - to other countries
- Loss of market share of local businesses
Technical economies of scale
Fixed costs better spread; less share of fixed costs vs variable costs
Managerial economies of scale
Remunerations of managers (part of companies fixed or semi-variable costs, also called overheads or expenses may spread better and lower average costs, thus enabling business to afford more managers with specialized skills, instead of a few doing everything
Financial economies of scale
economies of scale is a financial concept in general, but in a narrower sense , e.g - risks are better managed
Marketing economies of scale
Marketing costs can be better spread over larger output. Business has a choice either keep average marketing cost low or or invest larger resources available in more aggressive marketing campaigns
Purchasing economies of scale
discounts available for larger purchases
Employee based economies of scale
In the areas of a lot of people with proper skills, less cost for staff or company relocation, or transport or perks like cars or housing
