Economies of Scale Flashcards
state what is meant economies of scale
where the average or unit cost of production falls as the scale of production rises
explain the different types of economies of scale: managerial
a larger firm can afford to employ the best people in their fields - these experts can help to both increase revenue and reduce costs
explain the different types of economies of scale: purchasing
a firm can gain a discounted price from a supplier as they are buying in larger quantities
explain the different types of economies of scale: technical
a firm can invest in new product development or technology to make their production process more efficient
explain the different types of economies of scale: financial
larger firms tend to be less risky - they have already establishes a customer base and and are likely to have assets that can be sold to pay off debt, therefore they can access cheaper sources of finance as they are less of a risk
explain the different types of economies of scale: risk-bearing
large firms can spread their risk - they can afford to make a loss in one market because they are big enough to operate in other, more profitable markets
state what is meant by diseconomies of scale
occurs when a business becomes insufficient because of growth : this leads to a rise in unit costs
explain some types of diseconomies of scale
communication:
as there are more people within the organisation, it becomes more difficult to keep everyone up to date and informed. - messages may get confused or take long to get to the right people
relationships with suppliers may be difficult to maintain
reduce staff motivation:
employees may feel overworked and stressed leading to them not working so hard, reducing productivity
employees may be absent
may feel like a number where they are not treated as individuals in the work place
state what is meant by internal and external growth
internal growth: when a business expands from within
for example: opening new stores or launching new products
external growth: when a business grows by joining with other businesses
for example: buying out a competitor
explain some possible approaches of internal growth
opening new stores:
- increasing the number of physical stores
- making it more convenient for customers
franchising:
- when one business gives another person or business the right to trade using its name and to sell its products or provide its services
ADV: can grow more quickly and can use national advertising campaigns
DIS: potential damage to brand reputation
explain some possible approaches of external growth
merger:
- where two businesses agree to become integrated to form one business under joint ownership
- the managers of both businesses will make decisions together
takeover:
- where one business buys another
- the manager of the dominant business will be in control
- this form of external growth can be hostile
state the advantages of internal growth
- relatively low risk
- builds on the businesses own strengths
- will not be the risk of clash of cultures
state the advantages of external growth
- can be achieved quickly
- the business has access to the customers of both businesses
- it can allow a business to be established itself in a new market quickly
