Expanding

Question 1

What is economies of scale?

Answer 1

Economies of scale describe businesses benefiting from a reduction (fall) in the average unit cost of their product or service because of increasing production (the number of units produced).

Question 2

Why does technical economies of scale happen?

Answer 2

Large companies are able to invest in expensive, specialist machinery and equipment.

Question 3

What is purchasing economies of scale?

Answer 3

This is when larger companies get discounts from their suppliers because they are buying lots of units in bulk.

Question 4

When does diseconomies of scale take place?

Answer 4

It happens when a business grows so large that the business’ products average unit cost increases.

Question 5

How do coordination issues cause diseconomies of scale?

Answer 5

As a firm grows, the way the firm functions or operates becomes more complex. New departments and different teams may be located in different places. This can make it harder and more expensive to manage effectively.

Question 6

How does lower employee motivation cause diseconomies of scale?

Answer 6

Workers can become demotivated if they feel like a cog in a wheel and can’t see the impact of their on the business’ overall performance. This may result in a drop in productivity and an increase in average unit cost.

Question 7

How does communication issues cause diseconomies of scale?

Answer 7

In a larger business, communication becomes more difficult because of the size of the work force and the number of different divisions in the business.

Question 8

What is internal expansion?

Answer 8

When a business grows by expanding its own operations. This is a slower route to expansion than internal expansion, but it is usually less risky.

Question 9

How can businesses expand internally?

Answer 9

• Increase production capacity
• Opening new stores
• Launch new products

Question 10

What is external expansion?

Answer 10

Growth achieved by acquiring another business. Mergers happen when 2 firms combine to make 1 large company. In takeovers, 1 firm buys a controlling stake (50%+) of another firm.

Question 11

What are the advantages of external expansion?

Answer 11

• Reduce competition
• Diversify (spread) risk
  (A firm can merge or take over a firm in a different industry. This makes the company less reliant on its existing products / services and can spread a company’s risk)
• Rapid expansion
  (The key benefit of external expansion is the speed with which firms can expand.
  For example, in 2014 Facebook bought WhatsApp for $19 billion. This is a large amount of money but it instantly gave Facebook 700 million customers.)

Question 12

What are the disadvantages of mergers and takeovers?

Answer 12

• Tension and lost jobs
• Complicated
• Demotivated employees due to different management and culture.

Question 13

What is franchising?

Answer 13

Franchising is where a company gives someone the right to sell its products and use its trademarks. The ‘franchisee’ usually pays the business an upfront fee and a percentage of the profits.

Question 14

What are the advantages of franchising?

Answer 14

• The business can expand without needing large amounts of investment. The firm does not incur the costs involved with opening new stores
• Franchising increases brand awareness of the firm’s products or services.
• The business also does not have to be concerned about some of the risks of becoming a larger corporation, for example, diseconomies of scale (which may be caused by the growth from opening and operating new stores themselves).

Question 15

What are the disadvantages of franchising?

Answer 15

• The franchiser does not have complete control over how they operate.
• If a franchise is run badly, then a single franchise or store can negatively affect the brand image.