Growth and Evolution Flashcards
economies of scale
the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs
purchasing economies of scale
Purchasing goods in bulk creates an economy of scale by allowing a lower cost per unit and contributing to lower production costs.
Reduced costs for larger businesses in buying inputs, such as raw materials and parts, or of borrowing money because of a larger discount given to a larger purchase than smaller businesses can make.
Some types of economies of scale
technical purchasing marketing financial and many more...
marketing economies of scale
More options are available for larger firms, such as television and other national media, which would not be cost-effective for smaller producers.
The marketing cost for selling 10 million items might be no greater than to sell 1 million items.
diseconomies of scale (+ main sources)
These are inefficiencies that can arise when a firm operates on a larger scale (do not confuse with high capacity utilisation).
The main diseconomies of scale are:
Lack of motivation – in larger firms, workers can feel that they are not appreciated or valued as individuals - see Maslow and Herzberg. It can be more difficult for managers in larger firms to develop the right kind of relationship with workers. If motivation falls, productivity may fall leading to inefficiencies.
Poor communication – it can be easier for smaller firms to communicate with all staff in a personal way. In larger firms, there is likely to be greater use written of notes rather than by explaining personally. Messages can remain unread or misunderstood and staff are not properly informed.
Coordination – a very large business takes a lot of organising, leading to an increase in meetings and planning to ensure that all staff know what they are supposed to be doing (e.g. supply chain). New layers of management may be required, adding to costs and creating further links in the chain of communication.
internal/organic growth
The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. It is the expansion from within a business by expanding the range of products and/or locations, and hence an increase of the customer base. (e.g. without buying new businesses).
The highest level of growth achievable for a business without obtaining outside financing.
external growth (definition + types)
When a company increases its sales and profits by buying other companies, rather than from its own operations.
mergers and acquisitions, takeovers, joint ventures, franchising, strategic alliances,
merger
the combining of two or more companies
takeover
the purchase of one company (the target) by another (the acquirer, or bidder)
joint venture and strategic alliance
joint venture: A commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities.
strategic alliance: Same but less formal than joint venture.
• These form of cooperation lies between mergers and acquisitions and organic growth.
Example: entering a foreign market, sharing local knowledge in a joint venture results in considerable cost and time savings.
franchising
An authorisation granted by a government or company to an individual or group enabling them to carry out specified commercial activities, for example acting as an agent for a company’s products.
A type of license that a party (franchisee) acquires to allow them to have access to a business’s (the franchisor) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business’s name. In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees.
horizontal merger (+benefits)
integration with firm in the same industry/market (rival)
benefits: instant additional market share, synergy (1+1=3; large gains from combining knowledge, skill and capital)
vertical merger (+benefits)
merging of businesses operating at different levels in an industry’s supply chain
benefits: controlling the supply chain (either forwards towards the customer [“downstream”] or backwards to monitor and secure raw materials [“upstream”]
conglomerate
merging with a businesses in a different industry
benefits: eliminates costly research and development
market capitalisation (and other indicators of organization size)
Answers the question: how big is the organisation.
The number of shares a business owns multiplied by the current share (stock) price and sales revenue.
- Profit is rarely used as an size indicator.
- Employees can also be used, though have limitations in the internet and software era (one person now has many abilities to create huge companies).
