Section Twelve • Strategic Methods - Business Growth Flashcards
What is economies of scale?
Economies of scale mean that as the scale of production increases, the cost of producing each item (the unit cost) decreases.
What are different types of internal economies of scale?
- Technical
- Managerial
- Purchasing
- Marketing
Describe technical economies of scale
Technical economies of scale are related to production. Production methods for large volumes are often more efficient. Large businesses can afford to buy better, more advanced machinery, which might mean they need fewer staff, and wage costs will fall.
Describe managerial economies of scale
Large businesses can employ managers with specialist skills to manage specific departments.
They oversee plans and strategies which can result in work being done more quickly and efficiently.
Describe purchasing economies of scale
Purchasing economies of scale are to do with discounts. Big businesses can negotiate discounts when buying supplies in large quantities. They can get bigger discounts and longer credit periods than their smaller competitors. They can also borrow money at lower rates of interest than small businesses.
Describe marketing economies of scale
Marketing costs are usually fixed (no matter how many units are sold), so a business with a large output can spread the cost over more units. A large business can also afford more effective forms of advertising, e.g. TV adverts.
Explain external economies of scale and give an example
External economies of scale happen when industries are concentrated in small geographical areas.
1) Having a large number of suppliers to choose from gives economies of scale. Locating near lots of suppliers means firms can easily negotiate with a range of suppliers, which tends to increase quality and reduce prices.
What does the Experience Curve look like?
As a business grows and increases its sales volume, it will begin to produce more products. Workers will get more experienced and more efficient at making the products, which will cause the cost per unit to decrease.
What does the Experience Curve look like?
What is economies of scope?
When a business produces multiple products instead of specialising in one. It’s cheaper for one business to produce many products than it is for many businesses to produce one product each.
What is diseconomies of scale?
1) Diseconomies of scale make unit costs increase as the scale of production increases.
They happen because large firms are harder to manage than small ones.
2) It’s important to keep all departments working towards the same objectives. Poor coordination makes a business less efficient. In a big firm, it’s hard to coordinate activities between different departments.
What is retrenchment?
Where businesses become smaller
How can retrenchment be achieved?
4 bullets
- Cutting jobs - if sales are decreasing, a business will need to decrease its wage bill by cutting jobs.
- Reducing output - if a business is selling fewer units it has to reduce its output and capacity.
- Withdrawing from markets - businesses might choose to stop selling products in less profitable markets.
- Splitting the business up (demerging) - it’s easier to manage and control a smaller business, so a large business might split up into several smaller ones and focus on making each one profitable.
