Topic 1 - Business in the real world (7. expanding a business) Flashcards
benefits of being a larger firm
make more products and have more money
purchasing economies of scale - larger businesses buy in bulk so they get each unit at a cheaper price than a smaller firm
technical economies of scale - larger firms can afford to buy and operate more advanced machinery, law of increased dimensions means that a factory that is 10 times larger will no be 10 times as expensive
profits can be reinvested to expand the business even more
disadvantages of being a larger firm
diseconomies of scale - increases in average unit cost
the bigger the firm the harder and more expensive it is to manage it properly
decisions take time to reach the whole workforce, harder communications
production process will be complicated
miscommunication
what are the 2 main types of expansion
internal and external
what is internal expansion
also known as organic growth when a business grows by expanding its own activities
advantages of internal expanding
a business can maintain its own values
lower risk
higher production means the business can benefit from economies of scale and lower average costs
disadvantage of internal growth
return on investment could take a long time
slower growth
growth may be limited and is dependent on the reliability of sales forecasts
3 methods of expanding internally
opening new stores, E-commerce, outsourcing
why should a business expand internally by opening new stores
fairly low risk, if the store runs similarly to the other existing stores it should be a success
however a lot of extra cost which the company may not be able to afford
why should a business expand internally by e-commerce
firm sells via the internet, lots of people can buy products from the firm even if they’re not near a shop, cheaper firm does not have to pay for rent or staff
however technology has to be regularly updated, any technical problems can cause customers to be unsatisfied
why should a business expand internally by outsourcing
outsourcing is paying another firm to carry out task the business could do themselves this means businesses can carry out tasks cheaper or to a higher standard
however outsourcing means you lose some control over parts of its operations
business could also receive a bad reputation if the firm it outsources has low standards
what is another method that is also considered organic growth
franchising
what is franchising
this is where a company expands by giving other firms the right to sell its products in return for a percentage of its profit.
the product manufactures are known as the franchisors and the firms selling their products are franchisees
however if the franchisee has low standards then this could lead to a bad reputation for the franchiser
what is external expansion
expanding by working with another business. external expansion is quicker than internal however it can be hard for other businesses involved
what are the 2 ways or expanding externally
merging and taking over
what is a merger
when two firms join together to form a new but bigger firm
