Unit 1 - 1.5 Growth and Evolution Flashcards
Economies of scale
When average costs of production decrease as the organisation increases the size of its operations
Diseconomies of scale
When an organisation becomes too large, causing productive inefficiencies that result in an increase in average costs of production
Internal economies of scale
Occur inside the business and are within the firm’s control
Types of internal economies of scale (7)
- Technical
- Financial
- Managerial
- Specialisation
- Marketing
- Purchasing
- Risk-bearing
Technical economies
Use of sophisticated capital and machinery to mass produce goods → high fixed cost of equipment spread over huge scale of output → reduction of average cost
Financial economies
Firms borrow large sums of money at lower rates of interest due to reliability for return to financiers
Managerial economies
Division of managerial roles by employing specialist managers → higher efficiency results in fall of costs
Specialisation economies
Use of mass production techniques and specialisation → division of labour and limited responsibility at a high standard → higher productivity → lower costs
Marketing economies
Selling in bulk through marketing campaigns, the cost of which can be spread through using the same one across the world
Purchasing economies
Buying resources in bulk with discounts → cutting costs
Risk-bearing economies
Spread risk on the sale and introduction of different products → even if one fails, the others will keep the business and its profit running
Examples of internal diseconomies of scale (5)
- Lack of control and coordination
- Poorer working relationships
- Lower productuve efficiency from outsourcing
- Bueraucracy
- Complacency
External economies of scale
Business enhancing factors that occur outside a company but within the same industry
Types of external economies of scale (4)
- Technological progress
- Improved transportation networks
- Abundance of skilled labour
- Regional specialisation
Technological progress
Tech. innovation increases productivity within industry → significant cost savings
Improved transportation networks
Globalised transportation networks → firms’ ability to import raw materials and finished goods at much lower manufactured costs → increased convenience from improved logistical networks → faster deliveries at lower costs
Abundance of skilled labour
Locations may benefit from reputable education and training facilities → reduced cost of recruitment and training
Regional specialisation
Locations or countries have reputations for specialising in certain goods or services → access to specialist labour, sub-contractors and suppliers → can charge premium price for products
Examples of external diseconomies of scale (4)
- Higher rents
- Local market conditions for pay and financial rewards
- Traffic congestion
- Context specific problems
Internal growth
When a business grows by using its own capabilities and resources to increase the scale of its operations and sales revenue
External growth
When dealing with outside organisations: usually in the form of alliances or mergers with other firms or the acquisition of other businesses
Methods of internal growth (name 4)
- Changing prices
- Effective promotions
- Product innovation
- Incrased distribution
- Preferential credit for customers
- Capital expenditure
- Staff training and development
- Providing overall value for money
Advantages of internal growth (4)
- Better control and coordination
- Relatively inexpensive
- Maintains corporate culture (values and ethics of business)
- Less risky
Disadvantages of internal growth (4)
- Diseconomies of scale
- Restructuring the form of ownership may be needed
- Lead to dilution of control and ownership
- Slower method of growth
External growth methods (5)
- Mergers and acquisitions
- Takeovers
- Joint ventures
- Strategic alliances
- Franchising
Mergers and Acquisitions (M&A)
Mergers: when two firms agree to form a new company with its own legal identity
Acquisitions: when a company buys a controlling stake in another firm with the permission and agreement of its board of directors
Benefits of M&As (name 4)
- Greater market share
- Economies of scale
- Synergy (cooperative action is greater than individual effect)
- Survival
- Diversification
- Gain entry into new markets
Drawbacks of M&As (name 4)
- Redundancies
- Conflict
- Culture clash
- Loss of control
- Diseconomies of scale
- Regulatory problems
Takeovers
When a company purchases a controlling stake in another company without the permission and agrement of the company or board of directors (hostile takeover)
Joint ventures (JVs)
When two or more businessed split the costs, risks, control and rewards of a business project and set up a new legal identity (whilst keeping the original companies)
Strategic alliances (SAs)
When two or more businessed cooperate in a business venture for mutual benefit
* share the costs of produc development, marketing and opertion
* stay as independent organisations
Benefits of JVs and SAs (name 4)
- Synegry
- Spreading costs and risks
- Entry to new/foreign markets
- Relatively cheap
- Competitive advantages
- Exploitation of local knowledge
- Relatively high sucess rate
Drawbacks of JVs and SAs (3)
- Rely heavily on goodwill and resources of their counterparts
- Enormeous expenditure on braind development
- Possible culture clashes
Franchising
A form of business ownership whereby a person or business buys a license to trade using another firm’s name, logos, brnads and trademakrs
* Franchisor - selling the license
* Franchisee - the entrepreneur buying the license
Benefits of franchising for franchisors (name 3)
- Cheaper and faster than internal growth
- Enter new local and international markets
- Growth withour day-to-day running costs
- Income from royalty payments
- Franchisees are more motivated than salaried managers
Benefits of franchising for franchisees (name 3)
- Relatively low risk
- Relatively low start-up costs
- Training and advice on financial management
- Large scale advertising performed by franchisor
- Greater likelihood of success due to local market insights
Drawbacks of franchising for franchisors (3)
- Risk damage to brand name if unsuccessful
- Monitor quality standards can be difficult
- Slower method than M&As
Drawbacks of franchising for franchisees (3)
- Stifled creativity due to rules and requirements
- Can be very expensive to buy a franchise with no gurantee of a return on investment
- Significant percentage of revenues paid to franchisors
Advantages of external growth (5)
- Quickers than organic growth
- Synergies
- Reduced competition
- Economies of scale
- Spreading risks
Disadvantages of external growth (5)
- More expensives than internal growth
- Greater risks
- Regulatory barriers
- Potential diseconomies of scale
- Organisational culture clash
Ways to measure the size of a business (5)
- market share
- total sales revenue
- size of workforce
- profit
- capital employed
Benefits of being a large business (name 4)
- economies of scale
- lower prices
- brand recognition
- brand reputation
- value-added services
- greater choice
- customer loyalty
Benefits of being a small business (name 4)
- cost control
- government aid
- local monopoly power
- personalised services
- flexibility
- small market size
