Unit 1.5 Flashcards
Economies of Scale (in summary)
Have a lower average cost of production as a company operates on a larger scale due to improved production efficiency.
They gain a competitive edge because their average costs goes down, meaning the higher their profit margins for each unit sold. (HL content: Cost Leadership)
They can afford to purchase or finance (take out a loan) larger assets that raise their initial costs but over the long-term, reduce their costs per unit sold which will, eventually, lead to larger profits in the long run.
Internal EoS
Technical Economies, Financial Economies, Managerial Economies, Specialization Economies, Marketing Economies, Purchasing Economies, and Risk-bearing Economies
External Economies of Scale
Technological Progress
Improved Transportation Networks
Skilled Labour
Regional Specialisation
Internal Diseconomies of Scale
Diseconomies of scale are when a company becomes too big and production costs increase as a result.
reasons for DoS
Too many managers, for too many/few employees. This leads to communication problems, alienation and inefficiency.
Too much bureaucracy (paperwork and company policies) which can demotivate staff
Complacency: Too many years of being a top company leads to a lack of drive and innovation
Small Business
Being highly specialized allows companies to remain focused on a core function or product. You can be the best of the best and charge Premium Pricing as a result.
You are ignored by competitors and governments: If a small firm beings taking sales away from competitors, they can be targeted. Additionally, governments often investigate large companies more frequently than smaller ones. As a result, any mistakes or under the table behaviour could be caught.
Internal (organic) Growth
occurs when a business grows organically, using its own capabilities and resources to increase the scale of their operations and sales revenue.
how does Internal (organic) Growth happen
Growing sales of existing products in its existing markets
Developing new products for its customers
Find new markets where it can sell its products
External (inorganic) Growth
occurs through dealings with outside organizations. This often comes from alliances or mergers with other companies/firms or through the acquisition (takeover) of other businesses
Benefits of External Growth
It is faster than internal (organic growth)
Quickly reduces competition
Brings about greater market share and market power (Unit 4.1)
Working with other businesses means sharing of ideas, therefore, improving on skills, efficiency, experiences, and bringing in new customers
Helps a company evolve and spreads our risk over a larger company (aka Risk-Bearing economies of scale)
Mergers & Acquisitions and Takeovers
when two or more companies become one.
Mergers- occur when two firms agree to form a new company and merge together and form a new company.
Acquisitions- occur when a company agrees to be bought and merged with another company, usually a larger firm.
Takeovers- occurs when a company buys a controlling interest in another firm (buying enough shares to have a majority stake). This is often done by offering shareholders a higher price for their share to entice them to sell enough so that they can gain enough control.
four types of integration that occur in a M & A
Horizontal Integration: when firms in the same industry come together (Disney & Pixar)
Vertical Integration: when firms at different stages of production come together (coffee bean producer merges with a coffee cafe which sells the coffee)
Lateral Integration: similar operations but not in direct competition (Pepsi merging with Quaker Oats in 2001→ Both in the food & drink industry)
Conglomerate M & As: businesses coming together from very different markets (Samsung making phones but also sell insurance in S.Korea)
M & As and Takeovers are beneficial
Synergy: through the integration methods (last slide) companies can better streamline their operations to lower costs.
Eliminate direct competition: Using these three options, a direct competitor is taken out of the market
Entry to foreign markets: avoid STEEPLE-based threats and take full advantage of opportunities. By utilizing one of these three methods, you can expand quickly into new markets and avoid common mistakes that can occur if organize growth was the method of expansion.
M & As Drawbacks
Can be very expensive to do and you also add the acquired companies problems to your own.
Gains a lot of attention from governments and media, increasing scrutiny of a firm’s business activity (if they’re doing something bad, they might be caught!)
Leds to stakeholder conflict (in particular with takeovers) as companies now need to work together as one.
Joint Ventures (JV)
Occurs when two or more businesses split the costs, risks, control, and rewards of a business project. By doing so, they set up a new legal entity (business) and split everything, including losses, 50/50 or another agreed upon ratio.
