Unit 1.5 Growth and evolution Flashcards
Technical Economies
Technical economies refer to cost savings that a business achieves by using advanced technology and specialized equipment in its production processes, leading to lower per-unit production costs
Purchasing Economies
Large companies save on the cost of raw materials/supplies because they buy in bulk. They get good discounts.
Marketing Economies
Marketing economies are the cost savings and efficiencies that a business gains in its marketing efforts, which can include reduced advertising costs, improved marketing strategies, or more efficient use of resources to promote products or services
Financial Economies
cost savings and efficiencies that a business achieves through effective financial management, including obtaining favorable loans, managing cash flow efficiently, and making sound investment decisions. These economies help improve the company’s financial health and profitability.
Managerial Economies
More specialised management can be employed, saves business money because they are more efficient.
When costs of managers for a large firm are spread over number of units produced the average cost of managers is lower compared to a firm that doesn’t produce as much.
Risk-bearing Economies
Risk-bearing economies are the cost savings a business achieves by managing and reducing risks efficiently, which helps protect the company from financial losses and uncertainties
. Large companies sell a variety of products in different which reduces the risk if one product or market fails.
What growth is
the process of increasing in size.
Advantages of growth
Increased Revenue and Profitability
economies of Scale
Market Dominance
Diversification
Access to Capital
Brand Recognition
Competitive Advantage
Disadvantages of growth
increased Costs
Complexity
Risk Exposure
dilution of Focus
cultural Challenges
Lack of Flexibility
Competitive Pressures
Internal Economies of Scale
These are cost advantages that arise from within the organization as it grows. Examples include the ability to purchase raw materials in bulk at lower per-unit costs, increased specialization and division of labor among employees, and more efficient use of machinery and equipment.
External Economies of Scale
These result from factors outside the individual organization but within the industry or geographical area. For instance, a cluster of related businesses in a specific location may benefit from shared infrastructure, a skilled labor pool, or access to specialized suppliers, all of which can reduce costs for each firm in the cluster.
economies of scale
the cost advantages that a business can achieve as it increases its level of production or output. These cost advantages result from spreading fixed costs over a larger number of units, leading to lower average costs per unit produced.
average cost
total cost of producing a certain quantity of goods or services divided by the number of units produced. It represents the cost per unit and is essential for analyzing a company’s cost efficiency.
TC/Q= AC
average fixed cost
refers to the total fixed costs incurred by a business divided by the number of units produced. It represents the portion of total cost that remains constant per unit produced, regardless of the quantity produced.
TFC/Q= AFC
average variable cost
total variable costs incurred by a business divided by the number of units produced. It represents the variable cost per unit and reflects how costs change with variations in production levels.
TVC/Q=AVC
specialization economies
the cost advantages gained when individuals, teams, or businesses focus on producing a specific product or service efficiently, benefiting from expertise, streamlined processes, and increased productivity.
examples of external economies of scale
-technological process
-imporved transportation networks
-abundance of skilled labour
-regional specialization
diseconomies of scale
result of higher unit cost as the firm contiues to increase in size
internal diseconomies of scale reasons, examples
-lack or control and coordination
-poorer working relationships
- lower productive efficiency
-bureaucracy
-complacency
bureaucracy
excessive administeration paperwork and company policies
complacency
state of self-satisfaction or a lack of motivation and effort within an organization, often resulting in reduced productivity, innovation, or competitive advantage.
external diseconomies of scale reasons, examples
-higer rent
-higher pay and financial awards
-traffic congestion
internal growth
- changing price
- improved promotion
- purchasing improved or better
- selling through a greater distrubution network (placement)
- offer preferentail credit
- increased capital expidenture (investment spending)
- training and development
- providing overall value for money
advantages of internal growth
- control and coordination
- relitivley inexpensive
- maintains corporate culture
- less risky
disadvantage of internal growth
- diseconomies of scale
- a need to restructure
- dilution of control and ownership
- slower growth
external growth
occurs with dealings with outside organizations own business operations
advantages of external growth
- quicker than organic growth
- synergies
- reduced competition
- economies of scale
- spreading of risks
- lower prices
- brand recognition
- value added services
- greater choice
- customer loyalty
disadvantages of external growth
- more expensive than internal growth
- greater risks regulatory barries
- potential diseconomies of scale
- organizational culture clash
reasons why businesses grow
- market share
- total sales revenue
- size of workforce
- profit
- capital employed
reasons business stay small
- cost control
- loss of control
- financial risks
- government aid
- local monopoly power
- personalized services
- flexibility
- small market size
cost control explanation
large scale operations can mean that a firm encounters diseconomies of scale due to problems of control corrdination and communication.
loss of control explanation
external growth through methods such as mergers and aquisitions (M&A’s) and takeovers may result in dilution of ownership and and control for the original owners.
government aid explanation
mainly offered to small businesses to help them start up and develop
local monoploy power explanation
small businesses may enjoy being the only firm in a particular location. large firms may be reluctant to settle in remote areas
Mergers and Aquisitions
consolidation or integregation of two or more businesses to form a single company. the new larger business enitity will usually benefit from improved synergies, such as economies of scale and have larger scale of the markets to operate in.
Merger
two or more firms agree to make a new company with its own legal identity
acquisition
when a company buys a controlling interest in another firm with the permission and agreement of its board of directors to do so. this means the aquiring company buys enough shares to in the target company to hold a majority stake
synergy
this occurs when the whole is greater than the sum of the indivisual parts when two or more businesses are integregated
horizontal integrigation
this occurs when there is an Amalgamation of firms operating in the same industry
vertical integregation
takes place between businesses that are at different stages of production its the Amalgamation of businesses that head towrds the final stage of production
lateral integregation
between firms that have similar operations but do not directly compete with each other
conglomorate M&As
the Amalgamation of businesses that operate in completley distinct or diversified markets
Amalgamation
Amalgamation is a process of combining two or more organizations or entities into a single, unified entity, often with the goal of creating a larger, more efficient, or more competitive entity.
benefits of M&As
- greater market share
- economies of scale
- synergy
- survival
- diversification
- gain entry into new markets
drawbacks of M&As
- redundancies
- conflict
- culture clash
- loss of control
- diseconomies of scale
- regulatory problems
takeovers
occurs when one company acquires a controlling stake or ownership of another company, typically by purchasing its shares or assets.
hostile takeovers
an acquisition of one company by another that is strongly resisted or opposed by the management and board of the target company
joint venture
is a partnership between two or more companies or individuals who collaborate to undertake a specific project, business activity, or venture. Each participant contributes resources, expertise, and shares in the risks and rewards of the joint endeavor.
advantages of joint ventures
- synergy
- spreading costs and risks
- entry to forign markets
- relativley cheap
- competitive advantage
- exploitation of local knowledge
- high success rate
strategic alliances
partnerships where two or more companies work together to achieve shared goals, combining their resources and expertise for mutual benefit.
key stages to the formation of strategic alliances
1- feasibility study
2- partnership assessment
3- contract negotiations
4- implementation
franchise
a business arrangement in which one party (the franchisor) grants another party (the franchisee) the right to operate a business using the franchisor’s established brand, products, and business model in exchange for fees and ongoing royalties.
franchisor
A franchisor is the company or entity that allows others (franchisees) to operate businesses using its brand and business system in exchange for fees and royalties.
franchisee
A franchisee is someone who buys and runs a business using the name, products, and methods of a larger company (franchisor) in exchange for payments and following the franchisor’s rules.
royalty payment
A royalty payment is money paid to the owner of certain rights, like a brand name or a patent, in exchange for using those rights in a business.
benefits for franchisor
Expansion
Risk Sharing
Increased Revenue
Local Expertise
Brand Visibility
Cost Savings
Motivated Operators
Market Diversification
Innovation
Customer Loyalty
Competitive Advantage
benefits for franchisee
Established Brand
Proven Business Model
Training and Support
Marketing Assistance
Reduced Business Risk
Access to Suppliers
Exclusive Territory
Independence
Faster Start-Up
Entrepreneurial Opportunity
drawbacks for franchisor
- Quality Control: Maintaining consistent quality across franchise locations can be challenging.
- Legal Liability: Franchisors may be held liable for the actions of franchisees in certain situations.
- Loss of Control: Franchisors must relinquish some control over day-to-day operations to franchisees.
drawbacks for franchisee
- Royalty Fees: Franchisees must pay ongoing royalty fees to the franchisor, which can reduce profitability.
- Lack of Independence: Franchisees must adhere to the franchisor’s rules and standards, limiting autonomy.
- Initial Investment: Starting a franchise often requires a significant upfront investment in fees and equipment.
conglomrates
businesses that produces a diversical range or products and operate in a range of different industries
