Unit 1.6 (Growth and evaluation)

Question 1

Economies and of scale

Answer 1

textbook defniiton
Economies of scale enable business to beneift from lower unit costs of production by operation on a large scale. Lower average costs help to give the firm a price advantage

Economies of scale are cost advantages that can occur when a company increases their scale of production and becomes more efficient, resulting in a decreased cost-per-unit. This is because the cost of production (including fixed and variable costs) is spread over more units of production.

Economies of scale occur in a business when costs per unit of a product decreases as the business expands. Diseconomies of scale happen when production costs increase per product as the business expands.

 Increase in efficiency of production as the number of output increases
 Average cost per unit decreases through increased production
 Fixed costs are spread over an increased number of output
 Cost per unit = (total variable costs + total fixed cost) ÷ units produced
 Importance: customer enjoy lower prices due to the lower costs which in
turn increases market shareorbusiness could choose to maintain its
current price for its product and accept higher profit margins

Question 2

Types of economies of scale

Answer 2

Types of economies of scale:
 Internal – achieved by the organization itself
An internal economy of scale measures a company’s efficiency of production.

 Technical economies:
Investing in technology to reduce costs

Purchasing economics: comanies cna lower thier average cost by buying in bulk

 Financial economies
Large firms can borrow massive sums of money at lower levels of interest compared to small

 Marketing economies
More efficient to advertise a large number of products

 Managerial economies
 Larger firms are able to hire specialists who help improve
efficiency

 External
 Improved infrastructure (e.g. transportation)
 Advances in the industrial efficiency due to better training,
innovations in processes/machinery, etc.
 Growth of other industries that support the organization

Question 3

Diseconomies of scale

Answer 3

 Diseconomies of scale
When a business becomes to large that economies of scale can no longer be exploited,. Disecomomies of scale are the result of higher unit costs as a firm continues to increase in size and the business becomes outzied and inefficient so average costs began to rise

Internal discomies of scale:
Internal diseconomies of scale involve either technical constraints on the production process that the firm uses or organizational issues that increase costs or waste resources without any change to the physical production process

External diseconomies of scale: refer to an increase of costs of products as a firm grows due to factors beyond its control

 Economies of scale have peaks, if this point is passed, diseconomies of
scale are experienced
 Can occur when a company or even the whole industry becomes too big
and unit costs begin to increase rather than decrease
 Possible due to:
 Communication problems leading to poor coordination
 Overworked machinery and laborers
 Alienation of workforce and slower decision-making (for larger
businesses)

 Diminishing marginal returns
 Decrease in the marginal (per-unit) output of a production process as
the amount of a single factor of production is increased, while

Question 4

Internal growth

Answer 4

Internal/organic growth
 Occurs when businesses grow using its own resources

Examples:
Changing prices, effective promotion, improved training and development, providing overall value for money

scale of its operations and sales revenue
 Methods used to achieve internal growth:
 Change of pricing strategies
 Increase advertising and promotions

 Offer flexible financing schemes
 Improve and innovate the product or service
 Sell in different locations
 Increase capital expenditure on production and technologies
 Train and develop staff

Question 5

External growth methods

Answer 5

External growth methods

External grow (inorangic growth) occurs through dealing with outside organizations, such growns usually comes in the form of alliance or mergers, or through the acquisition (takeover_ of other n\businesses
 Conglomerate mergers, takeovers, or acquisitions
 Amalgamation of two businesses that are in completely different markets
 Results in dissolution of original business entities in favor of forming a
new one
 Reasons for mergers:
 They want to increase revenue
 Fight the rising of prices together
 Increased customer satisfaction (new and better content)
 Bigger market
 Reasons for failure:
 The companies could not synergize
 The competition was stronger than the merged business
 Conflicting cultures
 Poor management and leadership
 Poor timing/recession
 Joint ventures
 Two companies join for a specific undertaking and set-up a new legal
entity
 e.g. Sony + Ericsson = Sony Ericsson
 Strategic alliances
 Like a joint venture, but NO new legal entity is created (only for a specific
project or product)
 Profit is split between the two companies
 Franchising
 An individual buys the right to operate under another business’ name
 Can be offered individuals or large businesses

 Franchisee pays a franchise fee (royalties and supplies) and is given a
license to operate by the franchiser
 Franchisee is a different type of entrepreneur – much less risk compared
to the normal entrepreneur
 Franchiser provides marketing, training and equipment to set-up
 Support to ensure business will have a good chance of success,
retain good brand image, and maintain standard of product/service
quality
 Franchiser may take a portion of profits and has a say on how the
business should be run
 Franchisor
 Benefits
 Grow cheaply and quickly
 Less manpower to directly manage
 Income from franchise fee, royalties, and supply purchases
 Downside
 Not easy to revoke
 Less control over quality or performance of franchise
 Conflict in profit vs. volume
 Franchisee
 Benefits
 Known brand results in strong start-up sales
 Support from franchisor
 Easy financing options
 Lower cost of supplies because of economies of scale (though
sometimes the franchisor charges high for supplies)
 Downsides
 Little freedom/flexibility in running
 Franchise/start up fee may be too costly
 Bad management in headquarters affects all branches
 Still not guaranteed success

Question 6

Globalization

Answer 6

Globalization
 Expansion of a business worldwide
 Contributing factors:
 Advancement in technology – reduced cost of production and information
interchange
 Trade liberalization and deregulation – easing of government rules, trade
barriers, tariffs
 Multicultural awareness – appreciation of foreign culture means
consumers may patronize products from other countries
 Language – ease of communication

Question 7

Multinational corporations (MNCs)

Answer 7

Multinational corporations (MNCs)

 MNCs are businesses with operations in two or more countries.
 Advantages:
 Expand customer base beyond the domestic market
 Achieve greater economies of scale
 Work around government barriers to imports
 Access to cheaper or more abundant raw materials and labour
 Spread risks in any one market through diversification
 Impact on domestic businesses of a host country
 Increase competition which increases customer expectations
 Drive up expenses and costs for local businesses
 May dominate particular markets and distribution channels
 Allows local businesses access to foreign capital and shareholders
 Can provide R&D, and technological advancement for local businesses
 Impact on economic & socio-political conditions of host country
 Economical
 Foreign direct investments
 More options for consumers
 May threaten local industries
 Develop high-tech industries
 Balance of trade (exports > imports)
 Employment
 Job creation with new skills
 Unemployment when workers are displaced in local industries
 Sociological Impact
 Change in behavior, consumption patterns and lifestyle
 Environmental Impact
 Utilization of resources
 Increase waste
 Possible environmental degradation (leading to climate change)
 Political
 Calls for stabler policies (e.g. deregulation, removal of trade barriers)
 Public-private sector partnerships

Question 8

External growth methods, defintions

Answer 8

Mergers: when two firms agree to form a new company together
Takeover. When a company buys a controlling interest in another form, it buys enough shares in the target business to hold
a mhority stake
Join venture: when two or more business split the costs risks, control and rewards of a business project