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iB Business Management > Unit 1.6 : Growth and Evolution > Flashcards

Unit 1.6 : Growth and Evolution Flashcards

1
Q

Economies of scale

A
  1. The lower average costs of production as a firm operates on a larger scale due to an improvement in productive efficiency
  2. Economies of scale can help business to gain a competitive cost advantage because lower average costs can mean a combination of lower prices being charged to customers and a higher profit margin earned on each unit sold
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2
Q

Average cost

A
  1. Average Cost (AC) is the cost per unit of output
  2. Calculated by dividing total costs by the quantity of output
    AC = TC / Q
  3. Average costs is split into two components: average fixed costs and average variable costs
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3
Q

Average fixed costs

A
  1. Average Fixed Costs (AFC) is calculated by dividing the total fixed costs by the level of output
    AFC = TFC / Q
  2. The average fixed costs of a firm will continue to decline with larger levels of output. This is because TFC remains constant but are spread over an increasing amount of output
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4
Q

Average variable costs

A
  1. Average variable costs (AVC) is calculated by dividing the total variable costs by the level of output

AFC = TFC / Q

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5
Q

Internal economies of scale

A
  1. Economies of scale that occur inside the firm and are within the firm’s control
  2. By operating on a large scale, a business can reduce its average costs of production due to several factors
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6
Q

External economies of scale

A
  1. Economies of scale that occur within the industry and are largely beyond an individual firm’s control
  2. These are cost-saving benefits of large scale operations arising from outside the business due to its favourable location or general growth in the industry
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7
Q

Types of internal economies of scale

A
  1. Technical economies
  2. Financial economies
  3. Managerial economies
  4. Specialisation economies
  5. Marketing economies
  6. Purchasing economies
  7. Risk-bearing economies
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8
Q

Technical economies

A
  1. Large firms can use sophisticated machinery to mass produce their products
  2. The high fixed costs of their equipment and machinery are spread over the huge scale of output, which will reduce their average costs of production
  3. Small businesses do not find it feasible or cost-efficient to buy or use such technology
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9
Q

Financial economies

A
  1. Large firms can borrow massive sums of money usually at lower rates of interest compared to smaller rivals because the larger firms are seen as less risky to financial lenders like banks
  2. A large and established business looking to borrow money will probably choose a lender that offers the most attractive/lowest rate. There is usually competition amongst lenders to finance the larger businesses as they usually borrow a large sum of money
  3. In contrast, smaller firms often struggle to raise external finance and are charged higher interest rates when they borrow money
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10
Q

Managerial economies

A
  1. A sole trader or small business owner often has to fulfil the functions of marketer, accountant, and production manager
  2. People can not be equally good at everything though so specialisation leads to higher productivity.
  3. Large firms are able to divide managerial roles by employing specialist managers
  4. Through growth, a business can avoid a duplication of effort in planning and other processes due to specialist managers. This higher productivity means that average costs will fall
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11
Q

Specialisation economies

A
  1. Similar to managerial economies of scale but results from division of labour of the workforce rather than management
  2. They can hire specialists who focus on specific part of production such as design, production, marketing etc
  3. The specialists are responsible for a single part of the production process and their skills and expertise mean there is greater productivity which will cause for average costs to fall
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12
Q

Marketing economies

A
  1. Large firms can benefit from lower average costs by selling in bulk which will reduce time and transaction costs
  2. The cost of marketing and advertising is spread over a larger number of unit which makes average costs fall
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13
Q

Purchasing economies

A
  1. Large firms can lower their average costs by buying resources in bulk
  2. This reduces the unit cost of each item bought and gives the firm an advantage over smaller businesses which buy in small quantities.
  3. Bigger businesses being able to buy bigger quantities (normally for lower prices)
    1. Smaller firms can also gain from purchasing economies by gaining discount by buying in bulk, however the larger the order, the greater the bulk discount likely is so there is a huge advantage to being a larger firm
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14
Q

Risk-bearing economies

A
  1. These savings can be enjoyed by conglomerates (firms that have a diverse portfolio of products in different markets)
  2. Conglomerates can spread their fixed costs, such as advertising and r&d across a wide range of operations
  3. Unfavourable trading conditions for certain products or industries can be offset by more favourable conditions in other industries that the firm is apart of
  4. Basically, a loss in one area of their business may not jeopardise their business overall
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15
Q

Types of external economies of scale

A
  1. Technological Progress
  2. Improved transportation networks
  3. Skilled labour
  4. Regional specialisation
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16
Q

Technological progress

A
  1. Technological progress increases the productivity within the industry
  2. e.g. the internet has led to huge cost savings by businesses who have switched to or are engaged in e-commerce
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17
Q

Improved transportation networks

A
  1. Improved transportation networks help to ensure prompt deliveries
  2. Employees who are late to work due to poor transportation links cost the business money so improved network transportation networks reduces that cost
  3. Customers want convenience and prefer to visit suppliers that are easily accessible
  4. Ultimately, congestion increases business costs whilst reducing revenues and improved transportation networks reduces congestion
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18
Q

Skilled Labour

A
  1. An abundance of skilled labour might exist in the local area. This could be due to government aid training programmes, good education, or training facilities which are in a specific area
  2. This provides businesses (especially local) with a suitable pool or educated and trained labour which will help to cut recruitment costs and training costs without compromising productivity level
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19
Q

Regional specialisation

A
  1. Regional specialisation means that a particular location or country has a highly regarded and trustworthy reputation for producing a certain good or service
  2. e.g. Murano famous for glass products
  3. This allows the industry to benefit from having access to specialist labour, sub-contractors, and suppliers. This will reduce the average costs of production for the industry
  4. It could also allow for the industry/location to charge high prices due to its reputation
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20
Q

Diseconomies of scale

A
  1. There comes a “tipping point” where economies of scale can no longer be exploited
  2. Diseconomies of scale are the result of higher unit costs as a firm continues to increase in size
  3. The potential for large firms to experience diseconomies of scale means that some businesses may prefer to grow via franchising
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21
Q

Internal diseconomies of scale

A
  1. Are within the firm’s control and within the firm

2. Usually due to managerial problems

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22
Q

Types of Internal diseconomies of scale

A
  1. Lack of control and coordination
  2. Poorer working relationships
  3. Slack
  4. Amount of bureaucracy
  5. Complacency
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23
Q

Lack of control and coordination

A
  1. As a firm becomes larger, span of control is likely to increase which can cause lack of control and coordination and communication problems
  2. Ultimately, these difficulties slow down decision-making
  3. Coordination and control problems also occur for businesses with operations in different locations throughout the world
  4. Workers in larger organizations are much more likely to feel a sense of alienation which can harm staff morale
  5. These issues add to the firm’s costs without corresponding to an increase in productivity so unit costs are raised.
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24
Q

Poorer working relationships

A
  1. There is likely to be poorer working relationships in an oversized business
  2. Since span of control is getting larger, senior managers are more likely to become detached form those lower in the hierarchy which makes them feel distanced or out of touch
  3. This damages communication and morale which will reduce productivity and lead to higher unit costs
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25
Q

Slack

A
  1. Big organizations are likely to suffer from the disadvantages of specialisation and division of labour as workers may become very bored with performing repetitive tasks
  2. This can lead to slack (inefficiency and procrastination) which will reduce productivity and efficiency leading to an increase int eh average costs of production
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26
Q

Amount of bureaucracy

A
  1. The amount of bureaucracy (administration, paperwork, policies etc) is likely to increase as a business grows
  2. This makes decision-making more time consuming and adds to the costs of the business, but is unlikely to contribute to any extra output of goods or services to the customer
  3. Bureaucracy can also make communication more difficult which will worsen working relationships and also contribute to higher unit costs
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27
Q

Complacency

A
  1. Complacency with being a large and dominant player or possibly even market leader in the industry can cause many problems
  2. Complacency is likely to reduce productivity which will raise unit costs of production
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28
Q

External diseconomies of scale

A
  1. External diseconomies of scale refer to an increase in the average costs of production as a firm grows due to factors beyond its control
  2. It is usually problems that affect the whole industry or occur because there are too many firms
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29
Q

Types of external diseconomies of scale

A
  1. Increasing market rents
  2. Higher wages and financial rewards
  3. Traffic congestion
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30
Q

Increasing market rents

A
  1. Too many businesses locating in a certain area can cause land to become more scarce and increase market rents
  2. This will add to the fixed costs of all businesses in the area and will not lead to an increase in output so unit costs will rise
  3. The high demand for businesses to locate in busy cities such as Manhattan or London has resulted in a sustained and continuous rise in the rental value of land in these “prime” locations
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31
Q

Higher wages and financial rewards

A
  1. Workers have a greater choice from a large number of employers in the local area, so businesses most likely have to offer higher wages and financial rewards to retain workers and attract new staff
  2. This will increase costs without increasing output which will raise average costs of production
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32
Q

Traffic congestion

A
  1. Traffic congestion results from too many businesses being located in one area
  2. Deliveries are likely to be delayed due to traffic and overcrowding
  3. This increases transportation costs for businesses which will increase the unit costs of production
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33
Q

Ways a business can be measured

A
  1. Market share - a firm’s sales revenue as a percentage of the industry’s total revenue
  2. Total revenue - the value of a firm’s annual sales turnover per time period
  3. Size of workforce - the total number of employees hire by the business
  4. Capital employed - the value of the firm’s capital investment for the business to function

DO NOT USE PROFIT !!

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34
Q

Benefits to an organization being large/growth of a company

A
  1. Brand recognition - familiarity with the brand allows large businesses to sell to a wider market. Large firms are often established enough to have global brand recognition
  2. Bran reputation - larger firms tend to be more trusted due to their brand image and reputation
  3. Value-added services - Larger firms have the resources and capital to provide a wider range of services such as extending opening hours
  4. Lower prices - Larger firms can benefit from economies of scale and offer customers better prices
  5. Greater choice - larger firms can provide more choice of items such as Amazon
  6. Customer loyalty - customers are more likely to remain loyal to a business, its products, and its brands due to the perceived trust and value for money
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35
Q

Benefits to an organization remaining small

A
  1. Cost control - Large scale operations may lead to diseconomies of scale and so owners of small firms may not want to expand as they may face higher unit costs as their organizations grow. Growth also requires a lot of money and possible dilution of control
  2. Financial risk - The costs of running a large global business is expensive so the financial risk is also very high
  3. Government aid - Financial support in the form of grants and subsidies is often offered to small businesses
  4. Local monopoly power - small businesses may enjoy being the only firm in a particular location (such as a local restaurant) which provides themselves an opportunity to establish themselves in an area
  5. Personalised services - small firms have more time to devote to individual customers and getting to know them better as they are not pressurised by high sales targets
  6. Flexibility - small businesses tend to be more flexible and adaptive to change as compared to large businesses which have large financial commitments and conflicting stakeholder objectives
  7. Small market size - some small local businesses are unlikely to attract the attention of large firms due to their limited market size so they have less competition
  8. Cannibalisation of their own sales (if they open to many stores)
  9. Less workload
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36
Q

Reasons why firms to seek to grow

A
  1. To reap the benefits of economies of scale
  2. To gain larger market share and market power which will most likely allow the firm to charge higher prices
  3. Growth is often a means of survival as competitors are also striving for growth
  4. To spread risks by diversifying into new markets rather than focusing on only one market
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37
Q

Overtrade

A

a firm expanding too quickly by taking on more orders than they have the capacity to handle

38
Q

Types of business growth

A
  1. Internal growth

2. External growth

39
Q

Internal growth

A
  1. Internal growth occurs when a business grows organically, using its own capabilities and resources to increase the scale of its operations and sales revenue.
  2. It is typically financed through a combination or retained profits, borrowing, and issuing of new shares
  3. Internal Growth can happen at a steady slow pace and is how every business grows in the beginning
40
Q

Examples of types of internal growth

A
  1. Changing prices
  2. Effective promotion
  3. Better products
  4. Greater distribution network (Placement)
  5. Offer credit
  6. Increased capital expenditure
  7. Improved training and development
41
Q

Changing prices

A
  1. Type of internal growth
  2. More customers tend to buy a product at lower prices so lowering prices will most likely lead to an increase in sales especially in a highly competitive market
  3. However, if there are very few substitutes for this item in the market, the business will earn more revenue by raising prices
42
Q

Effective promotion

A
  1. Type of internal growth

2. People are more likely to buy a product if they are informed, reminded, and persuaded about its benefits

43
Q

Better products

A
  1. Type of internal growth
  2. Through methods such as market research, innovation, and new product development business can product products that are more appealing to the market which will raise sales
  3. Most new products on the market fail so it’s quite common for firms to improve on features of the existing product
  4. Innovation is a lucrative source of internal growth
44
Q

Placement

A
  1. Type of internal growth
  2. Selling through a greater distribution network (placement) will make the product more widely available thus increasing sales
45
Q

Offer preferential credit

A
  1. Type of internal growth
  2. Customers are more likely to make a purchase if they are offered the ability to “buy now and pay later”
  3. Allowing customers to pay in regular instalments over 12 or 24 months for the price of expensive products like cars can attract more customers to the market
  4. Firms have to be careful though not to give out too much credit as it will have a negative impact on their cash flow
46
Q

Increased capital expenditure

A
  1. Type of internal growth
  2. Internal expansion of the business to new locations or the introduction of new production processes and technologies to improve productivity
  3. Investing more into the company
  4. Have to be careful so that investment risks are not too high
47
Q

Improved training and development

A
  1. Type of internal growth
  2. Employees is vital as customers are unlikely to buy from people who have little to no product knowledge
  3. Training and development not only helps to make staff more confident and competent, but it can help to motivate them
  4. This improves the level of customer service which leads to greater customer loyalty and higher sales
48
Q

Pros of internal growth

A
  1. Better control and coordination as it is easier to grow internally than to rely on external sources. Organic growth means the firm maintains control whereas external growth can lead to a loss of control and ownership
  2. It is relatively inexpensive as the main source of organic growth is retained profit. The higher cost of external growth may mean that for some firms internal growth is the only suitable method for growth
  3. Maintains corporate culture as management usually does not change
  4. Less risky and is the easiest method of growth for most businesses - steady growth
  5. Benefits from economies of scale
49
Q

Cons of internal growth

A
  1. Diseconomies of scale especially because hierarchical structures tend to be a feature of internal growth which causes communication and slow decision making problems
  2. A need to restructure and hire if the growth is large
  3. Dilution of control and ownership if a firm grows by changing its legal status such as a partnership with a public limited company
  4. Slower growth than external growth
50
Q

External growth

A
  1. also called inorganic growth
  2. Occurs through dealing with outside organizations
  3. Such growth usually comes in the form of alliances, mergers, or takeovers, with other firms
51
Q

Amalgamation of firms

A
  1. Could also be known as integration of firms
  2. Mergers and acquisitions (M&As) are collectively known as amalgamation of integration of firms
  3. M&As is the integration of two or more businesses to form a single company
  4. The new firm will usually benefit from economies of scale and have a larger share of the market they are in
52
Q

Pros of external growth

A
  1. External growth is a faster way to grow and evolve as compared to internal growth as the groundwork is usually laid down (merging with a supermarket)
  2. It is a quick way to reduce competition. Some strategies however can be prohibited by the government because the lack of competition might not be in the best interest of the general public
  3. It can bring greater market share and market power
  4. Working with other businesses means sharing of ideas which will generally lead to generating new skills experiences and customers
  5. Can help a firm to evolve which will spread risks across several distinct markets
  6. Benefit from economies of scale
53
Q

Cons of external growth

A
  1. Huge costs, which are much higher than what is needed for internal growth
  2. culture of company may change
  3. lose control of the company
  4. diseconomies of scale
54
Q

External growth methods

A
  1. Mergers and acquisitions (M&As)
  2. Join ventures
  3. Strategic alliances
  4. Franchising
55
Q

Merger

A
  1. A merger takes place when two firms agree to form a new company
  2. e.g. the merger between a UK and USA oil company (the company will be renamed)
  3. Mutual decision of two companies to combine and become one entity, a decision made by two “equals”, the goal of producing a company that is worth more than the sum of its parts.
  4. Shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity.
56
Q

Takeover

A
  1. A takeover is also known as an acquisition
  2. It occurs when a company (usually larger) buys a controlling interest in another firm and absorbs the company into their own
  3. To entice shareholders of the target company to sell their shares, the offer price is likely to be well above the stock market value of the shares - they buy it outright from shareholders
  4. Can be “hostile” or “friendly”
57
Q

Reasons why businesses become takeover targets

A
  1. They have growth potential but lack sufficient funds for internal growth
  2. They are seen as a small rival that has growth potential
  3. They have a widely recognised corporate name of brand but are facing a financial crisis
  4. They are vulnerable (which makes them an easy target for a takeover) due to a drop in profits and subsequent fall in their share price
58
Q

Types of integration

A

There are four types of integration that can occur in a M&A

  1. Horizontal integration
  2. Vertical Integration
  3. Lateral integration
  4. Conglomerate M&As
59
Q

Horizontal integration

A
  1. Most common type of M&A
  2. It occurs when there is an amalgamation of firms operating in the same industry such as Nike buying Umbro (both sports apparel industry)
  3. Horizontal M&As do not represent growth in the industry but a larger market share, and hence greater market power for amalgamated businesses
  4. Companies are essentially buying or merging with a direct competitor
60
Q

Vertical integration

A
  1. vertical integration takes place between businesses that are at different stages of production but in the same industry
  2. It can be forward vertical integration (the amalgamation of businesses that head towards the end stage of production - buying a customer such as a coffee manufacturer buying cafes) or backward integration (businesses towards an earlier stage of production - buying a supplier such as a coffee manufacturer merging with its supplier of coffee beans)
  3. This strategy helps the manufacturer to secure lower costs of raw materials
61
Q

Lateral integration

A
  1. Lateral integration refers to M&As between firms that have similar operations but do not directly compete with each other
  2. e.g. PepsiCo acquiring Quaker Oats or Tata motors (mass market cars) acquiring Jaguar and Land Rover (luxury cars)
  3. They are not a direct competitor
62
Q

Conglomerate M&As

A
  1. Conglomerate M&As are the amalgamation of businesses that are in completely distinct or diversified markets
  2. e.g. Berkshire Hathaway owning businesses in insurance, clothing, flight services etc
  3. Known as diversification
63
Q

Benefits of M&As

A
  1. Greater market share and larger customer base
  2. Economies of scale
  3. Synergy as the integrating firms have access to each other’s resources, such as distribution channels and technology. Their combined resources will help to boost productivity and profits
  4. M&As are a fast method of growth to protect the survival of businesses
  5. Diversification through some M&As which will allow them to benefit from a larger customer base and reduce risks
64
Q

Cons of M&As

A
  1. Redundancies are likely to occur due to cost savings in M&As
  2. Conflict between the firms is inevitable in M&As
  3. Culture clash due to the different firms. People and processes will need to adapt to the desired corporate culture of the newly formed organization. This could take time
  4. Loss of control from the original owners as the new board of directions will need to be restructured
  5. Diseconomies of scale
  6. Regulatory problems as governments may be concerned if the new organization could become a monopoly
65
Q

Benefits of horizontal integration

A
  1. reduces the number of competitors
  2. economies of scale
  3. combined business will have a bigger share of the total market than either business before the integration
66
Q

Benefits of forward vertical integration

A
  1. Merger gives an assured outlet for its product
  2. Profit margin made by the retailer is absorbed by the expanded business
  3. Retailer could be prevented from selling competing brands
  4. Information about consumer needs and preferences can be obtained directly by the manufacturer
67
Q

Benefits of backward vertical integration

A
  1. merger gives an assured supply of important components
  2. profit margin of the supplier is absorbed by the expanded business
  3. supplier could be prevented from supplying other manufacturers
  4. Costs of components and supplies for the manufacturer could be controlled
68
Q

Benefits of conglomerate integration

A
  1. Business has activities in more than one industry so the business has diversified
  2. Spreads the risk taken by the business
  3. Could be a transfer of ideas between the different sections of the business despite them being in different industries
69
Q

Joint Ventures

A
  1. A join venture occurs when two or more businesses split the costs, risks, control, and rewards of a business project
  2. They are setting up a new legal entity
  3. e.g Coca-Cola has a joint venture with San Miguel by shared ownership of Coca-Cola’s bottling plant in the Philippines
  4. Typically, a join venture allow organizations to enjoy some of the benefits of mergers and acquisitions (such as higher market share) but without having to lose their corporate identity
70
Q

Pros of joint ventures

A
  1. Higher market share without loosing corporate identity
  2. Synergy - pooling of experiences, skills, and resources of the collaborating firms should create synergy
  3. Spreading of costs and risks are shared which help to reduce the financial burden on a single organization
  4. Can help a firm to diversity their products which spreads risks
  5. Joint ventures are often used by companies wanting to enter foreign countries by forming an agreement with local firms
  6. Relatively cheap in comparison to things such as a takeover
  7. Competition could be reduced by forming a JV - companies cooperating in a JV are unlikely to directly compete with each other but their joint resources make them a stronger force against their rivals
  8. Economies of scale
  9. Exploitation of local knowledge and reputation
  10. High success rate as they are often friendly and receptive and have a mutual benefit. By contrast, takeovers often fail due to their unfriendly and hostile nature
71
Q

Cons of joint ventures

A
  1. Partners in a JV have to rely heavily on the resources and goodwill of their counterparts
  2. There is likely to be dilution of the brands, yet firms spend huge money trying to develop their own brands
  3. The possibility of organizational culture classes which can lead to operational problems
  4. If the project is successful the profits must be shared
72
Q

Strategic alliances

A
  1. A strategic alliance is similar to a join venture in that two or more businesses cooperate in a business venture for mutual benefit
  2. The firms in the SA share the costs of product development, operations, and marketing
  3. Unlike JVs, forming a strategic alliance means that the affiliated businesses remain independent organizations
  4. It is usually an informal agreement between 2 firms (unlike joint ventures)
73
Q

Four key stages to the formation of strategic alliance

A
  1. Feasibility study - Investigate and establish the rationale, objectives, and feasibility of the SA
  2. Partnership assessment - Analyse the potential of different partners and what they can offer (financially and human expertise)
  3. Contract negotiation - Negotiations take place to determine each member’s contributions and rewards and then form a mutually acceptable contract
  4. Implementation - Operations are initiated with commitment to the contract from all parties
74
Q

Main purpose of strategic alliances

A
  1. The main purpose of SAs is to gain synergies from the different strengths of the members of the alliance by pooling their resources
  2. They benefit from each other’s expertise and financial support
  3. e.g. two airlines both with half-empty aircraft could directly compete or they could collaborate to form a full airplane and cut staff and fuel costs and then split the profits from mutual benefits
75
Q

Pros of SAs

A
  1. Gain synergies from each other
  2. Benefit from economies of scale
  3. Customers are likely to benefit from added value services under a SA, such as the convenience of access to wider channels of distribution
76
Q

Cons of SAs

A
  1. Partners in a SA have to rely heavily on the resources and goodwill of their counterparts
  2. The possibility of organizational culture classes which can lead to operational problems
  3. If the project is successful the profits must be shared
77
Q

Franchising

A
  1. A franchise is a form of business ownership whereby a person or business buys a license to trade using another firm’s name, logos, brands, and trademarks
  2. In return for the benefit, the purchaser of a franchise (aka franchisee) pays a license fee to the parent company of the business (aka franchisor)
  3. The franchisee also has to pay a royalty payment (usually commission) based on the sales revenue of the franchisee
  4. The franchisee invests an amount of initial capital but the franchisor supports the franchisee with training, marketing, and advice
  5. The franchisee has to adhere to certain rules set by the franchisor
  6. Firms like mcdonalds and subway use this often to grow
78
Q

Benefits of franchising for the franchisor

A
  1. The company can experience rapid growth without having to risk huge amounts of money as the franchisee pays for the outlet itself. It is often cheaper than internal growth
  2. It allows the company to have a national or international presence without the higher costs of organic growth or M&As (franchisee helps to finance the expansion)
  3. The franchisor benefit from growth without having to worry about running costs such as staff salaries - Management of outlets is the responsibility of the franchisee
  4. Franchisors receive royalty payments, usually set as a percentage of the sales revenue. They can also charge a “membership” fee to the new franchisees
  5. Franchisees have more incentives to do better than salaried managers, so their is an increase chance of success
79
Q

Benefits of franchising for the Franchisee

A
  1. There is lower risk since the franchisor has a tried and tested formula so the chances of success are high. They are usually selling a well-known product
  2. Relatively lower start-up costs because the business idea has already been developed by the franchisor (no need for market research or product development)
  3. In the best interest of the franchisor to ensure that the franchise succeeds, so it will provide added-services to the franchisor such as training
  4. The franchisee is likely to benefit from large scale advertising used by the franchisor (free advertising and promotion) which will help to reduce their costs
  5. Franchisees can have a greater awareness of local market conditions and needs which will boost the chance for success
  6. Fewer decision than an independent business - prices, store layout, and range of products have been decided by the franchisor
80
Q

Drawbacks of franchising for the Franchisor

A
  1. There is huge risk in allowing others to use the franchisor’s name. Unsuccessful franchisees can damage the reputation of the whole business
  2. It can be difficult to control the daily operations of franchisees and get them to meet the quality standards set by the franchisor
  3. Although franchising is faster than internal growth, it is not as quick as M&As
  4. The franchisee keeps most profits from the outlet
81
Q

Drawbacks of franchising for the Franchisee

A
  1. Franchisees cannot simply use their own initiative to try out new ideas as they are regulated by the franchisor. This constrains the entrepreneurial talents of the franchisee
  2. Buying a franchise can be expensive, and their is no guarantee for profit
  3. Franchisees have to pay a significant percentage of their revenues to the franchisor
  4. Usually absorbs the loss if no profit is made
82
Q

Globalization

A
  1. Globalization is the growing integration and interdependence of the world’s economies
  2. It has caused national economies to integrate towards a single global economy, where consumer have ever-increasingly similar habits and tastes
  3. With globalization, economic and political decisions taken in one region of the world will affect those in other parts as well
  4. Multinational firms such as Apple and IKEA design and market their products to a world audience which often leads to consumers around the world easily recognise and have similar taste for their products
  5. Globalization often allows firms to exploit global marketing and production economies of scale as they grow and evolve
83
Q

Cons of globalization on business growth and evolution

A
  1. Globalization considerably increases the level of competition in a market as more brands are available worldwide. The internet has also reduced costs for many industries, thereby reducing barriers to entry and attract competition.
  2. Meeting customer expectations becomes increasingly more demanding as businesses must now meet the ever-greater customer demands for quality, customer service, price, and after-sales care in order to have any competitive advantage
  3. Pressure groups and the media are more adamant and powerful
84
Q

Pros of globalization on business growth and evolution

A
  1. Can benefit from economies of scale such as global marketing or risk-bearing economies
  2. Greater choice of location for multinational companies which can help reduce a firm’s costs of production - e.g. apple is created in California and assembled in China (labour in China is cheaper etc)
  3. There are more external growth opportunities such as joint ventures and M&As. Globalization enables businesses to have more choice in their expansion plans
  4. Increase sources of finance to fund business growth and evolution
  5. A business that is able to expand overseas before its rivals may gain first-mover advantage as it establishes itself and builds up a loyal customer base
85
Q

Multinational companies

A
  1. MNCs is an organization that operates in two or more countries
  2. MNCs often have their head office based in their home country
  3. Examples include Apple, HSBC, Nike, etc which all excel within their industries in terms of sales, profits, assets, and market value
86
Q

Transnational corporation

A
  1. Similar to MNCs and sometimes used interchangeably
  2. However instead of having their head office based in their home country like MNCs, transnational corporation has regional head offices rather than a single international base
87
Q

Why businesses want to become MNCs

A
  1. Increased customer base allows them to increase their sales turnover
  2. International brand recognition
  3. Are usually able to benefit from cheaper production costs, especially inexpensive labour
  4. As production levels increase, MNCs can benefit from economies of scale and benefit from the host country’s infrastructure, better quantity/quality of land, financial incentives from the government etc
  5. By producing within a particular country, MNCs can usually avoid any protectionist policies that the country may impose
  6. Help to spread risks between different markets and locations (natural disasters, low economy, diseases etc)
88
Q

Host country

A

A host country is any nation that allows a multinational company to set up in its country

89
Q

Pros of MNCS to the host country

A
  1. MNCs create jobs in the host country which can lead to an increase in the economy as people have more disposable income. MNCs also tend to offer higher pays than local firms
  2. Help to boost the host country’s GDP by creating consumption expenditure (since more people are paid due to employment) and by boosting export earnings for the host country, which can help improve its standards of living
  3. Introduction of new skills and technology in production processes to host countries. With new ideas in management thinking and technology transfer, the efficiency of production in the host country is raised
  4. Intensify competition in the host country which can help to push domestic firms and also give customers more choice
90
Q

Cons of MNCS to the host country

A
  1. MNCs are also capable of causing unemployment in the host country as they often pose a threat to domestic businesses if they are unable to compete and end up making people redundant or even closing down
  2. Whilst MNCs can create wealth in a host country, the profits are repatriated to the home country (money is usually sent back to the home country)
  3. Degree of uncertainty because MNCs are footloose (not tied to a specific location so they can change at short notice)
  4. MNCs may not follow their social responsibility in their attempt to grow and exploit the planet’s scarce resources. Host nations are often unable to control the actions of large MNCs because of their huge market power
  5. Domestic firms might be forced into reducing prices to remain competitive. They become very prone to takeover bids or collapse
91
Q

Brand acquisition

A
  1. Alternative to a complete merger or takeover
  2. Buying a brand instead of the whole business
  3. Cheaper and lower risk
92
Q

Optimal level of output

A

the optimal level of output is the most efficient scale of operation for a business which occurs at the level of output where average costs of production are minimised

iB Business Management (14 decks)

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