unit 4 Flashcards
reasons for a business to stay small (4)
- easier for the owner to manage
- quicker decision making
- personal service to customers
- growing may mean additional investment - could give up ownership
reasons for a business to grow
- economies of scale (EOS)
- higher sales revenue = potentially higher profit
- Higher market share (more power in market)
- Better brand recognition
- More power over suppliers
- Sense of achievement for owners
- Can invest in research and development
Two forms of growth
- internal growth
- external growth
What is internal growth?
Example?
- Expansion of a business by its resources and not involving other businesses
- Might be financed through loan capital, share capital, retained profits etc.
Eg.
- Opening new shops/factories
- Expanding overseas
What is external growth?
Examples (5)
- Expansion involving other businesses
Eg.
- Merger & Acquisition
- Takeover
- Joint Venture
- Strategic Alliance
- Franchise
What are economies of scale?
- when the firms average cost decreases as it increases its scale of production
- As the firm produces more, it becomes more cost efficient
What is a diseconomy of scale?
- When a firms average cost increase as it increases its scale of production
What is the definition of internal economies of scale?
Economies of scale resulting from the firm producing more output
List 5 Internal Economies of scale
- Purchasing Economies
(higher purchase power - enable to negotiate discounts)] - Financial Economies
(lower interest rates on loans - size and creditworthiness and stability ) - Managerial Economies
(dividing tasks and responsibilities among specialised departments - greater efficiency and productivity) - Marketing Economies
(spread marketing and advertising=reach broader audience) - Technical Economies
(advances technology+machinery = increase efficiency - EOS)
What are external economies of scale?
Economies of scale resulting from the whole industry growing in size
List 3 external economies of scale (explain them)
- Infrastructure improvements (transportation etc.)
- More skilled labour (larger pool to hire from)
- Suppliers become more efficient
Definition of diseconomies of scale
- Shen average costs go up as output increases
- Usually from the problems managing too large a business
3 examples of diseconomies of scale (explain)
- Lack of communication
- Poor coordination and control (spread out departments)
- Staff morale
What is a merger?
Company X + Company Y = Company Z
When two firms agree to combine to form one larger business
- the shareholders of X and Y become shareholders of Z\
Eg. Kraft Heinz
What is acquisition?
Company X (takes over Company Y) = to make Company X
- or a controlling interest - meaning buying >51% of the shares
Eg. Amazon buying Zappos
What is takeover?
When company X says “we want to buy you company Y” and company Y says no
- company X buys >51% of the shares of company Y
List Integration Methods
Horizontal Integration
Vertical Integration
Backwards Vertical Integration
Forwards Vertical Integration
Conglomerate Integration
What is horizontal integration
Combining of two firms in the same industry and at the same stage of production
Pros (3) and Cons (3) of Horizontal Integration
Pros
- Greater market share and dominance
- Can enter a new market
- Economies of scale
Cons
- Leadership and culture clash
- Regulatory attention (from government could say the two companies are too big)
- Potential for diseconomies of scale
What is vertical integration
Integration with firm in the same industry and at different stages of production
Backwards Vertical Integration:
- Integration with a supplier
Forwards Vertical integration:
- Integration with a customer (in forms of retail etc.)
Pros (3) and Cons (3) of Vertical Integration
Pros
- Can control own supply chain (BVI)
- Greater knowledge of the market (FVI)
- Economies of scale
Cons
- Costs of acquiring other businesses
- Lose focus on core business activities
- Potential for diseconomy of scale
What is conglomerate integration?
Integration with a firm in a different industry
- Eg. an airline buys a car manufacturer
- Eg. a chocolate company buys a zoo
What is a conglomerate business?
A business which operates in a number of different industries
Eg. Nestle
Pros (3) and Cons (3) of conglomerate integration
Pros
- Spread risk through diversification (spread to different markets so if trends change its ok)
- Access to new customers and markets
- Economies of scale
Cons
- Costs of acquiring other business
- Lose focus on core business activities
- Potential for diseconomies of scale
What is a strategic alliance?
PROS?
Agreement between two firms to work together but still remain independent companies
Eg. Mcdonald’s sells cola
- more customers
- access to a larger market
What is a joint venture?
When two businesses combine their resources to set up a new business
- the new business set up has its own legal identity
Pros (3) and Cons (3) of Joint Venture
Pros
- Share knowledge and expertise
- Remain independent businesses
- To enter a foreign market
Cons
- Disagreement about the terms of the deal
- Clash over key decisions
- Culture clash
What is a franchise?
When a business (franchisor) allows another business (franchisee) to use their brand name, product and business model
What may franchisees use?
- brand name
- logo
- supply chain
- marketing
- training manual
Pros (2) and Cons (2) for a franchisor
Pros
- can grow quickly
- do not need to pay for the expansion
Cons
- need to ensure quality is maintained in each franchise
- one bad franchise can ruin the whole brand
Pros (2) and Cons (2) for a franchisee
Pros
- benefits from the brand image of the franchisor
- also benefit from their marketing, supply chain, training etc.
Cons
- have to pay part of the sales/profit to the franchisor
- no say in running of the business
What is operations management?
the process of designing and managing the production process - using resources to produce goods and services
How does operations management interact with the other parts of the business?
Marketing
- Quality and packaging
- Standardized production or custom-made
Human resource
- Mass production may lead to layoffs
- Amount of training/skills required
Finance
- Capital intensive machinery requires initial investment
- Labor intensive requires salaries
What is job production?
Each product is customised or tailor made to meet specific requirements of the customer
Eg. tailored suits, wedding dress, haircut, legal advice
What is batch production?
Producing a number of similar products (a batch) at one time
Producing items in identical groups
Eg.
- Bakery
- Newspapers
- Clothes
Pros (3) and Cons (3) of Job Productions
Pros
- Higher customer satisfaction
- Higher quality - USP - skilled workers
- Higher employee motivation
Cons
- Labor intensive, higher labor costs
- Time needed, less potential to automate
- Few economies of scale as lower output
Pros (3) and Cons (3) of Batch Production
Pros
- more product variety - can satisfy more customers
- still some flexibility to change the product between batches
- more economies of scale - lower unit costs
Cons
- less tailored for customers
- costs of holding stock - storing each batch
- set up costs - machinery etc.
What is Mass Production?
Involves large scale production of a standardised product. Usually capital intensive so highly automated
What is flow production?
similar to mass production, but continues 24 hours a day and very capital intensive
Eg. oil rigs
Pros (4) and Cons (4) of mass production
Pros
- Economies of scale from high volumes of production
- Higher labor efficiency as workers specialize in one job
- Standardised product enables consistent brand image
- Less labor intensive so lower labor costs and less motivation issues
Cons
- Set-up costs - buying production line machinery
- Lower employer motivation - specialization
- More difficult to offer a different product choices to consumers
- Higher storage costs
What is Mass Customisation?
Combines flexibility + personalisation from job production and scale from mass production.
- still has advantages of cost - economies of scale
Eg. MyMuesli
What determines what is the most appropriate method of production?
- Level of demand
- Which production will be high enough to make it profitable
- Services tend to be job production
- What are the marketing goals of the company?
