3.2 Flashcards
What are internal economies of scale?
A reduction in average cost bought about by an increase in the size of the business
Name some internal economies of scale?
Technical Marketing Managerial Financial Purchasing Risk spreading
What are external economies of scale?
A reduction in the average cost bought about by an increase in size of the WHOLE industry.
What is market power?
Means the the seller can have control over the price charged. Starts with product differentiation; as business grows it gets brand recognition and enhances market power. It can also mean that big businesses can control the prices they must pay when buying from small supplier businesses who compete with each other.
Problems arising from growth?
Diseconomies of scale
Communication within business becomes much harder - efficiency may drop
Weak communication may stop collaboration between departments
Staff motivation will fall as people feel less significant
Become less flexible, less able to respond quickly to change
Overtrading occurs when a business expands rapidly > may cause cash flow issues & insolvency
What is minimum efficient scale?
It shows the lowest level of output at which a business can get the maximum benefit from economies of scale.
When do diseconomies of scale occur?
When a business encounters cost increases that make larger scale production less efficient.
Reasons for mergers and takeovers?
Complementary strengths Sharing overhead costs Acquisition of assets, patents and brand names Breaking into new markets Diversification Defensive reasons Synergy
What is a merger?
It combines two businesses by mutual agreement, they then operate under a unified management structure.
When do takeovers occur?
When one business succeeds in buying more than half the shares of another business.
What is horizontal integration?
It means that two businesses in the same industry have joined together.
What is vertical integration?
When two businesses in the same industry, but at different stages of the production process of supply chain, have joined together.
What is conglomerate integration?
Occurs when two businesses that have nothing in common join together.
What is organic growth?
Occurs when a business grows from within by using its own resources to produce and sell more
What is inorganic growth?
Involved taking over or merging with another company in order to increase output and sales
