Flashcards in Crazy new shit Deck (56)
What are economies of Scale?
- as a business and their output increases, they commonly benefit from a reduction in average costs of production. Total costs will increase as output increases.
- However the cost of producing each unit falls as output increases. This fall in average costs as output increases indicates that a business is benefiting from economies of scale. This reduction in average costs is what gives larger businesses advantage over smaller businesses.
- Economies of scale are an important aspect of efficiency in production. Economies of scale can defined as;
The reduction in average costs of production that occur as a business increases its scale of production.
What are purchasing economies?
- As businesses grow they increase the size of orders for raw materials or components. This may then result in discounts being given and the cost of each individual component purchased will fall. This will therefore reduce the average cost of production.
What are Internal economies of scale?
What are Technical economies?
- As businesses grow they will have access to a wider range of finance. As the assets of businesses grow, they are able to offer more security when seeking to borrow money - reducing the risk to the lender. As a result, larger businesses can often negotiate more favourable rates of interest on any money they do borrow
What are financial economies?
- As businesses grow they will have access to a wider range of finance. As the assets of businesses grow, they are able to offer more security when seeking to borrow money ; reducing the risk to the lender. As a result, larger businesses can often negotiate more favourable rates of interest on any money they do borrow.
What are Managerial economies?
- As businesses grow they are able to employ specialist managers. These managers will know how to get the best value for each pound spent in the business whether it is in production, marketing or purchasing.
- This will increase efficiency and thereby reduce the average costs of producing goods and selling the goods or services on offer.
What are marketing economies?
- As businesses grow each pound spent on advertising will have greater benefit for the business. Imagine a chain of local supermarkets: a TV advertisement is placed to cover the region. If there were 10 stores in the chain the cost of the advert must be borne by each of the 10 stores. However if they have 20 stores, then the cost of the advert would be spread across each of the 20 stores and the benefit of the advert applies to each of the 20 stores.
What are external economies of scale?
- Financial services
What are supplier economies?
- A network of suppliers may be attracted to an area where a particular industry is growing. The setting up locally of supplier businesses, often in competition with one another, reduces buying costs and allows the use of systems such as JIT
What are educational economies?
- Local colleges will set up training schemes suited to the largest employers' needs, giving an available pool of skilled labour. This reduces recruitment and training costs for those businesses who make up the industry concerned.
What are financial economies?
- financial services can improve, with banks and other financial institutions providing services that may be particularly geared towards a particular industry.
E.G. for an industry where cash flow may be a particular problem, debt factoring services may be made available at competitive rates.
What are diseconomies of scale?
- The factors that cause higher costs per unit of output when the scale of an organisation continues to increase - the causes of inefficiency in large organizations.
What are the internal diseconomies of scale?
- coordination issues
- motivation issues
Diseconomies of scale: coordination issues
- The larger an organisation becomes, the more difficult it is to coordinate. Inevitably there is a good deal of delegation and this empowerment of more and more managers to make their own decisions can result in different departments heading in different directions. To counter this, numerous management meetings have to be held.
- The time that managers spend in meeting, in an attempt to ensure better coordination within large organisations, can be viewed as a significant overhead cost.
Diseconomies of scale: Communication issues
- As an organization grows and levels of hierarchy increase, the efficiency and effectiveness of communication breaks down.
- This leads to increasing misunderstanding and inefficiency as each level of hierarchy grows further and further apart and messages become distorted, resulting in increasing average costs.
Diseconomies of scale: Motivation issues
- With larger businesses it is harder to satisfy and motivate workers as many may feel that their views are ignored, as they distanced from the organisation's decision makers. This means that they may not give off their best as they are not focused on the organization's aims and objectives.
What are the external diseconomies of scale?
- overcrowding in industrial areas
- increased price of resources
Diseconomies of scale: overcrowding in industrial areas
- traffic congestion may occur; resutling in late deliveries and staff arriving late for work. Local residents may resent this and public relations may suffer
Diseconomies of scale; Increased price of resources
- More businesses in an area means increased demand for labour to work in that industry and the best employees may be harder to recruit and keep. Land, services and materials may all become more expensive as the industry grows and demand for such resources increases.
How do small businesses survive and compete with larger businesses?
- Target market size; sometimes the potential sales are suited to small businesses, for example dog grooming services or kennels
- Population density; Large businesses need large target markets, if these don't exist then the market is left to small businesses
- Quality of service; often it is this added value aspect of the business that justifies the higher prices charged
- Customer loyalty; even in the modern retailing environment there are customers that remain loyal to local shops and service providers
- niche markets; sometimes the segment the small business is targeting is just too small to be worthwhile to big business or the product is legally protected for a period.
What are market orientated strategies?
- Businesses are market orientated when they produce what the market wants.
- This means that a market orientated business will set a price at the level the market is willing to accept.
What are cost based strategies?
- Businesses are product orientated when they produce goods without in depth reference to the needs of consumers.
- With regard to price, this means that a product orientated business will set a price relate to the cost of producing or supplying the product.
What are some market orientated pricing strategies?
- psychological pricing
- market skimming
- market penetration
- loss leader pricing
- destroyer pricing
- going rate pricing
What is Market skimming?
- Market skimming means charging a high price to maximise profits on each item sold for a limited period.
- The aim is to gain as much profit as possible for a new product while it remains unique in the market.
- The ability to skim depends on having either a technological advantage based on brand image.
What is Market Penetration?
- In this case the objective is to gain market share. It involves pricing a product at a low level so that retailers and consumers are encouraged to purchased the product in large quantities.
- This pricing strategy can help establish brand loyalty- when the price of the product does rise from the initially low level, customers will continue to purchase it.
- However, if the price is set too low, customers may take the view that the product is low quality and therefore they will not purchase it in the first place. A business may infact lose revenue initially, by using this method.
What is Going rate pricing?
- For many small business accepting the current market pricing structure is all they are able to do. When this is the only option there is a strong element of being a price taker.
- They must sell their goods or services at a price broadly in line with the price charged by their competitors.
- Normally as new entrants enter the market, the price charged will have to be similar to that of the market leader.
What is Psychological Pricing?
- Using this strategy, prices are set at the level that matches what consumers may expect to pay. Consumers perceive that they are receiving value from the price paid.
- Convinces consumers they are getting value for money.
What is loss leader pricing?
- This strategy involves the selling of products at a loss, with the expectation that this will generate further sales of some form, elsewhere in the business. The additional sales that occur will hopefully recoup the initial loss and subsequently make a profit for the business.
What is destroyer pricing?
- This is also known as predatory pricing.
- This involves setting a price low enough to drive competitors out of the market. This type of pricing is not only used by the largest businesses on a national scale, but it can also appear battles between local businesses.
- This strategy is illegal as it is seen as anti competitive.