LESSON 1.5 Flashcards
Economices of scale
the lower AC of production as the scale of production increases due to improvements in productive efficiency
Diseconomies of scale
the cost disadvantages of growth; AC increase as production increases due to a lack of control/coordination/communication
Internal economies of scale
occurs within an organization as it grows in size
- Technical
- Financial
- Managerial
large firms divide managerial roles by employing specialist managers, leading to less work duplication
- Specialization
- Marketing - using same marketing campaign everywhere t o save money
when larger businesses can afford to hire specialist managers, improving efficiency and productivity
- Purchasing
large firms can lower their average costs by buying resources in bulk, AC lowers a lotttt
- Risk-bearing
occurs when large firms can beark risk more than small ones because they have a greater product portfolio
External economies of scale
economies of scale that occur within the industry; all firms in industry benefit
Types of external economies of scale
- tech progress
- improved transport networks
- abundance of skilled labour
- regional specialization!!!!! (Silicon valley)
Internal diseconomies of scale
occur due to internal problems of mismanagement, causing average costs of production to increase as a firm grows
types of internal diseconomies of scale
- lack of control/coordination
- communication probs.
- beauracracy, more paperwork
- poor working conditions - management become distant, employees lack motivation
external diseconomies of scale
occur due to factors beyond our control that raise AC of production
external diseconomies of scale (too many firms)
Too many businesses located in a certain area causes land to become more scarce thereby increasing market rents (rents of that industry); thus, adding to the fixed costs of a business without any increase in output
Workers have more employers to choose from in the local area, so a business will have to offer higher wages/financial rewards to retain employees; thus, increasing variable costs without necessarily increasing output; therefore, raising the AC of production
Traffic congestion; deliveries are likely to be delayed due to the overcrowding - increasing transportation costs for a business, thereby increasing AC
Benefits of an organization being large
Brand recognition & reputation
Value-adding services (larger firms have the financial resources to provide a wider range of services)
Lower prices (benefit from economies of scale)
More choices for customers
Customer loyalty (b/c of the aforementioned pros)
Benefits of an organisation being small
Cost control
Lower financial risk
Government aid
Local monopoly power (small businesses may enjoy being the only firm in a particular location that offers a certain service)
Personalized services
Flexibility
Small market size (large businesses might find it unnecessary to compete with these small firms, thereby allowing them to thrive)
Internal growth
a growth strategy where a business grows relying on its own resources + capabilities to scale its operations & sales revenue
Pros and cons of internal growth
pros: maintains corporate culture/less risky/less expensive/maintain control + coordination
cons: slower growth/dilution of control and ownership/a need to restructure - takes money + time
external growth
when a business grows by collaborating with/buying up/merging with other businesses
pros and cons external growth:
pros:
quick
economies of scale!
spreading of risk
synergy
reduced comp./greater market share
cons:
more expensive
more risky (diversification)
culture clash
potential internal diseconomies of scale
define mergers
define acquisitions
pros and cons of M&A
pros:
- greater market share
- economies of scale
- synergy, shared resources
- market development!!!
cons:
- culture clash/conflict
- job losses b/c of redundancies
- diseconomies of scale
