Unit 1 - 1.5 Growth and Evolution Flashcards
(43 cards)
Economies of scale
When average costs of production decrease as the organisation increases the size of its operations
Diseconomies of scale
When an organisation becomes too large, causing productive inefficiencies that result in an increase in average costs of production
Internal economies of scale
Occur inside the business and are within the firm’s control
Types of internal economies of scale (7)
- Technical
- Financial
- Managerial
- Specialisation
- Marketing
- Purchasing
- Risk-bearing
Technical economies
Use of sophisticated capital and machinery to mass produce goods → high fixed cost of equipment spread over huge scale of output → reduction of average cost
Financial economies
Firms borrow large sums of money at lower rates of interest due to reliability for return to financiers
Managerial economies
Division of managerial roles by employing specialist managers → higher efficiency results in fall of costs
Specialisation economies
Use of mass production techniques and specialisation → division of labour and limited responsibility at a high standard → higher productivity → lower costs
Marketing economies
Selling in bulk through marketing campaigns, the cost of which can be spread through using the same one across the world
Purchasing economies
Buying resources in bulk with discounts → cutting costs
Risk-bearing economies
Spread risk on the sale and introduction of different products → even if one fails, the others will keep the business and its profit running
Examples of internal diseconomies of scale (5)
- Lack of control and coordination
- Poorer working relationships
- Lower productuve efficiency from outsourcing
- Bueraucracy
- Complacency
External economies of scale
Business enhancing factors that occur outside a company but within the same industry
Types of external economies of scale (4)
- Technological progress
- Improved transportation networks
- Abundance of skilled labour
- Regional specialisation
Technological progress
Tech. innovation increases productivity within industry → significant cost savings
Improved transportation networks
Globalised transportation networks → firms’ ability to import raw materials and finished goods at much lower manufactured costs → increased convenience from improved logistical networks → faster deliveries at lower costs
Abundance of skilled labour
Locations may benefit from reputable education and training facilities → reduced cost of recruitment and training
Regional specialisation
Locations or countries have reputations for specialising in certain goods or services → access to specialist labour, sub-contractors and suppliers → can charge premium price for products
Examples of external diseconomies of scale (4)
- Higher rents
- Local market conditions for pay and financial rewards
- Traffic congestion
- Context specific problems
Internal growth
When a business grows by using its own capabilities and resources to increase the scale of its operations and sales revenue
External growth
When dealing with outside organisations: usually in the form of alliances or mergers with other firms or the acquisition of other businesses
Methods of internal growth (name 4)
- Changing prices
- Effective promotions
- Product innovation
- Incrased distribution
- Preferential credit for customers
- Capital expenditure
- Staff training and development
- Providing overall value for money
Advantages of internal growth (4)
- Better control and coordination
- Relatively inexpensive
- Maintains corporate culture (values and ethics of business)
- Less risky
Disadvantages of internal growth (4)
- Diseconomies of scale
- Restructuring the form of ownership may be needed
- Lead to dilution of control and ownership
- Slower method of growth
