Unit 1.6 - Growth and evolution Flashcards
What is the difference between internal and external economies of scale?
Internal: Arising from the company
External: Arising from extraneous factors such as industrial size
What is diseconomies of scale?
- Concept referring to a situation in which economies of scale no longer functions for a firm
- Firms see an increase in marginal cost when output is increased
Why do diseconomies of scale occur?
- A specific process within a plant cannot produce the same quantity of output as another related process
- As output increases, cost of transporting the good to distant markets can increase enough to offset any economic of scale
What is internal (or organic) growth?
When a business grows internally, using its own capabilities, and resources to increase the scale of its operation and sales revenue
What are the different methods of internal (organic) growth?
- Changing price
- Effective promotion
- Producing improved or better products
- Sell through a greater distribution network -> if a product is widely available, customers are more likely to buy it
- Increased capital expenditure (investment)
- Improved training and development
What is external (inorganic) growth?
Occurs through dealings with outside organisations. Such growth usually comes in the form of alliances or mergers with other firms or through the takeover of other businesses
What are the different methods of external growth?
Mergers - takes place when 2 firms agree to form a new company
Acquisition (takeover) - When a company buys a controlling interest in another firm
What is a joint venture?
2 or more business split the costs, risks, control, and rewards of a business project.
What are the advantages of a joint venture?
- Synergy: Pooling of experiences, skills and resources
- Spreading of costs and risks: Financial, costs, risks and losses are shares in a joint venture
- Entry to foreign markets
- Relatively cheap
- Competitive advantages
- High success rate
What are the disadvantages of join venture?
- Relies heavily on the resources and goodwill of their counterparts
- Possibility of organisational culture clashes
What is strategic alliance?
2 of more business cooperate in a business venture for mutual benefit. Affiliated businesses remain independent organisations.
What is franchising?
When a FRANCHISOR [the owner] provides a licensed privilege to the FRANCHISE to do business and offers assistance in organizing, training, merchandising, marketing, and managing in return for a monetary considersation
What are the benefits and drawbacks for the franchisor? Give 3 examples
benefits:
1. Company can experience rapid growth without having to risk huge amounts of money bc franchisee pays for the outlet itself
2. Don’t have to worry about running costs such as staff salaries, purchases of stocks, training
3. National and international presence without higher costs
drawbacks:
- Huge risk is allowing others to use the franchisor’s name, unsuccessful franchises can damage the reputation of the whole franchise business
- Difficult to control the daily operation of franchisees and to get them to meet the quality standard set by the franchisor
- Although franchising is faster than internal growth, it’s not as quick as M&As
What are the benefits and the drawbacks for the franchisee? Give 3 examples.
benefits:
1. Chances of business success are higher
2. Lower start-up costs
3. Franchisees can have greater awareness of local market conditions and needs, further boosting their chances of succeeding
drawbacks:
1. Can’t use their initiatives to try out ideas
2. Buying franchises can be very expensive
3. Franchises have to pay a significant % of their revenues to the franchisor
What is globalisation?
Process of interaction and integration among the people, companies, and governments
