- internal growth - external growth

unit 4 Flashcards by Sophia Student

reasons for a business to stay small (4)

easier for the owner to manage
quicker decision making
personal service to customers
growing may mean additional investment - could give up ownership

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reasons for a business to grow

economies of scale (EOS)
higher sales revenue = potentially higher profit
Higher market share (more power in market)
Better brand recognition
More power over suppliers
Sense of achievement for owners
Can invest in research and development

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Two forms of growth

internal growth
external growth

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What is internal growth?
Example?

Expansion of a business by its resources and not involving other businesses
Might be financed through loan capital, share capital, retained profits etc.

Eg.
- Opening new shops/factories
- Expanding overseas

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What is external growth?
Examples (5)

Expansion involving other businesses

Eg.
- Merger & Acquisition
- Takeover
- Joint Venture
- Strategic Alliance
- Franchise

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What are economies of scale?

when the firms average cost decreases as it increases its scale of production
As the firm produces more, it becomes more cost efficient

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What is a diseconomy of scale?

When a firms average cost increase as it increases its scale of production

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What is the definition of internal economies of scale?

Economies of scale resulting from the firm producing more output

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List 5 Internal Economies of scale

Purchasing Economies
(higher purchase power - enable to negotiate discounts)]
Financial Economies
(lower interest rates on loans - size and creditworthiness and stability )
Managerial Economies
(dividing tasks and responsibilities among specialised departments - greater efficiency and productivity)
Marketing Economies
(spread marketing and advertising=reach broader audience)
Technical Economies
(advances technology+machinery = increase efficiency - EOS)

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What are external economies of scale?

Economies of scale resulting from the whole industry growing in size

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List 3 external economies of scale (explain them)

Infrastructure improvements (transportation etc.)
More skilled labour (larger pool to hire from)
Suppliers become more efficient

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Definition of diseconomies of scale

Shen average costs go up as output increases
Usually from the problems managing too large a business

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3 examples of diseconomies of scale (explain)

Lack of communication
Poor coordination and control (spread out departments)
Staff morale

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What is a merger?

Company X + Company Y = Company Z

When two firms agree to combine to form one larger business
- the shareholders of X and Y become shareholders of Z\
Eg. Kraft Heinz

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What is acquisition?

Company X (takes over Company Y) = to make Company X
- or a controlling interest - meaning buying >51% of the shares

Eg. Amazon buying Zappos

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What is takeover?

When company X says “we want to buy you company Y” and company Y says no
- company X buys >51% of the shares of company Y

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List Integration Methods

Horizontal Integration
Vertical Integration
Backwards Vertical Integration
Forwards Vertical Integration
Conglomerate Integration

What is horizontal integration

Combining of two firms in the same industry and at the same stage of production

Pros (3) and Cons (3) of Horizontal Integration

Pros
- Greater market share and dominance
- Can enter a new market
- Economies of scale

Cons
- Leadership and culture clash
- Regulatory attention (from government could say the two companies are too big)
- Potential for diseconomies of scale

What is vertical integration

Integration with firm in the same industry and at different stages of production

Backwards Vertical Integration:
- Integration with a supplier

Forwards Vertical integration:
- Integration with a customer (in forms of retail etc.)

Pros (3) and Cons (3) of Vertical Integration

Pros
- Can control own supply chain (BVI)
- Greater knowledge of the market (FVI)
- Economies of scale

Cons
- Costs of acquiring other businesses
- Lose focus on core business activities
- Potential for diseconomy of scale

What is conglomerate integration?

Integration with a firm in a different industry

Eg. an airline buys a car manufacturer
Eg. a chocolate company buys a zoo

What is a conglomerate business?

A business which operates in a number of different industries

Eg. Nestle

Pros (3) and Cons (3) of conglomerate integration

Pros
- Spread risk through diversification (spread to different markets so if trends change its ok)
- Access to new customers and markets
- Economies of scale

Cons
- Costs of acquiring other business
- Lose focus on core business activities
- Potential for diseconomies of scale

What is a strategic alliance? PROS?

Agreement between two firms to work together but still remain independent companies Eg. Mcdonald’s sells cola - more customers - access to a larger market

What is a joint venture?

When two businesses combine their resources to set up a new business - the new business set up has its own legal identity

Pros (3) and Cons (3) of Joint Venture

Pros - Share knowledge and expertise - Remain independent businesses - To enter a foreign market Cons - Disagreement about the terms of the deal - Clash over key decisions - Culture clash

What is a franchise?

When a business (franchisor) allows another business (franchisee) to use their brand name, product and business model

What may franchisees use?

- brand name - logo - supply chain - marketing - training manual

Pros (2) and Cons (2) for a franchisor

Pros - can grow quickly - do not need to pay for the expansion Cons - need to ensure quality is maintained in each franchise - one bad franchise can ruin the whole brand

Pros (2) and Cons (2) for a franchisee

Pros - benefits from the brand image of the franchisor - also benefit from their marketing, supply chain, training etc. Cons - have to pay part of the sales/profit to the franchisor - no say in running of the business

What is operations management?

the process of designing and managing the production process - using resources to produce goods and services

How does operations management interact with the other parts of the business?

Marketing - Quality and packaging - Standardized production or custom-made Human resource - Mass production may lead to layoffs - Amount of training/skills required Finance - Capital intensive machinery requires initial investment - Labor intensive requires salaries

What is job production?

Each product is customised or tailor made to meet specific requirements of the customer Eg. tailored suits, wedding dress, haircut, legal advice

What is batch production?

Producing a number of similar products (a batch) at one time Producing items in identical groups Eg. - Bakery - Newspapers - Clothes

Pros (3) and Cons (3) of Job Productions

Pros - Higher customer satisfaction - Higher quality - USP - skilled workers - Higher employee motivation Cons - Labor intensive, higher labor costs - Time needed, less potential to automate - Few economies of scale as lower output

Pros (3) and Cons (3) of Batch Production

Pros - more product variety - can satisfy more customers - still some flexibility to change the product between batches - more economies of scale - lower unit costs Cons - less tailored for customers - costs of holding stock - storing each batch - set up costs - machinery etc.

What is Mass Production?

Involves large scale production of a standardised product. Usually capital intensive so highly automated

What is flow production?

similar to mass production, but continues 24 hours a day and very capital intensive Eg. oil rigs

Pros (4) and Cons (4) of mass production

Pros - Economies of scale from high volumes of production - Higher labor efficiency as workers specialize in one job - Standardised product enables consistent brand image - Less labor intensive so lower labor costs and less motivation issues Cons - Set-up costs - buying production line machinery - Lower employer motivation - specialization - More difficult to offer a different product choices to consumers - Higher storage costs

What is Mass Customisation?

Combines flexibility + personalisation from job production and scale from mass production. - still has advantages of cost - economies of scale Eg. MyMuesli

What determines what is the most appropriate method of production?

- Level of demand - Which production will be high enough to make it profitable - Services tend to be job production - What are the marketing goals of the company?