- Economies and diseconomies of scale
- The scale of operations/business
- Maximum output that can be achieved using available resources scale can only be increased in the long term by employing more of all inputsProducing more =/ the increasing scale of production increase scale of operations attains economies of scale
- Increase in efficiency of production as the number of output increases average cost per unit decreases through increased production fixed costs are spread over an increased number of output cost per unit = (total variable costs + total fixed cost) ÷ units producedImportance: customer enjoy lower prices due to the lower costs which in turn increases market share or business could choose to maintain its current price for its product and accept higher profit marginsTypes of economies of scale:Internal – achieved by the organization itselfPurchasing (bulk-buying) economiesWholesale discountsTechnical economiesInvesting in technology to reduce costsFinancial economiesEasier for large companies to receive loans from banksMarketing economiesMore efficient to advertise a large number of productsManagerial economiesLarger firms are able to hire specialists who help improve efficiencyExternalImproved infrastructure (e.g. transportation)Advances in
- industrial efficiency due to better training, innovations in processes/machinery, etc.Growth of other industries that support the organization
- Diseconomies of scale
- Economies of scale have peaks, if this point is passed, diseconomies of scale are experienced can occur when a company or even the whole industry becomes too big and unit costs begin to increase rather than decrease possible due to:Communication problems leading to poor coordinationOverworked machinery and laborersAlienation of the
- workforce and slower decision-making (for larger businesses)
- Diminishing marginal returns
- Decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant
- Economies of scale have peaks, if this point is passed, diseconomies of scale are experienced can occur when a company or even the whole industry becomes too big and unit costs begin to increase rather than decrease possible due to:Communication problems leading to poor coordinationOverworked machinery and laborersAlienation of the
- The scale of operations/business
- Small vs. large organizations
- Importance of small businesses
- Small firms create jobs small businesses are often run by dynamic and innovative entrepreneurs provides competition for big business supply specialists goods and services for specific industries small firms can become big businesses in the future
- Small business
- Easily managed & controlled by the ownerQuicker to adapt to changing customer needs and feedback offer personal service to customersEstablishes better employer-worker relationships
- Can afford to employ specialist, professional managers benefit from more economies of scale more access to varied sources of finance can diversify in several markets, thus spreading out the risks can afford more formal research & development
- Disadvantages
- Small business
- Can’t afford to employ specialist, professional managersDoesn’t benefit from more economies of scaleLess access to varied sources of financeCan’t diversify in several markets, thus spread out the risks can’t afford more formal research & development
- Large business
- Difficult to be managed & controlled by the owner slower to adapt to changing customer needs and feedback can’t offer personal service to customers
- Establishes poorer employer-worker relationships
- Small business
- Importance of small businesses
- Internal growth vs. external growth
- Internal/organic growth
- Occurs when businesses grow using its own resources to increase the scale of its operations and sales revenueMethods used to achieve internal growth:
- Changes of pricing strategies increase
- Occurs when businesses grow using its own resources to increase the scale of its operations and sales revenueMethods used to achieve internal growth:
- and innovate the product or service sell in different locations increase capital expenditure on production and technologies train and develop staff
- External/inorganic growth
- Occurs through dealings with outside organizationsVertical integration
- The main business takes part in the primary, secondary, and tertiary aspects of business
- Horizontal/lateral integration
- Businesses unify under the same industry between firms who have the same operations but do not necessarily compete with one another
- e.g. Ford bought Jaguar, Ford is low to mid class while Jaguar is high class. They don’t compete and when they merge they now cater to a bigger market
- Occurs through dealings with outside organizationsVertical integration
- Internal/organic growth
- External growth methods
- Conglomerate mergers, takeovers, or acquisitions
- An amalgamation of two businesses that are in completely different markets results in dissolution of original business entities in favor of forming a new one reason for mergers:
- They want to increase revenueFight the rising of prices together increased customer satisfaction (new and better content)Bigger market
- The companies could not synergize the competition was stronger than the merged businessConflicting culturesPoor management and leadershipPoor timing/recession
- Two companies join for a specific undertaking and set-up a new legal entity e.g. Sony + Ericsson = Sony Ericsson
- Like a joint venture, but NO new legal entity is created (only for a specific project or product)Profit is split between the two companies
- An amalgamation of two businesses that are in completely different markets results in dissolution of original business entities in favor of forming a new one reason for mergers:
- Franchising
- An individual buys the right to operate under another business’ name can be offered to individuals or large businesses Franchisee pays a franchise fee (royalties and supplies) and is given a license to operate by the franchiser Franchisee is a different type of entrepreneur – much less risk compared to the normal entrepreneurFranchiser provides marketing, training and equipment to set-upSupport to ensure the business will have a good chance of success, retain good brand image, and maintain the
- standard of product/service quality franchise may take a portion of profits and has a say on how the business should be run
- Benefits
- Grow cheaply and quickly less manpower to directly manage income from franchise fees, royalties, and supply purchases
- Not easy to revokeLess control over quality or performance of franchiseConflict in profit vs. volume
- Franchisee
- Benefits
- Known brand results in strong start-up sales support from franchisor easy financing options lower cost of supplies because of economies of scale (though sometimes the franchisor charges high for supplies)
- Downsides
- Little freedom/flexibility in running Franchise/start up fee may be too costly bad management in headquarters affects all branches
- Still not guaranteed success
- Benefits
- An individual buys the right to operate under another business’ name can be offered to individuals or large businesses Franchisee pays a franchise fee (royalties and supplies) and is given a license to operate by the franchiser Franchisee is a different type of entrepreneur – much less risk compared to the normal entrepreneurFranchiser provides marketing, training and equipment to set-upSupport to ensure the business will have a good chance of success, retain good brand image, and maintain the
- Conglomerate mergers, takeovers, or acquisitions
- Globalization
- Expansion of a business worldwide
- Contributing factors:
- Advancement in technology – reduced cost of production and information interchangeTrade liberalization and deregulation – easing of government rules, trade barriers, and tariffsMulticultural awareness – appreciation of foreign culture means consumers may patronize products from other countries
- Language – ease of communication
- Multinational corporations (MNCs)
- MNCs are businesses with operations in two or more countries.
- Advantages:
- Expand customer base beyond the domestic market achieve greater economies of scaleWork around government barriers to importsAccess to cheaper or more abundant raw materials and labour spread risks in any one market through diversification
- Increased competition which increases customer expectations drive up expenses and costs for local businesses may dominate particular markets and distribution channels allows local businesses access to foreign capital and shareholders can provide R&D, and technological advancement for local businesses
- Impact on economic & socio-political conditions of host country
- Economical
- Foreign direct investments more options for consumers may threaten local industries develop high-tech industries balance of trade (exports > imports)
- Job creation with new skillsUnemployment when workers are displaced in local industries
- Change in behavior, consumption patterns and lifestyle
- Utilization of resources increase waste possible environmental degradation (leading to climate change)
- Political
- Calls for stabler policies (e.g. deregulation, removal of trade barriers)
- Public-private sector partnerships
- Economical
- Advantages:
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