Business 3.2

what are internal economies of scale

the advantages enjoyed by a business as it increases the scale of its current operations leading to a fall in unit costs

some examples of internal economies of scale

technical (more efficient machinery)

purchasing (negotiated discounts for bulk buying from suppliers)

managerial (employing specialist personnel instead of using services of external organisation)

what are external economies of scale

these are when a business enjoys lower unit costs as a result of external factors such as growth in the industry and geographical clustering within an industry

some examples of external economies of scale

expertise (regions known for a particular industry leading to skilled workers and then a fall in unit costs)

cooperation (businesses working together resulting in greater efficiencies. offers joint projects and shared expertise)

support services (ancilary services locate near to the industry leading to more efficiency)

3 objectives of growth

1. increase market power over customers and suppliers

2. increase market share and brand recognition

3. increased profitability

name one problem arising from growth

diseconomies of scale

what are diseconomies of scale

the disadvantages suffered as a result of a business increasing the scale of its operations that lead to a rise in unit costs

what may a business have to do if they experience rising unit costs through diseconomies of scale

raise prices therefore selling less to cover increased average costs

maintain the same price and earn less profit per unit on the product

5 diseconomies of scale

1. communication

2. coordination and control

3. alienation

4. internal communication

5. overtrading

what is the CMA

what do they do

competition and markets authority

they work to promote competition for the benefit of consumers in the UK

what can the CMA do

invesitgate mergers between organisations to make sure they don’t reduce competition

protect consumers from unfair trading practice

what is a merger

a legal deal to bring two businesses together under one board of directors

the businesses are usually the same sixe and the name is normally changed (although not always)

what is a take-over

AKA an acquisition

a legal deal where one larger business purchases a smaller one

if the deal is unwanted by the management or board of directors, it’s known as a hostile ___

two reasons for mergers and takeovers

tactical (attempt to ensure increased market share, access to tech, staff, or intellectual property)

strategic (access to new markets, improved distribution/brand awareness)

what are the 3 sectors in business

primary (businesses that mine to get resources from the planet at source)

secondary (businesses that are involved in making raw materials into products)

tertiary (businesses that sell goods to the customers)

what is vertical integration

when one business in one sector takes over or mergers with a business in another sector or part of the supply chain

what is horizontal integration

when one business in one sector takes over or merges with a business in the same sector

two financial rewards of mergers and takeovers

increased revenue over time

economies of scale

four financial risks of mergers and takeovers

original purchase costs

cost of change into a new business

redundancies of duplicate staff e.g. two marketing managers

cost if it goes wrong

four problems of rapid growth

management may be under pressure, operating reactively not proactively

the quality of products and services could drop, causing an increase in customer complaints

the business may even lose customers to their competitors

Heavy workloads may increase staff turnover, leading to knowledge loss and increased costs for hiring and training new staff

problems with mergers and acquisitions

• clash of cultures

• possible communication issues

• A possible move away from the core competencies of the original business may cause issues of control

• unreliable merger partners

• diseconomies of scale

• lack of udnerstanding of local markets leading to wrong promotional message

• 75% of all mergers fail

2 types of growth

organic (internal)

inorganic (external)

what is organic growth

when a business expands in sixe by opening other stores, branches, functions, or plants

can be time consuming but it’s somewhat low risk

what is inorganic growth

when a business expands by either mergers or takeovers

can be high risk if the two businesses are not compatible

5 methods of growing organically

• new products

• new markets

• new routes to market

• franchising

• diversification

advantages of organic growth

• less risky

• greater consistency

• maintain distinctive capabilities

• less threat of brand dilution

• can be steady

• less loss of control

disadvantages of organic growth

• missed opportunities from acquisitions

• potential for growth maybe more limited

• lack of shared expertise

• lack of competitiveness use to a lack of economies of scale

• pressure on leaders

• dissatisfaction from shareholders