Growth and Evolution

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32 Terms

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Average Cost

the ratio of total cost of production to the number of items produced. 

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Economies of scale

Economies of scale enables a business to benefit from lower average costs by increasing the size of its operations.

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Optimal output level

Optimal output level is when the average cost of production is at its lowest level and profits are maximised. 

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Risk economies

A large company can diversify its product lines to lower the average risk it faces. Not all product lines are likely to experience losses at the same time. 

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Advertising

Raise awareness to consumers of products that are going to be sold.

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Internal economies of scale

Internal economies of scale assist businesses in reducing minor expenses or lowering the average cost per unit: 

  • Managerial economies

  • Financial economies

  • By products

  • Technical economies

  • Economies of inventory management

  • Marketing economies

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Managerial economies

Employing better qualified employees and managers who can make quicker and more profitable decisions. 

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Financial economies

Creditworthiness of the borrower is considered by lenders when determining the rate of interest. 

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By products

If waste production exceeds a certain threshold, a business may be able to manufacture specific by-products to increase revenue. 

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External economies of scale

External economies of scale occur when the firm’s average cost of production falls as the industry as a whole grows. All firms benefit. Examples, location, connectivity of infrastructure, business regulation laws.

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Diseconomies of scale

Diseconomies of scale occur when a firm grows beyond its ability to operate efficiently. 

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Internal diseconomies of scale

Internal diseconomies of scale occur due to problems within the organisation. Can occur due to larger businesses having communication and coordination more difficult.

  • Bureaucracy

  • Organisational diseconomies

  • Technical diseconomies

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Bureaucracy

Bureaucracy refers to any combination of excessive corporate policies, procedures and paperwork. Gets in the way of doing things due to the rules, policies and procedures. 

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Organisational diseconomies

Managing a large workforce may decline effective communication. Larger organisations risk isolating stuff making them feel demotivated which means lack of productivity. 

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Technical diseconomies

  • Inefficiencies in the production process. 

  • Overcrowding can result in poor work conditions and reduces productivity.

  • Lack of equipment and resources 

  • New facilities have a less efficient production process with employees needing training and time to familiarise themselves with tools and equipment.

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External diseconomies of scale

Raises the average costs of production of all businesses in the industry. Includes higher levels of rent, competition for scarce resources and traffic congestion/delays.

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Reasons for a business to grow

  • Survival

  • Economies of scale

  • Higher status

  • Market leader status

  • Increased market share.

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Reasons for a business to stay small

  • Greater focus

  • Greater prestige (more profit, can charge more)

  • Greater motivation

  • Competitive advantage (provide a more personalised experience). 

  • Less competition

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Internal growth (organic growth)

  • It happens slowly and steadily. 

  • Can grow without taking too many risks. 

  • Expands by selling more products or by developing its product range. 

  • Most expansion is self financed from retaining profits.

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External growth (fast track growth)

  • Quicker and riskier method of growth. 

  • The business expands by entering into some type of arrangement to work with another business. 

  • Requires significant external financing. 

  • Potential rewards increase market share and can decrease competition greatly.

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Merger and acquisition (M & A)

  • Merger is when two companies that are theoretically “equal” legally become one company. 

  • Acquisition is when one company purchases a majority or all the shares of another company, taking it over. 

Both result in a bigger business

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Takeover

An unwanted acquisition by a company.

Happens to publicly held companies.

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Horizontal integration

Occurs when two businesses being integrated are not merely in the same broad industry, but in the same chain of production. For example, two supermarkets.

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Vertical integration

Occurs when one business integrates with another at a different stage in the chain of production or when a business begins operations in an earlier stage through internal growth. 

Allows for reliable supply and reduce transaction costs

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Backwards vertical integration

when a business gets involved in an earlier stage in the chain of production. Example, Apple buying a chip company.

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Forwards vertical integration

occurs when one business integrates further forward in the chain of production. Example, a farmer opening a retail store.

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Conglomeration

Occurs when two businesses in unrelated lines merge. Known as diversification and reduces overall corporate risk.

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Joint venture

  • Two businesses agree to combine resources for a specific goal and over a finite period of time.

  • A separate business is created funded by two parent businesses. Once time is finished it may be gone or in one of the parents' business

  • Good that two firms enjoy greater sales by still having their separate legal existence and different workskills. 

  • Disagreement may arise. 

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Strategic alliance

Similar to joint venture except may be multiple business, no new business is created but it lacks stability.

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Franchises

An original business sells their concept and makes it more well known.

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Franchisor

Original business

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Franchisee

Right to offer the concept and sell the goods or services. Pay royalties to the franchisor.