Business Unit 1

advantages of small business

Advantage

1. greater focus (can choose where they want to invest, greater profits, higher % return on investment)

2. great cachet (more respected, can charge greater price and get better returns)

3. greater motivation (employees are more likely to feel values than just being 1 in 10,000 employees)

4. less competition (small market)

disadvantages of small business

1. limited finance

2. competition with large companies

3. limited access to skilled workers

4. struggle with economies of scale

advantages of big business

1. more customers

2. easier to reach economies of scale

3. more skilled workers

disadvantages of big business

1. stressful atmosphere

2. harder to organize

3. bigger competition (usually in competitive industries)

4. more office politics

how to define size of business

1. market shares by volume: how much products are being sold

2. market shares by revenue: how much money in the market is going to you

3. capital employed: value of the firm’s capital investment

economies of scale

when the business grows, the average cost of production decreases, but total cost still rising (the more you make, the cheaper each product becomes to make)

average unit cost

as you produced more quantity, the variable cost would increase but the fixed cost would stay the same

diseconomies of scale

when business expands, they experience inefficiencies that increase average unit costs

ex: when business expands, they might have to purchase another factor (internal/external), increasing the fixed cost for a while

internal factor (diseconomies of scale)

when internal factor causes the average cost of the product to increase

1. Bureaucracy: admins managing people needs to be expanded

2. communications and coordinations becomes more difficult

external (diseconomies of scale)

when external factors causes the avg. cost of the product to increase

1. traffic in CBDs leads to wasted time

2. increasing rent and labor shortages

technical economies (internal)

can be achieved by investing in more efficient machineries, equiments, and technological enhancements

= lower avg. cost of the production for the larger firm

financial economies (internal)

can be achieved when a firm has access to cheaper / more affordable financial markets or credit

Managerial economies (internal)

can be achieved by hiring more specialized managers

= an increase in overall productivity, reduce avg. cost of production

marketing economies (internal)

can be achieved by enhancing advertisement and marketing expenditure over a broader range of output or product range

purchasing economies (internal)

can be achieved when business buys in bulk, allowing the business to negotiate lower prices from suppliers

= lower avg. cost of production

risk-bearing economies (internal)

can be achieved when business operates in different industries or markets, spreading risk across its different business segments and reduce the impact of losses in one area

technological progress (external)

improvements in tech can lower costs of transportation and communications

improved workforce (external)

with better access to education, a better educated workforce can reduce avg. cost of production because of the higher level of labour productivity and knowledge

Government Initiatives (external)

government providing technical skills training, better road networks and infrastructure, in the industry or geographical area

Regional specialization (external)

sometimes, a geographical location is considered to be specialized in a specific industry (ex: watches is switzerland)

= reduce avg. cost of production for all companies in that particular industry

internal growth

selling more of the products or developing new ones to sell

(price, promotions, products, distribution channels)

advantages of internal growth

1. maintains business culture and control (existing values, management style, operation) because theres no merge or takeover

2. lower risks (growth is slow, so business has more time to adapt to changes)

3. does not have to combine its operations with another company

4. can achieve economies of scale

disadvantages of internal growth

1. slow growth causes business to miss opportuniies to enter new markets or respond quickly to competitors

2. needs strong management (responsibilities of expansion)

3. limited finance for fast expansion

4. against larger business

external growth

companies works with other companies or buy up other companies in order to grow

advantages of external growth

1. rapid growth through internal growth

2. access to new market (different culture, market, etc)

3. reduced competition

4. economies of scale (bulk purchasing, specialized management, shared resources)

disadvantages of external growth

1. expensive to merge or takeover

2. cultural clash - different values, management styles, business operation

3. diseconomies of scale - becoming too large can make communication and management difficult

4. loss of control

Mergers and Acquisitions - Mergers

when 2 companies buy up each other’s stocks and forms one company

Mergers and Acquisitions - Acquisition (takeovers)

when 2 company buys another company

advantage M&A

1. can help each other more effectively

2. additional growth and profits

3. subsidiaries gain more brand recognition and increase overall share

disadvantage of M&A

1. unreliable partners (risks of getting betrayed / bought by other company)

2. taking over a company with large debts

3. cultural clash, companies not working well together

strategic alliances

2 or more businesses agree to work together to achieve a common goal while remaining separate businesses

advantages for strategic alliances

1. fluid agreement - can leave if the alliance is no longer beneficial)

2. informal partnership - flexibility, can adjust to needs more easily

3. companies can keep personal independence

4. no new business

disadvantage for strategic alliances

1. fluid agreement - business can be taken advantage of (once the other party gets what they want, they can leave)

Join venture

when 2 companies agree to work together for a temporary amount of time

• they can create a 3rd legal company that is not meant to be permanent and share the profits from it

advantages of join venture

1. bound legally - ensures both companies follow the agreed terms (more reliable)

2. do things that the companies cannot do individually

3. new insights

4. improved resources

5. flexibility

6. benefits each other

disadvantage for joint venture

1. unreliable partners (risks of getting betrayed / bought by other company)

2. can’t easily change the focus and objectives of the business

3. cultural clash

4. 1 company putting more resources/work than the other

Franchisor

the business that allows another person or business to use its brand name, products, and business model in exchange for fees or royalties

ex: me owning a cafe business, allowing others to pay to open their own branch somewhere else,

franchisor - advantage / disadvantage

• adv: increased brand awareness, national/international expansion, increased revenue

• disadv: quality control, reputation risks, legal liabilities, extensive preparation

franchisee

the person or business paying the agreed fee to use the franchisor’s brand name, products, and business model

franchisee - advantage / disadvantage

• adv: brand recognition, reduce risks of failure, have rights to use the company’s name

• disadv: limited creative opportunities, financial risk in opening the new store

multinational corporation

big enterprises that operates in more than 1 country (coco-cola)

disadv: have to deal with a lot of more legal regulations than local firms

why companies want to become multinational

1. new market = more customers

2. increase brand value and brand recognition

3. economy of scales

host countries

countries where the MNC is operating and NOT inclduing where they originate

positive impacts of host countries

1. when MNC move to a country, they will hire locals to carry out their services

2. new skills and tech is moved to the country. places can develop

3. help increase national GDP (income)

Negative impacts of host countries

1. job losses - run local competitors out of business

2. profits made in the host country being brought back to home country

3. impact on cultural spread (ex: westernize)

4. local businesses not being able to compete and could close down = business results in economic dependency