1.5-1.6 Terminology

Fixed Costs

Costs that do not change with the level of output produced, such as rent, salaries, and insurance.

Variable Costs

Costs that vary directly with the level of output, like raw materials and direct labor. Higher production usually means higher variable costs.

Average Costs formula

The total cost of production divided by the number of units produced, representing the cost per unit.

Economies of Scale

The cost advantages that a business can achieve by expanding its scale of production, resulting in a decrease in average costs as output increases.

Internal Economies of Scale

Cost savings that arise from the growth of the business itself, such as technical, managerial, financial, and marketing economies.

Purchasing Economies

Cost savings achieved by buying in bulk, often resulting in discounts or lower per-unit costs.

Specialisation Economies

Cost benefits that come from dividing labor or tasks within the business, allowing workers to specialize in specific tasks, thus increasing efficiency.

Financial Economies

Advantages that large firms have in securing loans and other financial resources at lower interest rates due to their lower risk to lenders.

Marketing Economies

larger firms can spread the cost of marketing and promotion over a larger output, reducing the average cost per unit.

Risk-bearing Economies

The ability of large firms to spread risks across different products or markets, reducing the impact of failure in one area.

External Economies of Scale

Cost savings that arise from external factors outside the business, such as improvements in industry infrastructure, skilled labor availability, or supplier networks. Types include:

Supplier economies

Lower input costs due to close supplier networks.

Labor economies

Access to a skilled workforce in a particular region.

Technology economies

Shared innovations that benefit the entire industry.

Diseconomies of Scale

When a business grows too large, leading to an increase in average costs due to inefficiencies.

Internal Diseconomies of Scale

Rising costs from internal inefficiencies within the business, such as poor communication, increased bureaucracy, or low employee morale.

External Diseconomies of Scale

Higher average and overall costs due to external factors, like industry congestion or resource shortages that affect all firms within an area.

Internal Growth (Organic Growth)

Expansion of a business’s operations using its own resources, without relying on mergers or acquisitions, through increased sales, new products, or entering new markets.

External Growth (Inorganic)

 Expansion achieved by acquiring or merging with other businesses rather than growing from within. This includes mergers, acquisitions, and alliances.

Merger

A form of external growth where two companies agree to join together to form a single, larger business.

Acquisition

When one company takes over another by purchasing a controlling interest. (>50%) The acquired company becomes part of the acquiring company.

Horizontal Integration

When a business acquires or merges with another business operating at the same stage of production and in the same industry, such as two competing retail companies merging.

Vertical Integration

When a company expands by merging with or acquiring another business in its supply chain.

Forward Vertical Integration

Moving closer to the end customer by acquiring or merging with a distributor or retailer.

Backward Vertical Integration

Moving closer to the source of raw materials by acquiring or merging with a supplier.

Lateral Integration

When a business merges with or acquires another business in a related but not directly competitive industry.

Conglomerate Integration

 When a company diversifies by merging with or acquiring a business in an entirely different industry, allowing the parent company to spread risk across various markets.

Joint Ventures

A business arrangement where two or more companies invest in a new project, sharing resources, risks, and profits while remaining separate entities.

Strategic Alliance

A cooperative agreement between companies to work together on a project or in a specific area, without forming a new legal entity.

Franchise

 A business model where a franchisor grants a franchisee the rights to operate a business using its brand, products, and business processes in return for fees and royalties.

Franchising

The process by which the franchisor licenses its brand and business model to franchisees.

Franchisee

An individual or business that purchases the right to operate a franchise under the franchisor's name and business system.

Franchisor

 The original business owner who grants the franchise rights to a franchisee.

strategies for internal growth

• increasing production & gaining market share: bus can increase outputs if market demands. they can increase shares by pricing changes, improved promotion or distribution

• developing new products: using market research bus can develop new products or better thier current ones to better satisfy the market and increase sales revenue

• finding new markets: bus can sell products in a new location. cost effective

benfits of internal growth

• less expensive than external

• less risky than external

• maintains more control over bus

• respects companies values more than external

limitations of internal growth

• slower than external - other competetion

• cash flow problems

• limited

benefits of m&a and takeovers

• range of economies of scale can be gained

• allow new larger firm to share costs, expertise, and risks

• quick way for a firm to enter new industries

• instantenous growth

disadvantages of m&a and takeover

• resistance from employees, unions, managers etc

• not always successful

• expensive

• culture clash

• diseconomies of scale

adv of joint venture

• combine resources ex. tech & capital leading to stronger position in market

• finacial risks shared

• allows companies to grow & eos

• firms enjoy adv of joint venture without losing their separate legal entities

• avoid legal costs of M&A’s

• market penetration

disadv of joint venture

• culture clash

• deos due to operations on a larger scale

• difficult to terminate because of legal binding obligations of new entity

adv of strategic alliance

• benefit from sharing expertise and expericence from other bsuiness

• businesses in SA remain seperate legal entities without high costs of forming new entity

• syngergies and eos

disad of strat alliance

• SA easy to join and leave so can be unstable and unreliable

• someitmes only short term temporary agreements

• can make firms vulnerable to mistakes or malpractice by other business

adv of franchise

• franchisor an expand its bus withot raisign and investing thier own finance

• franchisor gets royalties

• quick method of external growth, strengthens brand name

disadof franchise

• expensive startup for franchisee + royaltikes

• franchisee lacks freedom in desicison making

• bad franchisees tarnish brand name

• potential deos

reasons to stay small

• avoid risk, maintain control

• small amrket size, some companies like to cater to a niche market

• strong social network

• finance

reasons to grow

• large frims get eos

• financial resources - more capital than rivals

• attratc better staff & offer carrer develpment

• consumers like well known big brands

• less likely to fail so les risk for stakeholders

mnc

companies that have operations in 2 or more countries

adv of mnc

• employment opps in host counry increasing qol

• host gets more skilled labour force

• mnc’s may buy local resources - rveenue for local suppliers

• ompeteion from mnc’s cause domestic bus to imporve

disad of mnc

• domestic bus may loose customers market share & profit

• foreign companys may nto be socially responsible

• mnc’s can destroy domestic bus as they can compete

• cultural shifts - social political tensions

manegerail economies

large orgs can afford specialised manegers which bost production output

production economies

fixed productios costs are spread out over larger output volume, reducing avg production costs