Economies and diseconomies of scale
What are economies of scale?
Economies of scale are cost advantages that occur when a firm increases production and its average costs fall due to greater efficiency or external benefits.
What is internal growth?
Internal growth is when a business expands using its own resources, for example by opening new shops or increasing production.
What is franchising?
Franchising is when a business allows another person or company to use its name, logo, and business system in return for fees or a share of profits.
What is horizontal integration?
Horizontal integration is when a business merges with or takes over another business at the same stage of production.
What is the difference between internal and external economies of scale?
Internal economies of scale come from within the company (such as better machinery or management), while external economies of scale come from industry growth and outside factors.
What is external growth?
External growth is when a business grows by merging with or taking over another business.
Give one advantage of franchising to the franchisee.
There is a lower risk of failure because an established brand and product are used.
Give one advantage of forward vertical integration.
It allows the business to control the promotion and pricing of its own products.
Give two examples of internal economies of scale.
Purchasing economies (bulk buying at discounts) and technical economies (using large, efficient machinery).
What is a merger?
A merger is when two or more businesses agree to join together and form a new business entity.
Give one disadvantage of franchising to the franchisee.
The franchisee must pay a share of profits or sales revenue to the franchiser each year.
What is conglomerate diversification?
Conglomerate diversification is when a business enters a completely different industry to reduce risk and diversify its markets.
What are diseconomies of scale?
Diseconomies of scale occur when average costs rise because a business becomes too large and inefficient.
What is the difference between an acquisition and a takeover?
An acquisition is usually mutually agreed, while a takeover is often hostile and opposed by the company being taken over.
What is a joint venture?
A joint venture is when two or more businesses work together on a specific project and create a separate business division.
Give one advantage of being a small business.
Small businesses can adapt quickly to changes and provide more personal service to customers.
Name two causes of internal diseconomies of scale.
Communication problems and poor coordination/slow decision-making.
Give one advantage of external growth.
It allows faster expansion and access to new markets, resources, or skills.
What is a strategic alliance?
A strategic alliance is an agreement between businesses to share resources to achieve common objectives.
Give one disadvantage of being a large business.
Large businesses may suffer from slow decision-making and poor communication due to complex management structures.