1.6 Growth & evolution

Question 1

What is economies of scale and how is it achieved?

Answer 1

Reduction in average unit cost due to increase in output

Question 2

What are fixed costs?

Answer 2

Costs that do not change if output levels change

Question 3

What are variable costs?

Answer 3

Costs that do change if output levels change

Question 4

What are average costs?

Answer 4

Total costs/output (or Q)

Question 5

What is the optimum production?

Answer 5

At the point of lowest average cost

Question 6

Factors of internal economies of scale?

Answer 6

1. Technical - fixed costs better spread or less share of fixed costs vs variable costs
2. Managerial - business can afford more managers with specialized skills, instead of a few doing everything
3. Financial - risks are better managed
4. Marketing - more resources available
5. Purchasing - discounts available

Question 7

Factors of external economies of scale?

Answer 7

*Consumers - More sales means more output
*Employees - benefit from their concentration at some places

Question 8

Factors of diseconomies of scale?

Answer 8

1. Technical - added capacity adds to new fixed costs which may not be good spread in the beginning. (using just small space in a new warehouse)
2. Managerial - over-specialized or overqualified
3. Financial - larger (end historically successful businesses may overestimate their powers or competences and make poor investments
4. Marketing - costlier mistakes
5. Purchasing - costlier funds than cost savings from larger stock (which may deteriorate btw)

Question 9

What is the reason of external economies or diseconomies of scale?

Answer 9

Efficiency (a result of economies) and inefficiency (a result of diseconomies) of scale that happens when someone else has expanded.

Question 10

What type of businesses may choose not to expand and why?

Answer 10

Businesses offering high-end products or service providers, because of:
*High dependence on owner’s/specific person’s highly specific skills and need of their direct and intensive involvement in production or service offering, such as a private clinic with a well-known doctor; a restaurant with a well-known chef, a popular stylist’s shop etc
*Need to stay close to customers, to understand their ever-changing wants and needs:

Question 11

Advantages of being a big business?

Answer 11

*Better chances of survival
*Economies of scale (also at managerial level - highly *Specialized skills available)
*Higher status
*Easier to become market leader or gain larger market *Share and claim larger margins

Question 12

Disadvantage of becoming a big business?

Answer 12

1. Poorer decisions possible - The company will need to hire managers from outside, who may not understand or care enough where the value is really created for the customers
2. Deriving finance from external sources or selling shares of a company (e.g. listing on a stock exchange as a publicly traded company) may result in lost control over many decisions.

Question 13

Advantages of being small?

Answer 13

1. Closeness and understanding of customers
2. Motivation
3. Sense of exclusiveness (cachet)
4. If the market is niche, competitors may not be interested to enter

Question 14

What is internal growth?

Answer 14

Also called organic growth, mostly financed from internal sources, means growing slowly but steadily based on current operations:
1. Selling more products or
2. Developing a product range.

Question 15

What are limitations of internal growth?

Answer 15

1. It is slow
2. Lack of finance (possible)

Question 16

Benefits of internal growth?

Answer 16

1. Less risky
2. Retention of control and focus

Question 17

Types of external growth?

Answer 17

1. M&A - A merger & Acquisition (neutral) or takeover (unwanted, hostile)
2. A joint venture
3. A strategic alliance
   A Franchise

Question 18

Horizontal integration?

Answer 18

When the added business is in the same industry or in the same chain of production

Question 19

Vertical integration?

Answer 19

Added business in the earlier (supplier) or later (costumer) stages of the production chain

Question 20

Backward (vertical) integration?

Answer 20

Added business is from the supplier’s stage in the chain

Question 21

Forward (vertical) integration?

Answer 21

Added business is from the customers stage in the chain - so the business moves closer to end-customers

Question 22

Conglomeration?

Answer 22

Also called diversification, when integrated businesses are in unrelated lines.

Question 23

Benefits of a conglomerate?

Answer 23

1. Lower risks
2. For seasonal business it a possibility to minimize inactive periods

Question 24

Limitation of a conglomerate?

Answer 24

1. Operating in different industries requires different knowledge and skills. This need may even remain unnoticed by managers
2. Loss of focus

Question 25

What is a joint venture?

Answer 25

Conceptually it is a partnership, though legally may take different forms depending the state of incorporation and the choice of "parents". In particular, it is: 1. A separate business, created by two or more "parent" companies 2. For a defined/finite time period 3. For a specific goal

Question 26

What are the options of development of a joint venture after the end of predefined time period?

Answer 26

1. Dissolved completely 2. Incorporated into one of the "parents" 3. Time frame extended

Question 27

What benefit have the "parents" after the joint venture is dissolved?

Answer 27

A significant transfer/exchange of skills/expertise happens through the combination of different areas of expertise

Question 28

Disadvantages of a joint venture

Answer 28

1. It may be discovered at a later stage, that the company is not getting equal contribution from the partner 2. Company could achieve this level of knowledge independently more efficiently 3. After separation, some competitive advantage may be lost to the former partner and potential competitor

Question 29

Strategic alliance vs joint venture

Answer 29

Strategic alliance 1. is formed mostly by more than 2 companies 2. Not a separate entity, but an agreement to work for mutual benefit 3 Members remain independent in their decisions and often continue to compete with each other in the same or other areas. 4. Membership can change without destroying the alliance

Question 30

Disadvantages of an alliance?

Answer 30

1. More partners may lead to the lack of coordination and efficiency 2. Without a legal entity, access to finance and economies of scale may be limited 3. Competitive advantages may be still lost to competitors

Question 31

Franchisor vs franchisee

Answer 31

For both it is the fastest way to grow. In addition for Franchisor : 1. Has a business model/concept (including know-how of production processes, customer and supplier lists, well-developed brands) to sell 2. Oversees/Controls the management of franchisee and quality of output 3. Provides trainings 4. Global advertising 5. May have many franchisees Franchisee: 1. Has knowledge of local market 2. Pays royalty (continuous, fro sales or otherwise) or other type of remuneration (usually at the start one-time payment for transfer of knowledge and access to brands 3. Obliged to follow guidelines not to harm the reputation of the franchisor 4. Employment and management of staff 5. Law or no costs (only locally) to develop brands 6. Usually have one franchisor

Question 32

What is a business model?

Answer 32

A way to crate value in economic sense (and in other senses as well). This includes, but is not limited to the know-how/assets in: 1. Purpose 2. Strategies 3. Organisational structure 4. Production processes 5. Infrastructure (building etc)

Question 33

Disadvantages of franchise

Answer 33

For Franchisor: 1. Lost control of day-to-day decisions 2. Its reputation suffer from unacceptable practices of the franchisee 3. Competitive advantage may be lost if the franchisee later decides to develop own brand. For franchisee: 1. NO control over global decisions 2. Often no control over suppliers an aother partners in the chain

Question 34

What is globalization?

Answer 34

1. Process by which the world's regional economies are becoming integrated/interconnected. 2. Although there were other historical examples of globalisation (Roman and other empires, silk road etc) , today it is on another level and mainly achieved through trade and economic policies 3. Today's globalization is characterized small number of post-national of extremely large companies, who consider no country as their home or every country their home

Question 35

Impact of globalization on growth of domestic businesses

Answer 35

1. Increased competition forces to more efficiency 2. Forces to create greater brand awareness and USP (unique selling points) mainly focusing on local/national origins 3. skills transfer 4. New business opportunities/units: *Joint ventures *Strategic alliances *Franchises *Foreign direct investment with local co-owners *Distribution /import business 5. New ideas

Question 36

Drivers of modern globalization?

Answer 36

1. Improved ICT (Information and communications technology) 2. Removed trade barriers (e.g removed or reduced customs tariffs, bans etc) 3. Deregulation of financial markets 4. Harmonization of accounting standards 5. Encouragement of foreign investment by the government 6. Increasing economic and political power of multinationals

Question 37

What is a multinational?

Answer 37

A company operating or registered in several countries

Question 38

Disadvantage of globalization for local communities

Answer 38

1. Profits are repatriated - foreign companies pay taxes and salaries, but the profits may be totally taken out from the host country 2. Local culture or products may suffer or change through the appeal of globally advertised values 3. Brain drain - to other countries 4. Loss of market share of local businesses

Question 39

Technical economies of scale

Answer 39

Fixed costs better spread; less share of fixed costs vs variable costs

Question 40

Managerial economies of scale

Answer 40

Remunerations of managers (part of companies fixed or semi-variable costs, also called overheads or expenses may spread better and lower average costs, thus enabling business to afford more managers with specialized skills, instead of a few doing everything

Question 41

Financial economies of scale

Answer 41

economies of scale is a financial concept in general, but in a narrower sense , e.g - risks are better managed

Question 42

Marketing economies of scale

Answer 42

Marketing costs can be better spread over larger output. Business has a choice either keep average marketing cost low or or invest larger resources available in more aggressive marketing campaigns

Question 43

Purchasing economies of scale

Answer 43

discounts available for larger purchases

Question 44

Employee based economies of scale

Answer 44

In the areas of a lot of people with proper skills, less cost for staff or company relocation, or transport or perks like cars or housing