Economies of Scale - Lowered average costs of production as operations increase in scale due to improvements in productive efficiency. Economies of scale represents the cost-savings and competitive advantages businesses will gain from a growth in operations.
Technical Economies - The use of automation and machinery to produce a large output will reduce the average costs of production as the fixed costs of the machinery over the scale of the output.
Financial Economies - Larger firms can borrow large sums of money at lower interests rates as they are seen as less risky to financial lenders.
Managerial Economies - Larger firms are able to divide managerial roles so that management staff can be concentrated on specific tasks.
Specialisation Economies - Larger firms are able to hire specialised employees as they divide their workforce into specific departments.
Marketing Economies - Large firms can benefit from lower average costs by selling in bulk to retailers.
Purchasing Economies - Large firms can lower average costs by buying resources in bulk and negotiating with suppliers for discounts.
Risk-Bearing Economies - Large firms with a diversified product portfolio have larger room for error and risk-taking, as other successes can balance out any failures.
External Economies of Scale - Cost saving benefits of large-scale operations arising from factors outside the control of the business due to its favourable location or general growth in the industry. Examples include technological progress, improved infrastructure, growing economy, abundance of skilled labour in the area.
Internal Diseconomies of Scale - Higher unit costs of production as a firm continues to increase in size as inefficiencies begin to arise.
External Diseconomies of Scale - An increase in average costs of production as a firm grows due to factors outside of its control.
Brand Recognition - A more familiar brand due to larger marketing campaigns will allow large businesses to sell to a wider market.
Brand Reputation - Larger firms tend to be trusted due to their brand image and reputation, leading to greater casual purchases from unique customers
Lower Prices - Larger brands have a price advantage due to the economies of scale they can benefit from.
Customer Loyalty - Larger brands have greater number of loyal and repeat customers.
Cost Control - Small businesses are able to manage small details more effectively, and have greater control, coordination and communication.
Flexibility - Small businesses are able to adapt to changes more readily than big businesses as there are lesser things to maneuver within its operations.
Internal/Organic Growth - When a business expands its own capacity using its own capabilities and resources to increase the scale of its operations and sales revenue. Organic growth can be achieved through reinvesting profits to improve operational efficiency, and increase revenue and cash inflow.
Better Control and Coordination - Incremental growth allows the business to maintain control over the direction of the business, and monitor results of small changes to understand market preferences. Less risk will be associated with the changes made as they can are not definitive.
Relatively Inexpensive - A large one-time investment is not required in organic growth as it relies on incremental changes that accumulate over time using retained profits. The lower capital required will allow the business to grow without restricting itself to a vulnerable cash flow position.
Diseconomies of Scale - Higher unit costs of production can accumulate if the business does not monitor potential inefficiencies that appear due to growth of the scale of operations.
Slower Growth - Internal growth relies on incremental changes and is inevitably slower than a one-time investment for external growth. This may hamper the competitiveness of the business in comparison to other businesses who have grown at a faster rate with external growth.
External/Inorganic Growth - Growth through dealings with outside organisations to increase the scale of operations of the business.
Faster growth - Inorganic growth methods will lead to an immediate increase in market share or access to new markets.
Synergy - Combining resources with those of competitors may open the door to new insights that can help the business improve its operational efficiency.
Competitive Edge - Newfound resources, assets, and market share will enable the business to immediately increase its competitiveness.
Upfront Costs - Funding inorganic growth methods requires significant costs that could leave the business in a vulnerable cash flow position that may cost the survival of the business if the integration does not succeed.
Management Challenges - The sudden growth generates complexities associated with organisational structure and management control, such as a sudden increase in the scale of the workforce.
Merger - When two firms agree to form a new company.
Takeover/Acquisition - When a company buys a controlling interest in another firm.
Horizontal Integration - The most common type of M&A, when a company integrates with a competitor operating in the same industry to gain greater market share and power in the industry.
Forward Vertical Integration - Integration with a business towards the later stages of production (coffee manufacturer acquiring cafes).
Backward Vertical Integration - Integration with a business earlier in chain of production (coffee manufacturer merging with coffee bean supplier).
Lateral Integration - M&As between firms that have similar operations but do not directly compete with one another (PepsiCo acquiring Quaker Oats, Nike acquiring Converse).
Conglomerate M&As - M&As between businesses that are in completely different industries.
Greater market share - greater market share and power, and a larger customer base. Allows the business to gain influence over the entire industry.
Synergy - Integrating firms will have access to each other’s resources and learn each other’s practices; the synergy of these may birth new processes and operations that maximises the strengths from the merging companies and results in greater efficiency.
Redundancies - Merging with another company would mean intaking all their employees, which will lead to duplicate roles. Redundancies will be inevitable, and the lowered job security will negatively impact staff morale, leading to lower productivity.
Joint Ventures - when two or more businesses split the costs, risks, control and rewards of a business project, and in doing so, set up a new legal entity. JV allows organisations to enjoy some benefits from M&As without risking the loss of corporate identity.
Strategic Alliance - Two or more businesses cooperate in a business venture for mutual benefit. They share the costs and risks of the project but remain as separate legal entities.
Franchising - A form of business ownership whereby a person or organisation buys a license to trade using another firm’s name, logos, brands and trademarks. In return, the franchisee pays a license fee to the franchisor, together with royalty payments based on sales revenue.
Low Up-Front Costs - Company enjoy benefits of external growth without committing large investments that risk their cash flow position, and handling operational costs such as salaries and stocks.
Cultural Adaptation - Company can enjoy market development without having to expend resources researching to adapt to different cultures when entering new markets, as franchisees have local knowledge and can adapt their own store to the local culture.
Passive Income - Franchisors receive royalty payments from the franchisee, unlocking a consistent stream of passive income.
Quality Assurance - Franchisors do not monitor the daily operations of franchisees, and hence cannot ensure they meet quality standards of the franchise. Unsuccessful franchisees may damage the reputation of the entire franchise.
Low Risk - Lower risk in starting a franchise than to start an entirely brand new business, as they just have to adapt and apply a proven formula to their local market.
Guidance from Franchisor - It is in the best interest of the franchisor that the franchisee succeeds. Therefore, franchisors often offer assistance for functions like marketing and promotion.
Insignificant Revenue - Franchisee pays a significant percentage of their revenues to the franchisor, and begins the venture with a negative cash flow after paying the licensing fee.
Globalisation - the growing integration and interdependence of the world’s economies as they integrate towards a single global economy.
Reach - Increased customer base as businesses are able to easily access foreign markets.
Growth - External growth opportunities with businesses in foreign markets allow businesses to easily diversify and enter new markets.
Competition - Globalisation considerably increases the level of competition in the local market, as multinational companies begin to diversify and enter foreign markets.
Barriers to Entry - Customer expectations increase due to the quality of products available to them, thereby increasing the barrier to entry of a new business to impacted markets.
Multinational Company (MNC) - An organisation that operates in two or more countries.
Economic Stimulus - MNCs are considered as a major stimulus to economic growth in developing countries. They compensate for inadequate job opportunities by employing the local population, which has a domino effect of increasing consumer expenditure in the community and thereby boosting other local businesses and the local economy.
Competition - MNCs intensify competition in the host country, raising the standards of the market for consumers. Governments of developing countries also take initiatives to attract MNCs, such as building infrastructure, which will benefit the local population and businesses.
Workforce Development - MNCs build the competence and skill of local workers, who can then apply their experience working for a large company into entrepreneurship and other jobs that boost the local economy.
Competition - The intensified competition may force small local businesses into bankruptcy and foreclosure if they are operating in the same or similar industry. This raises unemployment and may cause unrest within the local community.
Lack of Accountability - MNCs are notorious for capitalising on the lack of manpower and environmental regulations in developing countries. The exploitation of low-wage workers, as well as the damaging environmental impacts of unregulated activities, adversely affect the local community and standard of living