2.1 Business Growth and competitive advantage

• 2 types of economies of scale

  internal and external
• define both types of economies of scale

  internal - occurs when the firm grows larger and average cost of production falls

  external - occurs within the industry
• what does the mnemonic "really fun mums try making pies" stand for(stands for all of the economies of scale)

  • risk bearing
  • financial
  • managerial
  • technological
  • marketing
  • purchasing
• describe financial economies of scale

  when a firm grows larger, it is seen as less risky and so its eligible for larger loans from banks for lower interest rates
• describe purchasing economies of scale

  as output increases, firms can bulk-buy meaning the cost per unit of output is reduced
• one way diseconomies of scale occur

  as the firm expands, some workers may feel alienated from their more important colleagues, and therefore demotivated to work hard
• what is the lowest point on the LRAC curve called

  the minimum efficient scale
• how do large firms have dominance over markets

  ability to set prices and discourage other firms from entering the market
• when does a firm have a competitive advantage

  when its goods are deemed better quality than its competitors by customers
• why would firms ensure their employees are well looked after

  boost employees motivation, which in turn increases productivity and output
• inorganic growth

  business expands by merging and acquiring other firms
• organic growth

  business grows by increasing output, expanding their customer base and developing new products
• disadvantages of organic growth compared to inorganic growth

  takes time to grow this way, and in this time other firms may gain a competitive advantage over the market, which may become a problem for shareholders
• vertical integration

  a firm merges with or acquires another firm in the same industry but different step in the supply chain
• which vertical integration is closer to the producer: forwards or backwards

  backwards
• horizontal integration

  a firm merges with or acquires another firm in the same industry and same stage of production
• how is horizontal integration beneficial for firms

  gives them a competitive edge over the market as their market share increases, leading to increased output
• conglomerate integration

  joining of 2 firms in two different industries
• definition of R&D

  investment in research with the intention of improving goods, introducing new ones and improving methods of production
• how can R&D increase market power

  differentiates products from their competitors, making them more unique and thus helps increase brand loyalty
• why does the state often provide funding for R&D

  the positive externalities of R&D are not always fully understood, so the state intervenes to ensure more investment in R&D
• how have price comparison sites been beneficial to consumers

  helped reduce information gaps by increasing the quality of knowledge consumers have about a good or service
• viral marketing

  the good or service is promotes on social media, where it can be shared with friends
• micro-marketing

  advertising is focused on a small group of consumers, rather than the market as a whole
• long tail theory

  suggests consumers get a wider choice when it comes to online retailing
• 2 ways online stores have an advantage over physical stores

  • online businesses are not restricted to physical space, so can target customers worldwide
  • online stores have lower costs, so can charge lower prices and therefore gain a larger portion of market share
• why can most small firms NOT benefit from economies of scale

  they do not produce enough output to lower their average costs
• how could small firms act as monopolists

  can create a local, more personal service and a niche market