Business TEST PREP UNIT 4 - ETHICS 2 PDF

Definitions: AO1 Economies of scale Economies of scale refer to the cost advantage experienced by a firm when it increases it increases its level of output. The advantage arises due to the inver...

Definitions: AO1 Economies of scale Economies of scale refer to the cost advantage experienced by a firm when it increases it increases its level of output. The advantage arises due to the inverse relationship between the per-unit fixed cost and the quantity produced, the greater the quantity of output produced, the lower the per-unit fixed cost is. Diseconomies of scale when an organization becomes too large, causing productive inefficiencies that result in an increase in average cost of production I.e. It is the cost disadvantage of growth when the business becomes too big. Internal economies of scale These are economies of scale that occur inside the firm They are within the firms control Internal growth This occurs when a business grows by using its own capabilities and resources to increase the scale of its operations and sales revenue External growth External growth occurs through dealing with outside organizations. Such growth usually comes in the form of alliances or mergers with other firms or through the acquisition of other businesses Mergers Mergers take place when two firms agree to form a new company with its own legal identity. This is a way for companies to expand into new segments Acquisitions Acquisitions occur when a company buys a controlling interest in another firm with the permission and agreement of its board of directors. These are typically made in order to take control of the target company's strengths Takeovers Takeovers occur when a company purchases controlling stake in another company without the permission and agreement of the company of board of directors These are also known as hostile takeovers Joint ventures (JVs) A joint venture occurs when two or more  businesses split the costs, risks, control and rewards of a business project In doing so the parties agree to set up a new legal entity Strategic alliances (SAs) strategic alliances occur when two or more businesses cooperate in a business venture for mutual benefit The firms in the SA share the costs of product development marketing and operations Franchising Franchising is a form of business ownership whereby a person or business buys a license to trade using another firm's name, logo, brand and trademarks Operations management The process of designing and managing the production process - using resources to produce goods and services Resources E.g. land, labour, machinery, raw materials Job production This involves creating an individual product from start to finish, tailor-made to meet specific needs of a customer The business owner does not start working on the next order until the first one is completed Batch Production This involves producing a limited number of identical products Work on each batch is fully completed before production switches to a new batch Mass production This is the manufacturing of large amounts of a standardized product It often involves the assembly of individual components Flow Production This focuses on a continuous production process of manufacturing products that are standardized in large quantities Flow production relies entirely on automated systems with very few workers required Mass customization Combines the higher production volume of mass production with the flexibility to be able to tailor each product somewhat to customer demands Labor intensive production Uses a greater proportion of labor than any  other factor input A key benefit is the ability to offer personalized services Capital-intensive production Have a relatively high proportion of capital costs compared with labor costs High levels of output are possible AO2 1.5 Types of internal economies ​ Technical economies ○​ Large firms can use sophisticated capital and machinery to mass produce thor goods ○​ The high fixed costs of their equipment and machinery are spread over the huge scale of output ○​ This results in the reduction of average costs of production ​ Financial economies ○​ Large firms can borrow large sums of money at lower rates of interest ○​ This is because they are seen as less risky to financiers ○​ This results in the reduction of the costs of borrowing finance. ​ Managerial economies ○​ Large firms divide managerial roles by employing specialist managers ○​ Small first are less able to do so ​ E.g. a sole trader often has to fulfil the functions of a marketer, accountant and production manager ○​ This results in the fall of average costs due to higher productivity ​ Specialisation economies ○​ These are the result from division of labour of the workforce ○​ By using mass production techniques, manufacturers benefit from having specialist labour ○​ These specialist are responsible for a single part of the production process ○​ This results in the fall of average costs due to higher productivity ​ Marketing economies ○​ Large firms benefit from selling in bulk ○​ High costs of advertising can also be spread by large firms through using the same marketing campaign across the world  ​ Purchasing economies ○​ Large firms benefit from buying resources in bulk ○​ Discounts are usually given to bulk purchases ○​ Large firms are able to purchase enormous quantities, so they get the biggest discounts ​ Risk-bearing economies ○​ Conglomerates can spread fixed costs across a wide range of business operations ○​ Unfavourable trading conditions for some products can be offset by more favourable trading conditions in their other products. Examples of internal diseconomies of scale ​ Lack of control and coordination ​ Poorer working relationships ​ Lower productive efficiency from outsourcing #bureaucracy ​ Complacency Types of external economies of scale ​ Technological progress ○​ Technological innovations increase productivity within an industry with significant cost savings ​ E.g. the internet has revolutionised business by offering e-commerce ​ This offers cost savings as the location of premises can be in more affordable areas. ​ Improved transportation networks ○​ Globalized transportation networks have enabled firms to import raw materials and finished goods that have been manufactured at much lower costs ○​ Increased convenience from improved logistical networks allows for faster deliveries at lower costs. ​ Abundance of skilled labour ○​ Certain locations may benefit from reputable education and training facilities ○​ Local businesses benefit from this by having a suitable pool of educated and trained labour ○​ This reduces costs of recruitment and training ​ Regional specialisation ○​ Certain locations or countries have established reputations for specialising in specific goods and services ○​ Firms in those locations benefit from having access to specialist labour, sub-contractors and suppliers ○​ They also are able to charge a premium price for their products.  ​ E.g. food from a certain region of a country Examples of external diseconomies of scale ​ Higher rents ​ Local market conditions for pay and financial rewards ​ Traffic congestion ​ Context specific problems Methods of internal growth ​ Changing prices ​ Effective promotions ​ Product innovation ​ Increase distribution ​ Preferential credit for customers ​ Capital expenditure ​ Staff training and development ​ Providing overall value for money Advantages and disadvantages of internal growth ​ Advantages ○​ Better control and coordination ○​ Relatively inexpensive ○​ Maintains corporate culture ○​ Generally less risky ​ Disadvantages ○​ Diseconomies of scale ○​ Restructuring of the form of ownership may be needed ○​ May lead to dilution of control and ownership ○​ Slower method of growth Advantages and disadvantages of external growth ​ advantages ○​ Quicker than organic growth ○​ Synergies ○​ Reduced competition ○​ Economies of scale ○​ Spreading of risks  ​ Disadvantages ○​ More expensive than internal growth ○​ Greater risks ○​ Regulatory barriers ○​ Potential diseconomies of scale ○​ Organizational culture clash Pros and cons of M&A ​ Pro ○​ Greater market share ○​ Economies of scale ○​ Synergy ○​ Survival ○​ Diversification ○​ Gain entry into new markets ​ Cons ○​ Redundancies ○​ Conflict ○​ Culture clash ○​ Loss of control ○​ Diseconomies of scale ○​ Regulatory problems Benefits and drawbacks of JVs and SAs ​ Benefits ○​ Synergy ○​ Spreading costs and risks ○​ Entry to new / foreign markets ○​ Relatively cheap ○​ Competitive advantages ○​ Exploitation of local knowledge ○​ Relatively high success rate ​ Drawbacks ○​ Rely heavily on goodwill and resources of their counterparts ○​ Enormous expenditure on brand development ○​ Possible culture clashes Benefits of franchising for franchisor and franchisees ​ Franchisors ○​ Cheaper and faster than internal growth ○​ Enter new local and international markets ○​ Growth without incurring day-to-day running costs ○​ Income from royalty payments ○​ Franchisees are more motivated than salaried managers ​ Franchisees ○​ Relatively low riks ○​ Relatively lower start-up costs ○​ Training and advice on financial management ○​ Large scale advertising performed by franchisor ○​ Greater likelihood of success due to local market insights Drawbacks of franchising for franchisor and franchisees ​ Franchisor ○​ Risk damage to brande name if franchisees are unsuccessful ○​ Monitoring quality standards or franchisees can be difficult ○​ Slower growth method than m&a’s ​ Franchisees ○​ Stifled creativity due to many franchisor rules and requierments ○​ Can be very expensive to buy a franchise with no guarantee of return on investment ○​ Significant percentage of revenues paid to franchisor Measuring the size of a business ​ The size of a business can be measured in several ways ○​ Market share ○​ Total sales revenue ○​ Size of workforce ○​ Profit ○​ Capital employed Generic benefits of being a large business ​ Economies of scale ​ Lower prices  ​ Brand recognition ​ Brand reputation ​ Value-added services ​ Greater choice ​ Customer loyalty Generic benefits of being a small business ​ Cost control ​ Loss of control ​ Financial risks ​ Government aid ​ Local monopoly power ​ Personalised services ​ Flexibility ​ Small market size 5.1 How does operations management interact with the other parts of the business? Marketing -​ Quality and packaging -​ Standardized production or custom-made Human resources -​ Mass production may lead to layoffs/redundancies -​ Amount of training/skill required -​ Motivation Finance -​ Capital-intensive machinery requires initial investment -​ Labor intensive requires salaries, bonuses, etc. 5.2 Job Production -​ Typically these products are one-off items (small to large scale): -​ Buildings -​ Wedding dresses -​ Movies -​ Haircuts -​ Musical instruments Advantages and Disadvantages of Job production: Advantages -​ Quality of production -​ Highly motivated workers -​ Uniqueness of the product acts as a unique selling point (USP) -​ Flexibility in the design and specifications of the product are possible Disadvantages -​ Labor intensive and therefore expensive -​ Time consuming due to the varying and specific design requirements -​ Long working capital cycle between producing and selling the product -​ Few economies of scale can be enjoyed since each product is unique (i.e. produced on a small scale) Batch Production -​ For example: -​ Bakery, News papers Advantages and Disadvantages of Batch production Advantages: -​ Economies of scale from machinery producing larger quantities.  -​ Specialization leads to increased productivity -​ Higher sales from a wider product portfolio, which gives customers greater choice -​ Products can still be tailored at relatively low cost, e.g. customized birthday cakes Disadvantages: -​ Inflexibility from difficulty in changing one batch to another once production has begun -​ Storage costs are high since there is a lot of work in progress -​ Jobs are repetitive and may lead to boredom -​ High production costs from using equipment and machinery Mass production Examples: -​ Ball bearings -​ Mobile phones -​ LEGO toys -​ Paper clips -​ Pins -​ Toothpicks Advantages and Disadvantages of Mass/Flow Production Advantages: -​ Large-scale output. (especially with flow production) -​ Economies of scale through capital-intensive methods -​ Standardized quality -​ Worker specialization leading to low defect rates -​ Low labor costs due to use of low-wage workers Disadvantages -​ Low levels of motivation due to boring repetitive work -​ Breakdowns will cause major delays  -​ Little flexibility for change once production begins -​ Capital intensive and therefore very high set up, running, and replacement costs -​ Large storage system is required for the large amounts of stock Labor-intensive production is highly suited for firms that: -​ Make products that are highly customized, e.g. tailormade suits -​ Are in the tertiary sector -​ Operate farming in economically developing countries Capital-intensive production is ideal for firms that: -​ Have goods that can be batch or mass produced AND -​ Operate in large markets that demand large volumes AND/OR -​ Have ambitious growth objectives