Expanding a business common mistakes

Common mistakes

• Confusing franchising with licensing

  Assuming that franchising is the same as licensing a brand name.

  Fix itFranchising involves ongoing support, training, and a royalty system, whereas licensing is a one‑time fee with limited support and no operational control.

• Confusing franchising with acquisition

  Assuming that franchising is a form of buying another business.

  Fix itFranchising is a licensing arrangement; the franchisee remains a separate entity and does not become part of the original company’s ownership.

• Confusing outsourcing with insourcing

  Students often think outsourcing means bringing a function back in-house.

  Fix itOutsourcing is contracting out; insourcing is bringing a function back inside the company.

• Confusing fixed and variable costs

  Assuming that variable costs per unit stay the same while total variable costs rise with output.

  Fix itVariable costs per unit remain constant, but total variable cost increases with output. Fixed costs stay constant in the short run, so the unit cost advantage comes from spreading these fixed costs over more units.

• Mixing up purchasing economies with economies of scale

  Assuming that purchasing economies automatically mean lower unit costs for all products.

  Fix itPurchasing economies only reduce the cost of inputs; the overall unit cost depends on how those inputs are used and whether the firm can spread fixed costs over more units.

• Assuming all growth leads to lower costs

  Thinking that expanding a business will automatically reduce costs per unit.

  Fix itGrowth can also increase complexity and costs; it is essential to analyse whether economies or diseconomies of scale are occurring.

• Confusing average unit cost with total cost

  Students often add fixed and variable costs and then divide by units, but forget to include the division step or misinterpret the result as total cost.

  Fix itRemember: Total cost = Fixed costs + (Variable cost per unit × Units). Then divide the total cost by the number of units to obtain the average unit cost.