Topic 1 Business Organisation & Environment

Unit 6Growth & Evolution

Learning ObjectivesApply the concepts of economies and

diseconomies of scale to business decisions.Evaluate the relative merits of small versus

large organizations.Explain the difference between internal and

external growth.Explain external growth methods:

Mergers and AcquisitionsJoint venturesStrategic AlliancesFranchising

Learning ObjectivesExplain the role and impact of globalization

on the growth and evolution of business Outline reasons for the growth of

multinational companies (MNC’s)Evaluate the impact of MNC’s pm the host

countries

Growth and EvolutionGrowth of a business refers to the expansion in

size of its operations and this can be measured in several ways, including:Sales Turnover (Sales Revenue)Market ShareCapital Employed (Long term sources of

finance)Employees

Growth and Evolution

Reasons why business want to grow:Economies of scaleMarket shareSurvivalSpread risksIncreased profit

(Long run)

THE SIZE OR VOLUME OF OUTPUT

Businesses that expand or increase their scale of operations can often use the larger scale to become more efficient.

Scale of operations

Economies of Scale

Refers to the reduction in average unit cost as a business (production) increases in size

Efficiency is measured in terms of costs of production per unit

Measuring Efficiency

Total costs = Fixed costs + Variable costs

Fixed costs: costs that do not change as production changesMonthly rent

Variable costs: costs that vary as production changesRaw materials

Further costs are known as average costs or unit costs or average unit costs

Measuring Efficiency

Average Costs= Total Costs (Fc + Vc) quantity produced

As quantity produced goes up, the variable costs go up

As quantity produced goes up, the fixed costs are spread over a greater quantity of units produced

The average costs go down

Economies of Scale explained

5 types of economies of scale:

 1. Purchasing economies 2. Technical economies 3. Financial economies 4. Marketing economies 5. Managerial economies

Reasons for diseconomies of scale:1. Communication problems

2. Alienation of the workforce3. Poor coordination and decision-making

Usually in larger firms this can happen if managers do not keep control of operations

Diseconomies of Scale

Factors that cause average costs of production to rise when the scale of operation is increased

Reducing a firms unit (average) costs of production that result from an increase in the scale of operations

Cost benefits, can be substantial in large industries, so much so that smaller firms may not survive

Internal (dis)economies of scale occur inside the firm and are within its control

External (dis)economies of scale occur within the industry and are largely beyond its control

Economies of scale

Growth and EvolutionInternal economies of scale

Technical economiesFinancial economiesManagerial economiesSpecialization

economiesMarketing economiesMonopsony economiesCommercial economiesRisk-bearing

economies

Internal diseconomies of scale

Lack of control and coordination

Poorer working relationships

SlackBureaucracyComplacency

Growth and EvolutionExternal economies of scale

Technological progress

Improved transportation and communication networks

Better trained laborRegional

specialization

External diseconomies of scale

Increasing market rents

Traffic congestionHigher wages

Large scale production – Unit costs

Scale of operation

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Economies of scale

Diseconomies of scale

There is not a particular point of operation at which

EOS cease and DOS begin

It is difficult to measure

Learning ObjectivesApply the concepts of economies and

diseconomies of scale to business decisions.Evaluate the relative merits of small versus

large organizations.Explain the difference between internal and

external growth.

Market size can be measured in several ways:Market ShareTotal RevenueSize of workforceProfitCapital employedMarket value

Small vs. Large Organizations

Benefits of being large include:Brand RecognitionImageConvenienceDiscountsCustomer LoyaltyMore Choices

Large Organizations

Cost ControlFinancial RiskGovernment AidLocal monopoly powerPersonalized servicesFlexibilitySmall market size

Small Organizations

Learning ObjectivesApply the concepts of economies and

diseconomies of scale to business decisions.Evaluate the relative merits of small versus

large organizations.Explain the difference between internal and

external growth.

Internal (Organic) Growth

Occurs when a business grows internally, using its own resources to increase the scale of its operations and sales revenue.

Internal (Organic) Growth Occurs When……

Changing priceAdvertising and

promoting.Producing

improved or better products.

Selling in different locations (placement)

Offering customers preferential credit payment terms.

Increasing capital expenditure (investment).

Improving training and development.

External (inorganic) Growth

Occurs through dealings with outside organizations. Usually comes in the form of alliances or mergers with other firms or through acquisitions