1.5 Growth and Evolution

Economy of Scale

The decrease in per unit production cost as output or activity increases.

Diseconomy of Scale

The increase in per unit production cost as output or activity increases.

Reasons for businesses to grow

• Survival: When a company is larger, its less likely that its bought or fail.

• Economics of Scale: Greater economy of scale means greater profits, higher returns and a healthier balance sheet.

• Higher Status: Larger firms have a greater status than smaller ones.

• Becoming Market Leaders

• Increased Market Share: Large companies that have a large market share can control the market by determining prices and deciding which services will be the industry standard.

Reasons for businesses to stay small

• Greater focus: small business can focus investments where they want and where they believe the greatest profitability lies. They may have lower profits than larger business, but have greater profitability and return on investment.

• Greater prestige: Greater sense of exclusiveness than larger businesses. Hence be able to charge higher than mass or bulk produced larger business products.

• Greater motivation: Through a greater connection to employees, they may feel more important to the functioning of the business.

• Competitive advantage: Through greater personalization of goods and services, allows smaller businesses to be more competitive.

• Less Competition: Through being in niche markets, a small business may feed into a market with lesser competition.

Internal Growth

Sometimes referred to as organic growth, this occurs when a business grows by relying on its own resources and capabilities: investment in new products, or new sales channels, or more stores to increases stores.

External Growth

Occurs when a business expands with the aid of resources and capabilities not developed internally by the company itself. Instead, the company obtains these new resources and capabilities by acquiring another company or forming some type of relationship with another organization.

Merger

Two companies that are theoretically “equal” legally become one company.

Acquisition

When one company purchases a majority or all the shares of another company.

Takeover

When one company acquires a majority or all the shares, its implied through the word, that the business being acquired doesn’t want to partake in the transaction.

Horizontal integration

When two companies are in the same industry, line of industry and same chain of production.

Vertical Integration

When one business integrates with another at a different stage in the chain of production. This type of integration may be caused by ensuring reliable supply, avoiding government regulation, reduce transaction costs, and eliminate the market power of other businesses.

Two types of Vertical Integration

Forward: A business integrates another which is part of an earlier stage in the chain of production.

Backwards: When one business integrates another one further down the chain of production.

Conglomeration

Two businesses in unrelated lines of business integrate, this is also known as diversification.

Joint Venture

An organization created, owned, and operated by two or more other organization. Legally distinct from the organizations that created it.

Strategic Alliance

• More than two business may be part of the alliance

• No new business is created.

• Individual Business in the alliance remain independent.

• Strategic Alliances are more fluid than joint ventures.

Franchising

A franchisor develops products or services and its brand and then sells the right to use the brand and its products or services to franchisees.

Franchisors provide

• The stock

• The fittings

• The uniforms

• Staff training

• Legal and Financial help

• Global advertising

• Global promotions

With given resources, Franchisee will…

• Employ the staff

• Set prices and wages

• Pay an agreed royalty on sales

• Create local promotion

• Sell only the products of the franchisor

• Advertise locally

Advantages for franchisee

• The product exists and is usually well known

• The format for selling the product is established

• The set-up costs are reduced

• The franchisee has a secure supply of stock

• The franchisor can provide legal, financial, managerial and technical help.

Disadvantages for Franchisee

• Has unlimited liability for the franchise

• Has to pay royalties to the franchisor

• Has no control over what to sell

• Has no control over supplies

Advantages for Franchisors

• Gains quick Access to wider Market

• Makes us of local knowledge and expertise

• Does not assume the risks and liability of running the franchise

• Gains more profits and the sign-up fees

  • Makes all of the global decisions

Disadvantages for the Franchisor

• lose some control in the day-to-day running of the business.

• Can see its image suffer if a franchise fails or does not perform adequately