IB Business Management SL - 1.4. Growth and evolution

Growth and evolution

The expansion of sales and the increased scale of production.

Economies of scale

As the production output of an enterprise increases, the cost per unit output decreases, as fixed costs are spread out over more units of output.

Diseconomies of scale

As the business expands and the scale of its operations is beyond the minimum efficient scale, the average costs per unit output rises.

Technical

Economy of scale. Increasing the size of the units of production decreases costs.

Managerial

Economy of scale. Managers can specialize in doing one particular job rather than attempting to do several different tasks at the same time.

Financial

Economy of scale. Larger firms have an advantage over small firms when it comes to raising finance.

Marketing

Economy of scale. Larger firms can have bigger and effective marketing campaigns.

Purchasing

Economy of scale. Larger businesses can get discounts when purchasing their inputs through bulk buying as they have higher bargaining power.

Internal growth

A business grows using its own resources to increase the scale of its operations and sales revenue.

External growth

A business grows by collaborating with another firm.

Horizontal integration

Firms are in exactly the same line of business and at the same stage of production.

Backward vertical integration

Merge with a business that is in a previous stage of production.

Forward vertical integration

Merge with a business that is in the next stage of production.

Lateral integration

Merging of firms with related goods that do not compete directly with each other.

Diversifying merger

Merging of firms in completely different lines of business.

Joint venture

A type of external growth strategy that combines the contributions and responsibilities of two firms to a shared project by forming a separate legal enterprise.

Strategic alliance

An agreement between parties to pursue shared objectives while remaining independent organizations, and without forming a legal partnership entity.

Franchising

The franchisor sells the rights to sell their products or use the company name or brand to the franchisees

Globalization

worldwide movement toward economic, financial, trade, and communications integration.

Small business

• Closer to its customers: ability to offer more personal services. • Less competition: small businesses can create a monopoly in a niche market. • Greater focus: they do not offer products to mass markets.

Big business

• Economies of scale: larger production output = decreased cost per unit. • Market leader status: big firms tend to be more influential. • Survival: greater capacity is used to spread the risk.