1.6 Growth and Evolution

Internal growth

It is anything a company undertakes on its own to grow and develop the business

External growth

It is the development involving the participation of another organization - a company works with another company to expand

Globalization

It is the increasing interconnectedness between countries across the world in terms of trade, communication, culture, and the movement of people

Free trade

A pact between two or more nations to reduce barriers to imports and exports among them

Protectionism

Economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, etc

MNC (multinational company)

A company that operates in two or more countries, in which one is their home country

Profit satisficing

Describes the behavior of business owners who choose not to grow their business because the existing enterprise meets their financial
needs

Economies of scale

A business increases in size, increasing the number of output and hence the average unit cost decreases (as fixed costs are spread over a larger number of outputs)

Purchasing (bulk-buying) economies of scale

Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount and lowers average cost

Technical economies

Occur as a firm is able to use its machinery at a higher level of capacity due to the increased output thereby spreading the cost of the machinery over more units and lowers the average cost

Financial economies

Large firms often receive lower interest rates on loans than smaller firms as they are perceived as less risky. A cheaper loan lowers the average cost

Marketing economies

Large firms spread the cost of advertising over a large number of sales and reduces the average cost. They can also reuse marketing materials in different regions which further lowers the average cost

Managerial economies

Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost

Diseconomies of scale

When average unit cost of production actually increases as the level of output increases because the firm is too large

Merger

A form of external growth that usually results in two firms combining to form a third entity. This new company then replaces the two that existed before the merger.

Acquisition

It is a form of external growth where one firm purchases another firm by acquiring 50% or more of the shares

Friendly takeover

Where acquisition has approval and support of the directors of the target company

Hostile takeover

Occurs against the will of the target company’s board of directors

Joint venture

It is a form of external growth which involves the creation of a new company by two or more 'parent' companies which can be dissolved at the end of a project without compromising the businesses of the parent companies. It is formed in order to carry out an aim or objective that might be difficult for each of the parent companies to achieve on its own.

Strategic alliance

It is a form of external growth which involves two or sometimes more organizations working together to achieve a set of common objectives. The relationship between the companies may be spelled out in a contractual agreement; however, no new entity is created and the original organizations remain intact

Vertical integration

Refers to a merger/takeover of another firm in the supply chain/different stage of the production process

Horizontal integration

Same industry, same stage of production

Forward vertical integration

Same industry, towards customer

Backward vertical integration

Same industry, towards supplier

Conglomerate integration

Different industry

Franchising

Involves an individual (franchisee) buying the rights to operate a business model, use its branding and software tools and receive support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees