Growth_and_evolution_2023 (3)

Growth and Evolution Notes

1. Costs

• Total Cost (TC): Complete costs associated with a given level of output.

2. Average Costs

• Average Total Cost (ATC/AC): Calculated as Total Cost (TC) divided by Quantity (Q) of output.

3. Scale of Production

• Economies of Scale: Long-Run Average Total Cost (LRATC) decreases as output increases.

• Diseconomies of Scale: LRATC increases as output increases.

• Constant Returns to Scale: LRATC remains constant as output increases.

4. Average Costs Overview

• AC: Relation of average costs in economies and diseconomies of scale, affecting Quantity (Q).

5. Internal and External Economies of Scale

Internal Economies of Scale

• Labour Division and Specialisation: Improved productivity through specialized tasks.

• Technical Economies: Savings from larger production methods.

• Marketing Economies: Cost advantages in marketing for larger firms.

• Purchasing Economies: Discounts from bulk buying.

Additional Internal Economies of Scale

• Financial Economies: Better financing rates for larger firms.

• Managerial Economies: Increased operational efficiency.

• Risk Bearing: Diversification reduces risk.

• Indivisibilities of Physical Capital: Large machinery that is more feasible at higher output levels.

External Economies of Scale

• Technological Progress: Industry-wide benefits from advances.

• Improved Transportation Networks: Lower costs due to better logistics.

• Regional Specialisation: Industry clustering improves efficiency.

• Access to Skilled Labourforce: Talent pooling enhances productivity.

6. Internal and External Diseconomies of Scale

Internal Diseconomies of Scale

• Control and Communication Problems: Managing larger organizations can be challenging.

• Complacency: Reduced motivation among staff.

• Red Tape: Bureaucratic inefficiencies.

• Alienation: Employees feeling disconnected from the business.

External Diseconomies of Scale

• Higher Rents: Increased costs in saturated markets.

• Higher Pays and Financial Rewards: Increased costs due to premium wages.

• Traffic Congestion: Delays affecting efficiency.

7. Average Costs and Size of a Business Measurement

• LRAC: Long-Run Average Cost related to Quantity (Q).

• Ways to Measure Size: Market Share, Total Revenue, Workforce Size, Profit, Capital Employed.

8. Advantages and Disadvantages of Staying Small

Advantages

• Direct control and management by owners.

• Quick market adaptation.

• Strong employee relationships.

• Better communication with stakeholders.

• Less impact from diseconomies of scale.

Disadvantages

• Limited finance sources.

• High personal responsibility for owners.

• Vulnerability to external changes.

• Missed opportunities for economies of scale.

9. Advantages and Disadvantages of Being a Big Business

Advantages

• Ability to hire specialists.

• Potential for economies of scale.

• Influence over market pricing.

• Access to diverse financial resources.

• Risk diversification.

• More resources for research.

Disadvantages

• Management challenges.

• Increased operational costs.

• Slower decision-making.

• Potential conflicts from separation of ownership and control.

10. Reasons for Seeking Growth

• Increased profits and market share.

• Economies of scale benefits.

• Enhanced market power.

• Business survival strategies.

11. Growth Strategies

Internal (Organic) Growth

• Utilizing own resources: New products, sales channels.

External (Fast Track) Growth

• Expanding through mergers or acquisitions.

12. Mergers and Acquisitions

• Merger: Combining two businesses under one board.

• Acquisition: One company buying a majority stake in another.

  • Types of Integration: Backward (with suppliers) and Forward (with customers).

13. Conglomeration

• A firm owning multiple unrelated businesses.

14. Joint Ventures and Strategic Alliances

• Joint Ventures: Collaboration for specific projects.

• Strategic Alliances: Resource commitment towards mutual objectives without forming a new entity.

15. Franchise Overview

• A business allows others to operate under its name and systems.

Franchisor Responsibilities

• Provides stock, fittings, staff training, and advertising.

Advantages and Disadvantages for Franchisors and Franchisees

• Franchisor: Wider market access, knowledge but risks losing control.

• Franchisee: Lower start-up costs, established systems but assumes risks and pays royalties.