1.6 Growth & evolution

Introduction

• Scale of operation: maximum output that can be achieved using the available inputs (resources) - this scale can only be increased in the long term by employing more of all inputs.

Increasing the scale of operations

• Economies of scale: reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations.

  • Reasons for the cost benefits to arise:
  • Purchasing economies
  • Technical economies
  • Financial economies
  • Marketing economies
  • Managerial economies

• Diseconomies of scale: factors that cause average costs of production to rise when the scale of operation is increased.

  • Causes of management problems:
  • Communication problems
  • Alienation of the workforce
  • Poor coordination and slow decision-making

• Large-scale production - unit costs

  

Merits of small and large organizations

• Potential advantages of small and large businesses

  • Small businesses:
  • Can be managed and controlled by the owner(s)
  • Often able to adapt quickly to meet changing customer needs
  • Offer personal service to customers
  • Find it easier to know each worker and many staff prefer to work for a smaller, more “human” business
  • Average costs may be low due to no diseconomies of scale and low overheads
  • Easier communication with workers and customers
  • Large businesses:
  • Can afford to employ specialist professional managers
  • Benefit from cost reductions associated with large-scale production
  • May be able to set prices that other firms have to follow
  • Have access to several different sources of finance
  • May be diversified in several markets and products, so risks are spread
  • More likely to be able to afford research and development into new products and processes

• Potential disadvantages of small and large businesses

  • Small businesses:
  • May have limited access to sources of finance
  • May find the owner(s) has to carry a large burden of responsibility if unable to afford to employ specialist managers
  • May not be diversified, so there are greater risks of negative impact of external change
  • Unlikely to benefit from economies of scale
  • Large businesses:
  • May be difficult to manage, especially if geographically spread
  • May have potential cost increases associated with large-scale production
  • May suffer from slow decision-making and poor communication due to the structure of the large organization
  • May often suffer from i divorce between ownership and control that can lead to conflicting objectives

What is an appropriate scale of operation?

• Business owners must weigh up and assess:
  • Owners’ objectives
  • Capital available
  • Size of the market the firm operates in
  • Number of competitors
  • Scope for economies of scale

Business growth

• Internal growth: expansion of a business by means of opening new branches, shops or factories (also known as organic growth).

• External growth: business expansion achieved by means of merging with or taking over another business, from either the same or a different industry.

• Merger: agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business.

• Takeover: when a company buys over 50% of the shares of another company and becomes the controlling owner often referred to as “acquisition”.

• Horizontal integration: integration with a firm in the same industry and at the same stage of production.

• Forward vertical integration: integration with a business in the same industry but a customer of the existing business.

• Backward vertical integration: integration with a business in the same industry but a supplier of the existing business.

• Conglomerate integration: merger with or takeover of a business in a different industry.

Joint ventures, strategic alliances and franchising

• Joint venture: two or more businesses agree to work closely together on a particular project and create a separate business division to do so.

• Strategic alliances: agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives.

• Franchise: business that uses the name, logo and trading systems of an existing successful business.

• Globalization: growing integration of countries through increased freedom of global movement of goods, capital and people.

• Free trade: no restrictions or trade barriers exist that might prevent or limit trade between countries.

• Protectionism: using barriers to free trade, such as tariffs and quotas, to protect a country's own domestic industries.

Multinational businesses

• Multinational company/business: business organization that has its headquarters in one country, but with operating branches, factories and assembly plants in other countries.

• Why become a multinational?

  • Closer to main markets
  • Lower costs of production
  • Avoid import restrictions
  • Access to local natural resources