1.6 Growth & evolution

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.

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

The impact of economies and diseconomies of scale on average costs

$Potential advantages of small and large businesses$ * 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

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

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 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 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