AA

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

    The impact of economies and diseconomies of scale on average 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