Growth_and_evolution_2023

1.5 GROWTH AND EVOLUTION

Costs

• pTotal Cost (TC): Represents the complete costs associated with a given level of output.

Average Costs

• Average Total Cost (ATC or AC): Total cost per unit of output.

  • Formula: ATC = TC / AC

Scale of Production

1. Economies of Scale: Situations where the Long-Run Average Total Cost (LRATC) decreases as output increases.

2. Diseconomies of Scale: Occurs when LRATC increases as output increases.

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

Average Cost Components

• Average costs are influenced by:

  • AC

  • Economies of scale

  • Diseconomies of scale

  • Constant returns to scale

Internal and External Economies of Scale

Internal Economies of Scale

1. Labour Division and Specialisation: Efficiency increases due to specialized roles.

2. Technical: Improved processes or technology lead to cost reductions.

3. Marketing: Greater efficiency and lower costs in marketing.

4. Purchasing Economies: Bulk purchasing reduces costs.

5. Financial: Gaining better financial terms due to size.

6. Managerial: Improved managerial efficiency.

7. Risk Bearing: Larger firms can better absorb risks.

8. Indivisibilities of Physical Capital: Large capital investments can be spread over higher output.

External Economies of Scale

1. Technological Progress: Industry-wide improvements reduce costs.

2. Improved Transportation Networks: Enhanced logistics reduce supply chain costs.

3. Regional Specialisation: Clustering of industries benefits companies within that region.

4. Access to Skilled Labour Force: Greater talent pool enhances operational efficiency.

Internal Diseconomies of Scale

1. Control and Communication Problems: Larger firms may struggle with coordination.

2. Complacency: Larger firms may become less adaptive to changes.

3. Red Tape: Increased bureaucracy can hinder responsiveness.

4. Alienation and Loss of Identity: Employees may feel disconnected in large organizations.

External Diseconomies of Scale

1. Higher Rents: Increased competition for space can raise costs.

2. Higher Wages and Financial Rewards: As demand increases for labor in certain industries, wages can rise.

3. Traffic Congestion: Increased operational challenges due to higher traffic in populous areas.

Average Costs and Size of Business

• Ways to Measure Size of Business:

  1. Market Share

  2. Total Revenue

  3. Size of Workforce

  4. Profit

  5. Capital Employed

Staying Small: Advantages

1. Controlled and managed by owners.

2. Adapts more quickly to changes in the market.

3. Owners know their workers and their needs.

4. Better communication between stakeholders.

5. Lack of diseconomies of scale.

6. Sometimes operate without competition.

Staying Small: Disadvantages

1. Limited sources of finance.

2. Owners bear significant responsibility.

3. Vulnerability to negative external impacts.

4. Unlikely to benefit from economies of scale.

Being Big Business: Advantages

1. Ability to hire professionals.

2. Potential to achieve economies of scale.

3. Ability to set market prices.

4. Access to a broader variety of financial sources.

5. Potential for risk diversification.

6. Enhanced resources for conducting research.

Being Big Business: Disadvantages

1. Management difficulties may arise.

2. Potential for increased costs associated with large-scale production.

3. Slower decision-making and communication breakdowns.

4. Possible conflict of objectives due to separation of ownership and control.

Reasons for Seeking Growth

1. Increased profits.

2. Increased market share.

3. Economies of scale.

4. Enhanced power and status.

5. Survival and sustainability in the market.

Types of Growth

• Internal (Organic) Growth: Growth achieved through investment in new products, sales channels, or physical locations.

• External (Fast Track) Growth: Growth achieved through mergers, acquisitions, or partnerships.

Internal Growth Strategies

1. Changes in the Marketing Mix (4P's): Product, Place, Price, Promotion.

2. Capital Expenditure.

3. Training and Development.

4. Preferential Credit Options.

Mergers and Acquisitions

• Merger: Agreement between two businesses to form a new entity.

• Takeover/Acquisition: When one company buys a majority stake in another to become the controlling owner.

Business Integration Strategies

Vertical Integration

• Backward Integration: Merging with a supplier.

• Forward Integration: Merging with a customer.

Horizontal Integration

• Combining with another firm in the same industry at the same stage of production.

Conglomeration

• Ownership of multiple unrelated business entities.

Joint Ventures and Strategic Alliances

• Joint Venture: Two or more businesses collaborate on a project, creating a new division.

• Strategic Alliance: Agreement between firms to share resources for mutual objectives without forming a new business.

Franchise System

Franchisor and Franchisee Roles

• Franchisor: Provides product and support; retains ownership of the business model.

• Franchisee: Operates an independent business under the franchisor's name and systems.

Advantages and Disadvantages of Franchising

• Franchisor Advantages: Increased market reach, local knowledge, lower risk, profit from fees.

• Franchisor Disadvantages: Loss of control, potential damage to brand image.

• Franchisee Advantages: Access to established products, reduced startup costs, supply security.

• Franchisee Disadvantages: Financial risk, royalty fees, limited operational control.