BUSINESS AND MANAGEMENT MODULE 1 BUSINESS ORGANIZATIONS & ENVIRONMENT

Growth  Businesses grow for a number of reasons –including to take advantage of a gap in the market, –to gain a competitive advantage over rivals, –to win increased market share –Spread the risk into different markets or sectors  There are two main types of growth: –Internal or organic growth –External growth involving merger and acquisition.

Economies of Scale  Refer to lower average costs of production as a firm expands capacity  Can result in lower prices to entice consumers  Can have internal and external economies of scale

Graphically Represented

Internal Economies of Scale  Technical –High fixed costs can be spread out of a long time  Financial –Large firms can borrow massive amounts of money –Monopsony  A large firm that can buy massive quantities at substantial discounts  Managerial –Having specialized people on staff

Internal Economies of Scale (continued)  Marketing –Benefit from lower average costs by selling in bulk –Exploit global markets  Monopsony –Negotiate with their suppliers for huge saving  Risk-bearing –Usually enjoyed by conglomerates (diversified companies)

External Economies of Scale  Arise from outside the firm due to its favourable location or growth  Technological progress –Internet and e-commerce initiatives  Improved infrastructure –Deliveries, billings and payment  Labour –Training programs & recruiting  Specialization –Country/region is regarded as a specialist in the area

Diseconomies of Scale  Businesses can become too large  Can result in higher unit costs –Organization is inefficient or outsized –A result of managerial problems  Lack of control  Poor working relationships  Too much bureaucracy  Complacency

External Diseconomies of Scale  An increase in average costs of production as the firm grows due to factors beyond its control –Land scarcity –Traffic congestion –Supply of local labour

Dealing with Diseconomies  Reduce level of output  Introduce measures to remove productive inefficiencies  Method used will depend on the cause

Mini Exercise  Exercise – Small vs Large on “S” drive