Topic 1 Business Organisation & Environment Unit 6 Growth & Evolution Topic 1 Business Organisation & Environment

Learning Objectives Apply the concepts of economies and diseconomies of scale to business decisions. Evaluate the relative merits of small versus large organizations. Explain the difference between internal and external growth. Explain external growth methods: Mergers and Acquisitions Joint ventures Strategic Alliances Franchising

Learning Objectives Explain the role and impact of globalization on the growth and evolution of business Outline reasons for the growth of multinational companies (MNC’s) Evaluate the impact of MNC’s pm the host countries

Growth and Evolution Growth of a business refers to the expansion in size of its operations and this can be measured in several ways, including: Sales Turnover (Sales Revenue) Market Share Capital Employed (Long term sources of finance) Employees

Growth and Evolution Reasons why business want to grow: Economies of scale Market share Survival Spread risks Increased profit (Long run)

The size or volume of output Scale of operations The size or volume of output Businesses that expand or increase their scale of operations can often use the larger scale to become more efficient.

Economies of Scale Refers to the reduction in average unit cost as a business (production) increases in size

Total costs = Fixed costs + Variable costs Measuring Efficiency Efficiency is measured in terms of costs of production per unit Total costs = Fixed costs + Variable costs Fixed costs: costs that do not change as production changes Monthly rent Variable costs: costs that vary as production changes Raw materials

Average Costs= Total Costs (Fc + Vc) Measuring Efficiency Further costs are known as average costs or unit costs or average unit costs Average Costs= Total Costs (Fc + Vc) quantity produced As quantity produced goes up, the variable costs go up As quantity produced goes up, the fixed costs are spread over a greater quantity of units produced The average costs go down

Economies of Scale explained

5 types of economies of scale:  1. Purchasing economies  2. Technical economies  3. Financial economies  4. Marketing economies  5. Managerial economies Reasons for diseconomies of scale: 1. Communication problems 2. Alienation of the workforce 3. Poor coordination and decision-making

Diseconomies of Scale Factors that cause average costs of production to rise when the scale of operation is increased Usually in larger firms this can happen if managers do not keep control of operations

Economies of scale Reducing a firms unit (average) costs of production that result from an increase in the scale of operations Cost benefits, can be substantial in large industries, so much so that smaller firms may not survive Internal (dis)economies of scale occur inside the firm and are within its control External (dis)economies of scale occur within the industry and are largely beyond its control

Growth and Evolution Lack of control and coordination Internal economies of scale Internal diseconomies of scale Lack of control and coordination Poorer working relationships Slack Bureaucracy Complacency Technical economies Financial economies Managerial economies Specialization economies Marketing economies Monopsony economies Commercial economies Risk-bearing economies

Growth and Evolution Technological progress External economies of scale External diseconomies of scale Technological progress Improved transportation and communication networks Better trained labor Regional specialization Increasing market rents Traffic congestion Higher wages

Large scale production – Unit costs There is not a particular point of operation at which EOS cease and DOS begin It is difficult to measure Economies of scale Diseconomies of scale Average production costs Scale of operation

Learning Objectives Apply the concepts of economies and diseconomies of scale to business decisions. Evaluate the relative merits of small versus large organizations. Explain the difference between internal and external growth.

Small vs. Large Organizations Market size can be measured in several ways: Market Share Total Revenue Size of workforce Profit Capital employed Market value

Large Organizations Benefits of being large include: Brand Recognition Image Convenience Discounts Customer Loyalty More Choices

Small Organizations Cost Control Financial Risk Government Aid Local monopoly power Personalized services Flexibility Small market size

Learning Objectives Apply the concepts of economies and diseconomies of scale to business decisions. Evaluate the relative merits of small versus large organizations. Explain the difference between internal and external growth.

Internal (Organic) Growth Occurs when a business grows internally, using its own resources to increase the scale of its operations and sales revenue.

Internal (Organic) Growth Occurs When…… Changing price Advertising and promoting. Producing improved or better products. Selling in different locations (placement) Offering customers preferential credit payment terms. Increasing capital expenditure (investment). Improving training and development.

External (inorganic) Growth Occurs through dealings with outside organizations. Usually comes in the form of alliances or mergers with other firms or through acquisitions

Small vs. Large Some businesses prefer to stay small. Airbus and Ferrari, for example, deliberately limit growth in their operations. Others, such as McDonald’s and Toyota, continually strive for expansion. Explain the circumstances when economies of scale might not actually benefit customers. Explain why economies of scale might be inappropriate, undesirable or inaccessible for certain businesses. If economies of scale are so important, examine the reasons why so many small firms continue to strive and thrive. To what extent do large businesses operate in the best interest of the general public?

Recommending an appropriate scale of production Number of competitors Owners objectives Capital available Size of the market Scope for scale economies