1. Economies of Scale
Internal Economies of Scale – advantages that arise as a result of the growth of the firm
External economies of scale – the advantages firms can gain as a result of the growth of the industry – normally associated with a particular area

2. Motives Efficiency Synergy Control of Markets Risk Bearing
Cost Savings
Managerial Rewards
Shareholder Value
Asset Stripping
Economies of Scale
Efficiency
Synergy
Control of Markets
Risk Bearing

3. Economies of Scale Internal: (a) Technical
Specialisation – large organisations can employ specialised labour
Indivisibility of plant – machines can’t be broken down to do smaller jobs!
Principle of multiples – firms using more than one machine of different capacities - more efficient
Increased dimensions – bigger containers can reduce average cost

4. Economies of Scale Internal (b) Commercial
Large firms can negotiate favourable prices as a result of buying in bulk
Large firms may have advantages in keeping prices higher because of their market power

5. Economies of Scale Internal (c) Financial
Large firms able to negotiate cheaper finance deals
Large firms able to be more flexible about finance – share options, rights issues, etc.
Large firms able to utilise skills of merchant banks to arrange finance

6. Economies of Scale (d) Managerial
Use of specialists – accountants, marketing, lawyers, production, human resources, etc.

7. Economies of Scale (e) Risk Bearing Diversification
Markets across regions/countries
Product ranges
R&D

8. Increased Dimensions:
Transport container = Volume of 20m3
Total Cost: Construction, driver, fuel,
maintenance, insurance, road tax =
£600 per journey
AC = £30m3 2m 2m 5m
Total Cost = £1800 per journey
AC = £11.25m3
The explanation that accompanies this slide is fairly straight forward – The first container has a carrying capacity of 20 cubic metres. The cost of carrying the product involves the actual construction of the container/lorry etc, the cost of the maintenance, driver etc. This is assumed to be £600 per journey and as such gives an average cost of £30 per cubic metre.
Doubling the dimensions of the container increases the carrying capacity by 8 times. However, the cost of the construction, maintenance etc is not likely to rise by 8 times. The example shows cost having risen 2 times. As a result the cost per unit is now £11.25 per cubic metre! Again the point about the relative competitive advantage is worth highlighting. 4m 4m
10m
Transport Container 2 = Volume 160m3

9. Financing Growth
To grow a firm needs to be able to expand – plant, equipment, buildings, human resources, etc.
To do this it needs to acquire finance
There are two basic sources:

10. Internal Sources Private funds – personal savings
Profits – retained profit ploughed back into the business. This assumes the business is successful
Internal sources tend to mean growth is slower

11. Finance can also be got from external sources Expensive but quicker
Loans – from banks and financial institutions
Venture Capital – specialist groups who provide capital – may take over ownership of the firm, build it up then sell it on at a profit in a few years
Leasing – allows a degree of flexibility in finance arrangements
EU/Government Grants

12. The quicker but even more expensive way
A hostile takeover
One firm buying/securing a controlling interest in another, the taken over firm may lose its identity (e.g. Morrisons takeover of Safeway will eventually lead to the disappearance of the name ‘Safeway’)
Horizontal – a business at the same stage of the production process
Vertical – a firm at different stages of the production process.
Forwards – towards the market
Backwards – towards the source

13. B) A merger
An agreed amalgamation of two or more firms
Each firm may retain some degree of identity – e.g. Cadbury Schweppes,
Horizontal mergers – at the same stage of the productive process
Vertical – at different stages of the productive process

14. Financing growth from your own resources is relatively cheap in cash terms as well as loss of control
Using external sources is more expensive in cash terms and possible loss of control
A merger is a quicker way of growing but expensive in cash and control terms
A takeover is more expensive as it is hostile and will be bitter, but the rewards may be worth it

15. A leveraged takeover is financed by issuing debt (bonds) .
Some of the assets of the firm that is being fought over and won are sometimes immediately sold to finance the takeover. This is called asset stripping and some badly run companies the value of the parts is more than the total company cost to take over. (The balance sheet valuation of the assets is not up to date!)

16. A leveraged takeover is financed by issuing debt and using other peoples’ money. Some of the assets of the firm that is being fought over and won are sometimes immediately sold to finance the takeover. This is called asset stripping and some badly run companies the value of the parts is more than the total company cost to take over. (The balance sheet valuation of the assets is not up to date!)