GROWTH AND EVOLUTION

It is not the strongest of the species

that survive, nor the most intelligent ,
but the one most responsive to
change
 ECONOMIES & DISECONOMIES OF SCALE
• Economies of scale- are factors that lower
production costs as a firm operates at a large scale
due to productive efficiency.
• Firms gain a competitive cost advantage.
• Average Cost(AC) is the cost per unit of output.
Calculated by dividing TC(total cost) by quantity(Q)
of output:
• Q that is AC= TC /Q
• If total costs of producing 1000 shirts amounts to
$8000 then the cost of each shirt is $8 (average
cost per unit of output).
 ECONOMIES & DISECONOMIES OF SCALE
• Average Costs (AC) consist of two components:
• A. Average Fixed Costs (AFC)
• B. Average Variable Costs (AVC)
• AFC is calculated by dividing the total fixed costs by
the level of out put. AFC= FTC / Q. Similary
• AVC= TVC/Q
• The AFC of a firm will decline continuously with large
levels of output. This is because the TFC remain
constant but are spread over an increasing amount of
output. i.e the fixed costs are being divided by a larger
and larger number. Level of output. Internal
economies of scale occur inside the firm and are
within its control
 ECONOMIES & DISECONOMIES OF SCALE
• Average costs
COSTS
($)

0 optimal level of Output

output
 Internal economies of scale
• By operating on a large scale, a business can reduce
its average costs of production due to any of the
combination of the factors below:
• Technical economies of scale sophisticated machines- mass
• Financial economies of scale- large sums borrowing
• Managerial economies of scale. Specialists lead
• Specialisation economies of scale. Division of labor
• Marketing economies of scale. Bulk selling
• Purchasing economies of scale. Discounts.
• Risk bearing economies of scale. Conglomerate
leading to diversification.
 External economies of scale
• These are cost-saving benefits- cost reduction from
outside due to large scale operation arising.
• Technological progress: increase in productivity and cost
savings due to internet to e-commerce users.
• Improved transportation networks: prompt deliveries,
easily accessible to customers, employees easily
transported to work places.
• Skilled labour Abundance: training programmes equip
businesses with a suitable pool of educated and trained
labour force. No compromise to productivity- no stopping
in production
• Regional specialisation: specialist product/ service is
provided. Having access to labour /suppliers/sub-
 INTERNAL DISECONOMIES OF SCALE
• These are higher unit costs an a firm increases in
size , the firm becomes outsized inefficient so average
costs begin to rise. Reduce productivity.
• Lack of control and coordination: span of control
increases and cause communication problems. This
slows down decisions and harms staff morale.
• Poor working relations: managers are detached from
lower down hierarchy/out of touch-this damages
communication flow and morale of staff.
• Boredom due to repetitive tasks.-division of labour
• Amount of bureaucracy(admin, paperwork, policies)
increases as firm grow. Time consuming in decision
 External diseconomies of scale
• Increase in average cost of production due to
factors beyond its control affecting the Industry.
• Increasing market rents: too many businesses
locating an one area. Land becomes scarce and
cause a rise in costs of rentals.
• Higher wage and financial reward: workers have a
greater choice from a large number of employers
who need to attract new staff. Increases costs.
• Traffic congestion; due to too many businesses
located in an area. Delays in deliveries due to
overcrowding. Transport costs increase.
 SMALL VERSUS LARGE OGANISATIONS
• Ways of measuring the size of a business:
• Market share: a firm’s sales revenue as a %tage of
the industry’s total revenue.
• Total Revenue: the value of a firm’s annual sales
turnover per time period.
• Size of work force: the total number of workers
hired by a business.
• Profit: the value of profits per time period.
• Capital employed: value of the firm’s money
invested for the business to function.
 BENEFITS TO AN ORGAN. OF BEING LARGE
FACTOR BENEFIT

Brand Familiarity allows business to sell to wider

market- global brand recognition.
recognition

Brand reputation Large firms tend to be more trusted due

to brand image and brand recognition.

Lower price Large firms are able to offer customers

greater price discounts- Economies of
Scale
Greater choice Large firms provide choice eg
Amazon.com sells a huge range of books,
toys, music, DVDs compared to small
local book shops.
Customer loyalty All above make customers loyal due to
perceived trust and value for money
 BENEFITS OF AN ORGAN. OF BEING SMALL
FACTOR BENEFIT
Cost control No diseconomies of scale. Problems of
control, coordination , communication,
borrowing costs.
Financial risk Better management and control of finances-
no training, R and D
Government aid Grants and subsidies may be offered to help
start ups.
Local Monopoly Small firm may enjoy being only one small
power in a remote area and also opportunity for
others to start.
Personalised Time to devote to individual customers.
services
Flexibility Small businesses are flexible and adaptive
to changes from a salon to tuck shop easily
Small market size Hair salon or private tuition are unlikely to attract attention
of large firms due to small market size , large corporations
 INTERNAL (ORGANIC) GROWTH
• Two growth types: Internal and external
• Internal- business grows organically using own resources and capabilities to
increase scale of operation and sales revenue. Its usually a combination of
retained profits, borrowing and issuing of new shares. INTERNAL GROWTH WAYS:
• Changing price: price reduction attracts more clients- substitutes
• Effective promotion: inform, remind and persuade more purchases
• Improved/better products: R&D , innovations.
• Sell thro a greater distribution network(placement): if product is widely
available customers buy it eg cocacola in cinemas, shops, airlines compared to
the world’s expensive car Bugatti Veyron in a few locations world wide.
• Offer preferential credit: buy now and pay later- installments
• Increase capital expenditure: technology to improve productivity.
• Improved training and development: helps stall to more confident and
competent
• Provide overall value for money- clients look at more than just price eg
quality, after-sales care, brand image, maintenance costs and environmental
considerations.
•
 ADVANTAGES AND DISADVANTAGES OF
INTERNAL GROWTH
ADVANTAGES DISADVANTAGES
Better control and Diseconomies of scale
coordination
Relatively Inexpensive A need to restructure as
it grows – specialist are
needed.
Maintains corporate Dilution of control and
culture ownership
Less risky Slower growth than
external growth.
 EXTERNAL(INORGANIC) GROWTH
• Occurs through dealings with outside organisations
• This comes through forms like alliances or mergers,
acquisition or takeover of other businesses.
• Mergers &Acquisitions(M&A) are collectively known as
the AMALGAMATION/INTERGRATION of firms. The
benefits of this are:
• -faster way to grow and evolve. supermarket and
another without buying or renting.
• Quick way to reduce competition by taking over rival
• Greater market share and market power.
• Sharing of new ideas, skills, experience and customers
 EXTERNAL GROWTH METHODS
• Merger and acquisitions(M&A)/takeovers
/amalgamation/integration- enjoys economies of sc
• TYPES OF INTERGRATION that can occur in (M&A)
• Horizontal Integration- same industry amalgamation
• Vertical Integration- different stages of production.
There is Forward Vertical Inte and Backward Vertical Int
. Lateral Integration; firms with similar operations but
do not compete with each other then join Tata(mass)
acquired Jaguar and Land Rover(luxury brands)
Conglomerate M&A: amalgamation of diversified and
distinct businesses. Eg clothes with property/ insurance
 BENEFITS &DRAWBACKS OF M&As
BENEFITS OF M&A DRAWBACKS OF M&A
Greater market share- customers Redundancies: cost saving leads to
job losses
Economies of scale: larger scale Conflict: potential disagreements.
operation helps lower unit costs. Conflict is inevitable.
Synergy: integating firms have access Culture clash: people and process
to each other’s resources like need to adapt to the desired corporate
technology, distribution channels, HR culture of the new organisation. This
and knowhow. entails change in core values and
mission statement.
Survival: M& As have a defensive Loss of control: original owners or
strategy that allows the new firm to be management lose some control as
stronger to compete new board requires restructuring.

Diversification: greater product mix. Diseconomies of scale: bureaucracy

Benefits from a larger customer base and longer channels of
and reduced risks communication.

Regulatory problems: GVT may be

concerned if M& A create a monopoly
 EXTERNAL GROWTH METHODS…..conti.
• JOINT VENTURE(JV): occurs when two or more
businesses split the costs, risks, control and reward
of a business project. New legal entities are set. Eg
• BMW has a JV with China’s Brilliance Automobile in
sharing paint facilities. Also Sony Ericson share 50:50
• JV allow org to benefit like M&s without losing their
corporate identity. Advantages of JV are;
• Synergy, Spread of costs and risks, Entry of foreign
markets, Relatively cheap, Competitive advantages,
Exploitation of local knowledge and High success
rate
 EXTERNAL GROWTH METHODS…..conti.
• STRATEGIC ALLIANCES(SA): similar to JV on mutual
benefit. They share costs of product development,
operations and marketing.
• STAGES TO FORM A STRATEGIC ALLIANCE:
• Feasibility study: investigate and establish rationale
• Partnership assessment: analyse potential of
different partners what they offer in term of HR,
expertise, financial resources.
• Contract negotiation: negotiation to determine
member’s contributions and rewards.
• Implementation: operations are initiated with
commitment to contract from all parties.
 EXTERNAL GROWTH METHODS…..conti.
• FRANCHISING: is an external growth method
which is a business form where a business
buys a license to trade using another firm’s
name, logo, brands, trademarks eg
McDonald’s, PnP, KFC, Burger King.
• The Franchisee pays a license fee to the
parent company known as Franchisor.
• Franchisee pays also a royalty payment like a
commission based on the sales revenue of
the franchisee.
 BENEFITS FOR THE FRANCHISOR AND FRANCHISEE.
NEFITS FOR THE FRANCHISOR BENEFITS FOR THE FRANCHISEE
pid growth without having to risk huge There is relatively low risk since the
ounts of money. Cheaper than int. franchisor has a tried and tested formu
owth the chances of business success are hi
llows the company to have a national or Relatively lower start-up costs because
ernational presence without the higher business idea is already been develope
sts of organic growth or (M&As) the franchisor(such as market research
product development)
anchisors receive royalty payments from It is in the best interest of the franchisor
franchise, usually set as a percentage ensure that the franchise succeeds, so
he sales revenues. They can also provide added-services to franchisees e
arge a ‘membership’ (joining) fee to their training and advice on financial manage
nchisees.
anchisees have more incentives to do The franchise is likely to benefit from lar
ter than salaried managers, thereby scale advertising used by the franchisor
reasing the chances of success for the the franchisees receive free advertising
nchisor promotion.
Franchisees can have greater aware of
market conditions and need, further boo
 DRAWBACKS FOR THE FRANCHISOR AND
FRANCHISEE
DRAWBACKS FOR THE DRAWBACKS FOR THE
FRANCHISOR FRANCHISEE
Unsuccessful franchisees can Franchisees cannot use their
damage the reputation of the own initiative to try out new
whole franchise business. ideas as they are regulated by
the franchisor.
It can be difficult to control the Buying a franchise can be very
daily operations of franchisees expensive, yet there is no
and to get them to meet the guarantee that this will ever be
quality standards set by the recouped.
franchisor
Although franchising is faster Franchisees have to pay a
than internal growth, it is not as significant percentage of their
quick as M & As revenues to the franchisor
 The role and impact of globalisation
• Globalisation is the growing integration and
interdependence of the world’s economies.
Economies have integrated towards a single global
economy where consumers have ever-increasingly
similar habits and tastes.
• With globalisation, economic and political decisions
taken in one region of the world will affect those in
other parts of the world too.
• Multinationals such as Apple, BMW, Coca-Cola etc
• McDonald’s and Coca-Cola production processes
are largely the same irrespective of location in the
world.
The role and impact of globalisation on business growth
and evolution
• Globalisation presents opportunities for
growth and evolution of businesses as well as
threats to their operations.
• Globalisation considerably increase the level
of competition eg Vodafone (UK) competing
with mobile operators Telefonica(Spain).
• 1. The internet has also reduced costs for
many industries, thereby reducing barriers to
entry and attracting competition.
The role and impact of globalisation on
business growth and evolution
• 2. Meeting customer expectations becomes increasingly
more demanding. Businesses must meet the ever
greater customer demands for quality, customer service,
price and after-sales care in order to have a competitive
advantage.
• 3. Increased customer base – multinationals and e-
commerce businesses benefit from increased customer
base that globalisation brings. China/India
• 4. Economies of scale- a global presence can benefit
from EOScale. 5.Greater choices. 6. External Growth
opportunities-mergers, acquisitions, JV. 7.Increased
sources of finance.
 MULTINATIONAL COMPANIES (MNCs)
• Multinational company (MNC) is an organisation
that operates in two or more countries eg Coca-cola
• MNC and Transnational corporation are often used
interchangeably. MNC’s head office is home country
and transnational corporation has regional offices
rather than a single international base. Eg coca-cola,
Microsoft, Nike, Smasun, Toyota and Walmart.
These excel within their industries in terms of sales,
profits, assets and market value.
 REASONS FOR BECOMING AN MNC
• 1. An increased customer increases sales turnover
expanding internationally
• 2. MNCs benefit from cheaper production costs e.g
inexpensive labour.
• 3. EOScale as production levels increase. MNCs locate
overseas to benefit from host country’s infrastructure
like roads, telecommunication and port networks.
• 4. MNCs spread risks- unfavourable market
conditions in on country/region might not damage
the overall business if it can spread risks
internationally. Natural disasters like tsunamis,
terrorist attacks 9/11attacks, diseases eg swine flu.
PROTECTIONIST POLICIES( Trade Barriers)
• Tariffs: are tax imposed on imports thus adding to
the price of foreign products. This makes imports
less price competitive. MNC can then establish
production facilities in the tariff-imposing nation.
• Quotas: are quantity limits imposed on the sale of
imports. This results in lower supply/availability pf
imported products and forces up import prices.
• Restrictive trade practices: are acts that unfairly,
although not illegally, discriminate against foreign
firms eg rigorous administrative procedures and
strict safety standards, raising the costs and limiting
the availability of imports.
HE IMPACT OF MNCs ON THE HOST COUNTRIES:
nation allowing MNCs to set up in
MERITS TO THE HOST COUNTRY DEMRITS TO THE HOST COUNTRY
MNCs create jobs in the host country MNCs are capable of causing
eg VW created 3500 jobs in Kaluga unemployment in the host country as a
Russia. pose a threat to domestic businesses.
MNCs help boost country’s GDP(value MNCs create wealth in host country,
of a country’s out by creating profits are repatriated to the home
consumption expenditure, boosting country. Thus a degree of insecurity as
export earning and improving living MNCs are increasingly footloose. They
standards. are not tied to the specific location so
can change at very short notice for
cost advantage. Can pull out.
MNCs have introduced new skills and Competitive pressure forces domestic
technology in production process in firms to reduce prices to remain
host countries. Japanese have competitive
introduced KAIZEN, and KANBAN
MNCs intensifies competition in host Host nations are often unable to
country leading to greater efficiency control actions of MNC due to their
sheer market power. Walmart’s sales
revenues exceeds the GDP of
Indonesia.