1.6. Growth and Evolution

  • Economies and diseconomies of scale
      • Scale of operations/business
        • Maximum output that can be achieved using available resources
        • Scale can only be increased in the long term by employing more of all inputs
        • Producing more =/ increasing scale of production
        • Increase scale of operations attains economies of scale
      • Economies of scale
        • Increase in efficiency of production as the number of output increases
        • Average cost per unit decreases through increased production
        • Fixed costs are spread over an increased number of output
        • Cost per unit = (total variable costs + total fixed cost) √∑ units produced
        • Importance: customer enjoy lower prices due to the lower costs which in turn increases market share or ¬†business could choose to maintain its current price for its product and accept higher profit margins
        • Types of economies of scale:
          • Internal – achieved by the organization itself
            • Purchasing (bulk-buying) economies
              • Wholesale discounts
            • Technical economies
              • Investing in technology to reduce costs
            • Financial economies
              • Easier for large companies to receive loans from banks
            • Marketing economies
              • More efficient to advertise a large number of products
            • Managerial economies
              • Larger firms are able to hire specialists who help improve efficiency
          • External
            • Improved infrastructure (e.g. transportation)
            • Advances in the industrial efficiency due to better training, innovations in processes/machinery, etc.
            • Growth of other industries that support the organization
      • Diseconomies of scale
        • Economies of scale have peaks, if this point is passed, diseconomies of scale are experienced
        • Can occur when a company or even the whole industry becomes too big and unit costs begin to increase rather than decrease
        • Possible due to:
          • Communication problems leading to poor coordination
          • Overworked machinery and laborers
          • Alienation of workforce and slower decision-making (for larger businesses)
        • Diminishing marginal returns
          • Decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant
  • Small vs. large organizations
    • Importance of small businesses
      • Small firms create jobs
      • Small businesses are often run by dynamic and innovative entrepreneurs
      • Provides competition for big business
      • Supply specialists goods and services for specific industries
      • Small firms can become big businesses in the future
    • Advantages
      • Small business
        • Easily managed & controlled by the owner
        • Quicker to adapt to changing customer needs and feedback
        • Offer personal service to customers
        • Establishes better employer-worker relationships
      • Large business
        • Can afford to employ specialist, professional managers
        • Benefit from more economies of scale
        • More access to varied sources of finance
        • Can diversify in several markets, thus spread out the risks
        • Can afford more formal research & development
    • Disadvantages
      • Small business
        • Can’t afford to employ specialist, professional managers
        • Doesn’t benefit from more economies of scale
        • Less access to varied sources of finance
        • Can’t diversify in several markets, thus spread out the risks
        • Can’t afford more formal research & development
      • Large business
        • Difficult to be managed & controlled by the owner
        • Slower to adapt to changing customer needs and feedback
        • Can’t offer personal service to customers
        • Establishes poorer employer-worker relationships
  • Internal growth vs. external growth
      • Internal/organic growth
        • Occurs when businesses grow using its own resources to increase the scale of its operations and sales revenue
        • Methods used to achieve internal growth:
          • Change of pricing strategies
          • Increase advertising and promotions
          • Offer flexible financing schemes
          • Improve and innovate the product or service
          • Sell in different locations
          • Increase capital expenditure on production and technologies
          • Train and develop staff
      • External/inorganic growth
        • Occurs through dealings with outside organizations
        • Vertical integration
          • The main business takes part in the primary, secondary, and tertiary aspect of business
        • Horizontal/lateral integration
          • Businesses unify under the same industry
          • Between firms who have the same operations, but do not necessarily compete with one another
          • e.g. Ford bought Jaguar, Ford is low to mid class while Jaguar is high class. They don’t compete and when they merge they now cater to a bigger market
  • External growth methods
      • Conglomerate mergers, takeovers, or acquisitions
        • Amalgamation of two businesses that are in completely different markets
        • Results in dissolution of original business entities in favor of forming a new one
        • Reasons for mergers:
          • They want to increase revenue
          • Fight the rising of prices together
          • Increased customer satisfaction (new and better content)
          • Bigger market
        • Reasons for failure:
          • The companies could not synergize
          • The competition was stronger than the merged business
          • Conflicting cultures
          • Poor management and leadership
          • Poor timing/recession
      • Joint ventures
        • Two companies join for a specific undertaking and set-up a new legal entity
        • e.g. Sony + Ericsson = Sony Ericsson
      • Strategic alliances
        • Like a joint venture, but NO new legal entity is created (only for a specific project or product)
        • Profit is split between the two companies
      • Franchising
        • An individual buys the right to operate under another business’ name
        • Can be offered individuals or large businesses
        • Franchisee pays a franchise fee (royalties and supplies) and is given a license to operate by the franchiser
        • Franchisee is a different type of entrepreneur – much less risk compared to the normal entrepreneur
        • Franchiser provides marketing, training and equipment to set-up
          • Support to ensure business will have a good chance of success, retain good brand image, and maintain standard of product/service quality
          • Franchiser may take a portion of profits and has a say on how the business should be run
        • Franchisor
          • Benefits
            • Grow cheaply and quickly
            • Less manpower to directly manage
            • Income from franchise fee, royalties, and supply purchases
          • Downside
            • Not easy to revoke
            • Less control over quality or performance of franchise
            • Conflict in profit vs. volume
        • Franchisee
          • Benefits
            • Known brand results in strong start-up sales
            • Support from franchisor
            • Easy financing options
            • Lower cost of supplies because of economies of scale (though sometimes the franchisor charges high for supplies)
          • Downsides
            • Little freedom/flexibility in running
            • Franchise/start up fee may be too costly
            • Bad management in headquarters affects all branches
            • Still not guaranteed success
  • Globalization
      • Expansion of a business worldwide
      • Contributing factors:
        • Advancement in technology – reduced cost of production and information interchange
        • Trade liberalization and deregulation – easing of government rules, trade barriers, tariffs
        • Multicultural awareness – appreciation of foreign culture means consumers may patronize products from other countries
        • Language – ease of communication
  • Multinational corporations (MNCs)
    • MNCs are businesses with operations in two or more countries.
    • Advantages:
      • Expand customer base beyond the domestic market
      • Achieve greater economies of scale
      • Work around government barriers to imports
      • Access to cheaper or more abundant raw materials and labour
      • Spread risks in any one market through diversification
    • Impact on domestic businesses of a host country
      • Increase competition which increases customer expectations
      • Drive up expenses and costs for local businesses
      • May dominate particular markets and distribution channels
      • Allows local businesses access to foreign capital and shareholders
      • Can provide R&D, and technological advancement for local businesses
    • Impact on economic & socio-political conditions of host country
      • Economical
        • Foreign direct investments
        • More options for consumers
        • May threaten local industries
        • Develop high-tech industries
        • Balance of trade (exports > imports)
      • Employment
        • Job creation with new skills
        • Unemployment when workers are displaced in local industries
      • Sociological Impact
        • Change in behavior, consumption patterns and lifestyle
      • Environmental Impact
        • Utilization of resources
        • Increase waste
        • Possible environmental degradation (leading to climate change)
      • Political
        • Calls for stabler policies (e.g. deregulation, removal of trade barriers)
        • Public-private sector partnerships

Kim De Leon1.6. Growth and Evolution

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