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)
