Navigate
X

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