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5 Growth & Evolution

Cost
Fixed: independent of output
Variable: dependent on output
Fixed + variable = total cost

Economies of scale - enables a business to benefit from lower average costs by increasing
the size per unit. Average costs go down when more is produced

Revenue = sales x sales price

Average cost = total cost/quantity
Total cost = total fixed costs + total variable costs

How can growth be measured?

-​ Sales revenue
-​ Profits
-​ Number of stores
-​ Number of employees
-​ Number of customers
-​ Market share

Diseconomies of scale - occur if the firm grows beyond its ability to operate efficiently
Causes: firm’s average cost of production rise due to problems such as: misunderstandings,
miscommunication, poor management of resources
External diseconomies of scale - when issues outside of the organization raise the average
costs of production for all businesses in the industry
 External Economies of Scale
Occur when a firm’s average cost of production falls as the industry as a whole grows,
meaning all firms in the industry will benefit.

Internal Economies of Scale

Occur for a particular organization (rather than the industry it operates in) as it grows. These
costs are generated by businesses buying on a larger scale

Financial economies of scale Banks and other lenders charge lower interest to larger businesses for overdrafts,
loans and mortgages because they represent lower risk

Marketing economies of scale Larger business can spread their fixed costs of marketing by promoting and
advertising a greater range of brands and products

Managerial economies of scale Larger businesses can afford to hire specialist functional managers thus improving
the organization’s efficiency and productivity

Technical economies of scale Cost savings by greater use of large-scale mechanical processes and specialist
machinery

Purchasing economies of scale Larger firms can gain huge cost savings by buying vast quantities of stocks

Risk bearing economies of scale Large business can bear greater risks than smaller firms due to a greater product
portfolio, therefore inefficiencies will harm smaller firms to a greater extent

Specialization economies of Larger firms can afford to hire and train specialized workers which help to boost
scale output, productivity, and efficiency thereby cutting average production costs
 Average cost = (fixed + average)

Internal Growth
When a company uses its own tools and resources to expands
A business can grow internally in several ways:
-​ Changing Prices (↑ if inelastic; ↓ if elastic)
-​ Improved Promotion
-​ Producing improved or better products
-​ Selling through a greater distribution network (placement)
-​ Offering preferential credit
-​ ↑ capital expenditure (investment spending)
-​ Improved training & development
-​ Providing overall ‘value for money’
Internal growth is to:
-​ foster brand awareness and brand loyalty
-​ increase market share
-​ maintain its corporate culture
-​ maintain ownership and control of the organization
-​ avoid the comparatively high expenses and risks associated with external growth.

Advantages Disadvantages

Better control & coordination Diseconomies of scale

Relatively inexpensive Requires restructuring of
Maintains corporate culture positions (takes time & money)
Less Risky Dilution of control & ownership
Slower growth

External growth
Occurs when a business grows & evolves by collaborating with, buying up or merging with
other organizations.
Takes place when:
-​ an organization needs the support of a partner organizations for growth.
-​ can be through M&As, takeovers, joint ventures, strategic alliances, franchising.
-​ Collectively referred to as amalgamation or integration of firms
External growth is to:
-​ grow at a faster pace
-​ diversify their product portfolio
-​ gain market share
-​ gain customers in new and existing markets
-​ reduce competition in the industry.
Advantages Disadvantages

Quicker than organic growth More expensive than internal

Creates synergies Could create more risk (uncertainty)
Reduces competition Regulatory barriers
Economics of scale Potential diseconomies of scale
Spreading of risk Organizational culture clash

External growth is usually faster than internal growth, but also more expensive to execute.

Size of business can be measured in many ways:

-​ Sale turnover
-​ Market share
-​ Gross profit
-​ Profit after interest and tax
-​ Market capitalisation
-​ Number of employees
-​ Number of customers
-​ Number of stores

Reaosns for staying small:

Owners do not want the additional costs, challenges, and pressures associated with growing
their business or operating on a larger scale.
Many businesses actually prefer to serve a smaller number of familiar or loyal customers.
For example, some law firms or accounting firms specialise in serving the needs of local
businesses.
Many small businesses can thrive alongside larger rivals
Despite the benefits of economies of scale for larger firms, there are many advantages of
operating on a smaller scale too.

-​ Privacy
-​ Ownership and control
-​ Autonomy
-​ Individuality
-​ Maintenance
-​ Specialisation

External growth methods:

-​ Mergers & Acquisitions (M&As)
-​ Takeovers
-​ Joint Ventures
 -​ Strategic Alliances
-​ Franchising

Mergers and Acquisitions

Mergers - takes place when two firms agree to form a new company with its own legal
identity
Acquisitions - occur when a company buys a controlling interest in another firm with the
permission and agreement of its board of directors (NOT a hostile takeover). 1 company is
born.

Benefits Drawbacks

-​ Greater market share -​ Redundancies

-​ Economies of scale -​ Conflict
-​ Synergy ( working together to achieve -​ Culture clash
something more than can be done -​ Loss of control
individually)
-​ Survival
-​ Diversification
-​ Gain entry into new markets

Strategic alliance - strategic alliance formed in area of mutual benefit. occur when two or
more businesses cooperate in a business venture for mutual benefit.
The firms in the SA share the costs of product development, marketing and operations.
However, SA firms remain independent organizations.

Takeovers - occur when a company purchases a controlling stake in another company without
the permission and agreement of the company or board of directors. Shareholder are offered
better shares in new company so they accept that

Joint venture -occurs when two or more businesses split the costs, risks, control and rewards
of a business project. In doing so, the parties agree to set up a new legal entity. 3rd company
is born

Benefits and drawkabcks of JVs and SAs

Benefits Drawbacks

-​ Synergy -​ Rely heavily on goodwill and resources

-​ Spreading costs and risks of their counterpart, and they dont’ stab
-​ Entry to new/foreign markets you in the back
-​ Relatively cheap -​ Enormous expenditure on brand
-​ Competitive advantages development
 -​ Exploitation of local knowledge -​ Possible culture clashes
-​ Relatively high success rate -​

Franchising
is a form of business ownership whereby a person or business buys a license to trade using
another firm’s name, logos, brands and trademarks.
Franchisor: the firm selling the license, and the
Franchisee: the entrepreneur buying the license

Benefits Drawbacks

Franchisors -​ Cheaper and faster than internal growth - Risk damage to brand name if franchisees are
-​ Enter new local and international markets unsuccessful
-​ Growth without incurring day-to-day - Monitoring quality standards or franchisees can
running costs be difficult
-​ Income form royalty payments - Slower growth method than M&As
-​ More motivated than salaried managers

Franchisees -​ Relatively low risk - Stifled creativity due to many

-​ Relatively lower start-up costs - franchisor rules and requirements
-​ Training and advice on financial - Can be very expensive to buy a franchise with
-​ management no guarantee of a return on investment
-​ Large scale advertising performed by - Significant percentage of revenues paid to
-​ franchisor franchisor
-​ Greater likelihood of success due to local
-​ market insights