Post on 22-Dec-2015
Learning ObjectivesApply the concepts of economies and
diseconomies of scale to business decisions.Evaluate the relative merits of small versus
large organizations.Explain the difference between internal and
external growth.Explain external growth methods:
Mergers and AcquisitionsJoint venturesStrategic AlliancesFranchising
Learning ObjectivesExplain the role and impact of globalization
on the growth and evolution of business Outline reasons for the growth of
multinational companies (MNC’s)Evaluate the impact of MNC’s pm the host
countries
Growth and EvolutionGrowth of a business refers to the expansion in
size of its operations and this can be measured in several ways, including:Sales Turnover (Sales Revenue)Market ShareCapital Employed (Long term sources of
finance)Employees
Growth and Evolution
Reasons why business want to grow:Economies of scaleMarket shareSurvivalSpread risksIncreased profit
(Long run)
THE SIZE OR VOLUME OF OUTPUT
Businesses that expand or increase their scale of operations can often use the larger scale to become more efficient.
Scale of operations
Economies of Scale
Refers to the reduction in average unit cost as a business (production) increases in size
Efficiency is measured in terms of costs of production per unit
Measuring Efficiency
Total costs = Fixed costs + Variable costs
Fixed costs: costs that do not change as production changesMonthly rent
Variable costs: costs that vary as production changesRaw materials
Further costs are known as average costs or unit costs or average unit costs
Measuring Efficiency
Average Costs= Total Costs (Fc + Vc) quantity produced
As quantity produced goes up, the variable costs go up
As quantity produced goes up, the fixed costs are spread over a greater quantity of units produced
The average costs go down
5 types of economies of scale:
1. Purchasing economies 2. Technical economies 3. Financial economies 4. Marketing economies 5. Managerial economies
Reasons for diseconomies of scale:1. Communication problems
2. Alienation of the workforce3. Poor coordination and decision-making
Usually in larger firms this can happen if managers do not keep control of operations
Diseconomies of Scale
Factors that cause average costs of production to rise when the scale of operation is increased
Reducing a firms unit (average) costs of production that result from an increase in the scale of operations
Cost benefits, can be substantial in large industries, so much so that smaller firms may not survive
Internal (dis)economies of scale occur inside the firm and are within its control
External (dis)economies of scale occur within the industry and are largely beyond its control
Economies of scale
Growth and EvolutionInternal economies of scale
Technical economiesFinancial economiesManagerial economiesSpecialization
economiesMarketing economiesMonopsony economiesCommercial economiesRisk-bearing
economies
Internal diseconomies of scale
Lack of control and coordination
Poorer working relationships
SlackBureaucracyComplacency
Growth and EvolutionExternal economies of scale
Technological progress
Improved transportation and communication networks
Better trained laborRegional
specialization
External diseconomies of scale
Increasing market rents
Traffic congestionHigher wages
Large scale production – Unit costs
Scale of operation
Ave
rag
e p
rod
uct
ion
co
sts
Economies of scale
Diseconomies of scale
There is not a particular point of operation at which
EOS cease and DOS begin
It is difficult to measure
Learning ObjectivesApply the concepts of economies and
diseconomies of scale to business decisions.Evaluate the relative merits of small versus
large organizations.Explain the difference between internal and
external growth.
Market size can be measured in several ways:Market ShareTotal RevenueSize of workforceProfitCapital employedMarket value
Small vs. Large Organizations
Benefits of being large include:Brand RecognitionImageConvenienceDiscountsCustomer LoyaltyMore Choices
Large Organizations
Cost ControlFinancial RiskGovernment AidLocal monopoly powerPersonalized servicesFlexibilitySmall market size
Small Organizations
Learning ObjectivesApply the concepts of economies and
diseconomies of scale to business decisions.Evaluate the relative merits of small versus
large organizations.Explain the difference between internal and
external growth.
Internal (Organic) Growth
Occurs when a business grows internally, using its own resources to increase the scale of its operations and sales revenue.
Internal (Organic) Growth Occurs When……
Changing priceAdvertising and
promoting.Producing
improved or better products.
Selling in different locations (placement)
Offering customers preferential credit payment terms.
Increasing capital expenditure (investment).
Improving training and development.