1. Topic 1 Business Organisation & Environment
Unit 6
Growth & Evolution
Topic 1 Business Organisation & Environment

2. Learning Objectives
Apply 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 Acquisitions
Joint ventures
Strategic Alliances
Franchising

3. Learning Objectives
Explain 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

4. Growth and Evolution
Growth 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 Share
Capital Employed (Long term sources of finance)
Employees

5. Growth and Evolution Reasons why business want to grow:
Economies of scale
Market share
Survival
Spread risks
Increased profit (Long run)

6. The size or volume of output
Scale of operations
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.

7. Economies of Scale
Refers to the reduction in average unit cost as a business (production) increases in size

8. Total costs = Fixed costs + Variable costs
Measuring Efficiency
Efficiency is measured in terms of costs of production per unit
Total costs = Fixed costs + Variable costs
Fixed costs: costs that do not change as production changes
Monthly rent
Variable costs: costs that vary as production changes
Raw materials

9. Average Costs= Total Costs (Fc + Vc)
Measuring Efficiency
Further costs are known as average costs or unit costs or average unit costs
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

10. Economies of Scale explained

11. 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 workforce 3. Poor coordination and decision-making

12. Diseconomies of Scale
Factors that cause average costs of production to rise when the scale of operation is increased
Usually in larger firms this can happen if managers do not keep control of operations

13. Economies of scale
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

14. Growth and Evolution Lack of control and coordination
Internal economies of scale
Internal diseconomies of scale
Lack of control and coordination
Poorer working relationships
Slack
Bureaucracy
Complacency
Technical economies
Financial economies
Managerial economies
Specialization economies
Marketing economies
Monopsony economies
Commercial economies
Risk-bearing economies

15. Growth and Evolution Technological progress
External economies of scale
External diseconomies of scale
Technological progress
Improved transportation and communication networks
Better trained labor
Regional specialization
Increasing market rents
Traffic congestion
Higher wages

16. Large scale production – Unit costs
There is not a particular point of operation at which EOS cease and DOS begin
It is difficult to measure
Economies of scale
Diseconomies of scale
Average production costs
Scale of operation

17. Learning Objectives
Apply 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.

18. Small vs. Large Organizations
Market size can be measured in several ways:
Market Share
Total Revenue
Size of workforce
Profit
Capital employed
Market value

19. Large Organizations Benefits of being large include: Brand Recognition
Image
Convenience
Discounts
Customer Loyalty
More Choices

20. Small Organizations Cost Control Financial Risk Government Aid
Local monopoly power
Personalized services
Flexibility
Small market size

21. Learning Objectives
Apply 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.

22. Internal (Organic) Growth
Occurs when a business grows internally, using its own resources to increase the scale of its operations and sales revenue.

23. Internal (Organic) Growth Occurs When……
Changing price
Advertising 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.

24. External (inorganic) Growth
Occurs through dealings with outside organizations. Usually comes in the form of alliances or mergers with other firms or through acquisitions

25. Small vs. Large
Some businesses prefer to stay small. Airbus and Ferrari, for example, deliberately limit growth in their operations. Others, such as McDonald’s and Toyota, continually strive for expansion.
Explain the circumstances when economies of scale might not actually benefit customers.
Explain why economies of scale might be inappropriate, undesirable or inaccessible for certain businesses.
If economies of scale are so important, examine the reasons why so many small firms continue to strive and thrive.
To what extent do large businesses operate in the best interest of the general public?

26. Recommending an appropriate scale of production Number of competitors
Owners objectives
Capital available
Size of the market
Scope for scale economies