1. Thought for the day:
  “Be not afraid of going slowly; be afraid only of standing still” Chinese proverb

2. Growth and Evolution: dis/economies of scale Merits of small and large business Internal/External growth strategies Franchising The Ansoff matrix HL: Porter’s Matrix

3. 1.7 Growth and evolution
Economies and diseconomies of scale
Apply the concepts of economies and
diseconomies of scale to business decisions.
Small versus large organizations
Evaluate the relative merits of small versus
large organizations.
Recommend an appropriate scale of
operation for a given situation.
Internal/organic growth
Explain the difference between internal and
external growth.
External growth
Evaluate joint ventures, strategic alliances,
mergers and takeovers as methods of achieving
a firm’s growth objectives.
Evaluate internal and external growth
strategies as methods of business expansion.
Porter’s generic strategies
Examine Porter’s generic strategies for
building competitive advantage.
Franchises
Analyse the advantages and disadvantages of a
franchise for both franchisor and
franchisee.
Evaluate the use of franchising as a growth
strategy.
Ansoff matrix
Explain the value of the Ansoff matrix as a
decision-making tool.
Apply the Ansoff matrix growth strategies to a
given situation.

4. Getting the grade: Key words

5. Getting the grade: Key words
In order to measure the growth of a business, look at:
its sales turnover,
its market share,
its capital employed, and
the number of employees employed.
Most businesses that look to expand are in the private sector.

6. Activity
Spider diagram why do you think business’ reasons to grow are?
Complete 6

7. Getting the grade: Key words
Businesses, whether large or small, generally look to expand their entities for four main reasons:
to enjoy economies of scale,
gain larger market shares,
for survival, and
to spread risks out amongst their branches.

8. Economies and diseconomies of scale
Long run average total cost curve:
This graph shows how as a firm operates, economies of scale are experienced, where avg. costs are minimized.
However, continual expansion will lead to diseconomies of scale

9. Economies of scale In VERY simple terms
If Fixed costs (eg Rent, electricity, wages) are $2000
And it costs $30 to make the product.
If you only sell two products:
$2060/2 = cost is $1030 per item
You sell 8 then:
$2240/8 = $280 per item
But there are also lots of other reasons for costs being reduced as you grow….

10. Economies scale Internal Economies of Scale
Also known as increasing returns to scale, internal economies of scale is achieved by a business with its own ability,
for instance, reducing their average production costs by producing on a much larger scale.
There are several branches that affect internal economies of scale: Technical Economies
use sophisticated machinery to mass produce
fixed costs spread out over huge scale of output = lower average costs
benefits businesses with products that have large market demand vs. impractical for small businesses (due to excess supply produced)

11. Economies of scale Financial Economies
large firms can borrow massive sums of money at lower rates of interest than smaller rivals (they seem less risky to financial lenders)
established businesses will look for lender with the most attractive rate of interest
vs. smaller firms struggle to raise external finance and have to pay higher rates of interest on overdrafts and loans

12. Economies of scale Managerial Economies
sole trader has to fulfill all business functions
vs. specialization of larger firms (higher productivity)
loss in one area will not jeopardize entire business

13. Economies of scale Synergy
through growth, businesses can avoid excess efforts in processes (reducing their units costs of production)
Specialization Economies similar to managerial except results come from division of labour, not management
specialists boosts firm’s productivity
motor vehicle manufacturer --> designers, production staff, engineers, marketers

14. Economies of scale Marketing Economies
lower avg. costs by selling in bulks
large businesses can exploit global marketing economies (same marketing campaign translated for each respective country)
Monopsony Economies large firms with strong buying power (e.g. Walmart, McDonald’s)
can demand low prices from suppliers
Commercial Economies purchasing/buying economies
similar to monopsony economies
lower avg. costs by buying supplies in bulks
Risk-bearing Economies enjoyed by conglomerates
loss in one area will not jeopardize entire business

15. External economies of scale
Technological progress
Improved transportation and communication networks
Better trained labour
Regional specialisation

16. External Economies of Scale
External economies of scale are, self explanatorily, affected by external factors.
These factors are out of the companies' control, and allow firms to reap the benefits of economies of scale.

17. External Economies of Scale
Technological Progress increases productivity of trading
Improved Transportation & Communication Networks deliveries arrive on time
easily accessible venues to shop at
Better Trained Labour
gov. training programmes or reputable training facilities
cut recruitment costs without compromising productivity levels
Regional Specialization industry benefits from specialist & efficient labour, subcontractors, suppliers

18. Internal Diseconomies of Scale
Lack Control & Coordination as a firm continues to grow, managers begin to lose control and coordination
additional time needed to communicate effectively with larger # of staff
slow decision-making
different locations in the world
workers lack staff morale

19. Internal Diseconomies of Scale
Poorer Working Relationships larger workforce = senior management more detached
affect communication flows negatively
Slack procrastination & inefficiency
specialists get bored of doing repetitive tasks
Bureaucracy Administration, paperwork, company policies increased
time consuming decision-making
communication more difficult
Complacency being large and dominant player/market leader

20. External Diseconomies of Scale
- increasing market rents due to excessive businesses in one area
- traffic congestion too many businesses in one area
increased transportation costs
- higher wages workers have more job opportunities

21. Dealing with diseconomies of scale
Reduce the level of output,
Introduce methods that will increase levels of productiveness in the workforce (Motivational strategies, Performance related pay).
Outsourcing

22. Extension: watch - 7 mins

23. REVISION: http://www.teachingbusiness.co.uk/index-12.html
Economies of scale penalty game

24. Assessment task 2
4. Describe, with relevant examples, three internal economies of scale and consider how these will apply to Open Views as it grows in size.
(Total 8 marks)

25. Business Growth and Size
Small, Medium or Large?
Classifications vary in industry and country.

26. This is how the size is measured:

27. Problems with measuring size
The number of people employed is a straight forward method.
But how do you compare business in different industries….
E.g a huge modern farm (using machinery) may employee just a few people, a local supermarket may employ a hundred or more?

28. EU & South African examples
SA: Small Business (varies industry to industry)

29. Problems measuring size…
A highly automated plant may employ only 45 people, but have a turn over of 50 million euros…. Small or large?

30. Turnover
Number of employees
Amount of capital employed
Market share

31. Question 2.
Analyse whether small and medium size firms such as Open Views’ have commercial and competitive advantages over multinationals like McGregor’s & Blue Seas. (total 8 marks)

32. Business
Growth
Business
Business

33. Business Growth and Size
There are perks to small and large businesses alike.
For instance, even though sole proprietors may be responsible for all the risks of their businesses, they receive all the profits earned.
Large businesses benefit from factors such as brand recognition, reputability, and convenience, while small benefit from factors such as government aid, local monopoly power, and flexibility.
Each type of business will look to expand in different ways, depending on their respective aims and objectives.
Pg 72 (advantages and disadvantages of Small and large businesses).

34. Reasons for Staying Small
Why remain a Small Business
remain control
avoid risk
prevent increase workload

35. Reasons for Staying Small
For a Sole Trader or a Partnership, a larger business could mean more responsibility and work.
A bigger business is likely to mean taking on more workers.
Some owners don’t want to lose control of the business they have created.
The business may only sell to a small or local market.

36. Business Growth: Why be Large?
So why do owners and directors seek growth?
Reasons For Growth:
Larger returns for the owners/ Increase future profits – greater profit (larger, sell more)
More rewards for the Directors and Managers. – bonuses, return on investment
Increase power and status of owners and directors
Survival – stay in business
Increase market Share
Increase economy of scale
Investment opportunities – elsewhere, projects, assets
Reduce the risk of being a takeover target
Business may be able to gain advantages over competitors by growing.
Reduce/Spreading risk (diversification)
Investment opportunities

37. Other benefits of being large:
Brand recognition
Image
Convenience
discounts
Customer loyalty
More Choice

38. Problems with growth Diseconomies of scale
Resistance from shareholders
Lack of expertise
Lack of funds

39. Business Growth
Growing can be internal or external

40. Internal growth
Internal growth is also sometimes referred to as organic growth, as companies use their own resources to grow.
There are several ways that a business may choose to take in order to grow internally. For example, they might decide on changing their products’ prices depending on price elasticity of demand.

41. Internal growth
If a product is in wider demand, the company may wish to increase the prices, and vice versa, in order to attract more customers to increase their sales revenue. Other ways that firms could grow organically is by:
Advertising
Producing improved products
Increasing availability
Increasing capital expenditure (investment)
Improving training and development
Benefits
Limitations
– better control and coordination – relatively inexpensive – maintains corporate culture
– diseconomies of scale – overtrading – a need to restructure – dilution of control and ownership

42. Summary: Internal Growth
An increase in the size of the business which is achieved through the existing business increasing profits, sales and employment.
Can be achieved by marketing, product development, and there just being a general increase in demand for existing products.

43. External growth …is sometimes referred to as inorganic growth.
Though organic growth is a great way for businesses to expand, external growth also has benefits that businesses may enjoy.

44. External growth Advantages Disadvantages
– much faster way to grow and evolve – quick way to reduce competition in market – greater market share – working with other businesses means sharing of good practice and ideas – spreads risks across several distinct markets
– costly

45. Summary: External Growth
External growth can be categorized into four different methods – joint ventures, strategic alliances, mergers/takeovers, and franchises.
Mergers When two businesses agree to join, usually two similar sized business.
Take-overs When one business buys another can be hostile or agreed.
Acquisitions When a business buys a part of another business.
Joint Venture Two business join together for a specific project.
Now in detail…..

46. External growth
Joint Ventures Joint ventures are created when two or more separate companies merge to become one single legal entity. There are many benefits to doing so, such as the pooling of experiences by the two companies (synergy), and the ability to enter foreign markets. The costs for starting a joint venture is relatively cheap, there would also be reduced competition for the newly formed company. Joint ventures generally have high success rates. However, the businesses in joint ventures depend heavily on both the resources and goodwill of their counterparts, which may be considered a disadvantage to forming joint ventures.

47. External growth
Strategic Alliances Strategic alliances are much like joint ventures. The main difference between the two is that companies that are part of strategic alliances remain as individual organizations. A business goes through four key stages before the forming of a strategic alliance with other companies is finalized. Feasibility study – investigate & establish rationale, objectives, and feasibility of alliance
Partnership assessment – analyze potential of different partners
Contract negotiation – determine contributions and rewards in form of contract
Implementation – initiate operations
Like joint ventures, the main purpose of strategic alliances is to gain synergy and resources from different strengths of alliance members. The formation of strategic alliances also helps alliance members gain credibility and brand awareness.

48. External growth
Mergers and Takeovers ‘Mergers and takeovers’ (also referred to as ‘mergers and acquisitions’) means the amalgamation or integration of two or more companies to form one single company. The new firm generally benefits from factors such as economies of scale, as well as obtaining a larger market share than they previously had. i. Merger Mergers are almost the same as joint ventures, when two or more firms agree to merge into one single company without retaining their own individual identities.
An example of a merger is the UK's British Petroleum and US' oil company Amoco in Together, they formed BP Amoco.

49. Play

50. 50

51. External growth
ii. Takeover/Acquisition Unlike mergers, takeovers are generally much less friendly. A takeover occurs when a company buys the controlling interest in another company, which can be due to many reasons. Some businesses become targets for takeovers because they seem to have space for growth, but lack funds, or they recently experienced a drop in profits. Businesses that takeover other companies are separated into two types – the ‘Black Knight’ and the ‘White Knight’.
Just as the titles suggest, the ‘Black Knight’ represents hostile takeovers, when the takeover’s targeted business does not wish to be taken over. Often times, businesses that are to be acquisitioned look for ‘White Knights’, companies that might be considered friendlier and better partners for the company, as opposed to the ‘Black Knight’.

52. Advantages and Disadvantages of Mergers & Aquistions.
Advantages
Disadvantages
– greater market share – economies of scale – synergy – survival – diversification
– loss of control – culture clash – conflict – redundancies – diseconomies of scale – regulatory problems

53. Integration
There are four types of integration when it comes to mergers and takeovers. 1. Vertical Integration businesses at different stages of production
forward or backward
Forward Vertical Integation
An example of a forward vertical integration: a coffee bean manufacturer may choose to merge with a café Backward Vertical Integration

54. Integration
2. Horizontal Integration businesses at the same stage of production
perhaps the most common type
larger market share for amalgamated business
greater market power
3. Lateral Integration
similar operations, but don’t directly compete with each other (e.g. Cadbury-Schweppes, 1969)

55. Integration 4. Conglomerate Mergers and Takeovers
businesses in completely distinct markets
Diversification
Conglomerates
economies of scale, spreading of risks, access to new and diverse markets, global recognition

56. Management buy-out (MBO) MBO is a defensive strategy businesses use when they are faced with a hostile takeover. When a 'black knight' is trying to take over a company, the company's board of directors may choose to purchase the controlling interest of the company in order to retain the firm's ownership.
Management buy-outs – occur when management of a company bys the company from the current owners. (would need a financial package: own investment, loans, equity investment from Venture capital company)
Venture capitalists company – Specialise in buying shares in medium size companies.
Brand acquisition Another way to take over a company completely is to buy one of its brands. For instance, in 2003 BMW bought the Rolls-Royce brand in order to appeal to a bigger market. Some companies may decide to sell certain brands of they are facing a liquidity problem (company's jeopardized due to shortage of cash).

57. External Growth: Summary
Mergers When two businesses agree to join, usually two similar sized business.
Take-overs When one business buys another. can be hostile or agreed.
Acquisitions When a business buys a part Of another business.
Joint Venture Two business join together for a specific project.

58. Integration Horizontal IBM Horizontal Integration
Buying a competing firm in the
same market.
Eg. IBM buying Dell
IBM

59. Integration Forwards Vertical IBM Forward Vertical Eg. IBM buying
eg. Buying retail outlets
Eg. IBM buying
PC world
Vertical
IBM

60. Integration Backwards IBM Vertical Backwards Vertical
eg. buying the suppliers
Eg. IBM buying Intel

61. Integration Lateral IBM Lateral integration
Buying a firm in related market
eg. IBM buying a software
company

62. Integration IBM Conglomerate Conglomerate integration
Buying a business in an unrelated market
eg. computer firm buying a chemicals
business
IBM
Conglomerate

63. Integration IBM Dell Conglomerate integration
Buying a business in an unrelated market
e.g. computer firm buying a chemicals
business
Forward Vertical
integration,
eg. buying your
retail outlets
Eg. IBM buying
PC world
Horizontal Integration
Buying a competing firm in the
same market.
Eg. IBM buying Dell
IBM
Lateral integration
Buying a firm in related market
eg. IBM buying a software
company
Dell
Backwards Vertical
integration.
eg. buying your
supplies
Eg. IBM buying Intel

64. Reasons for integration
Cost saving
Greater control of markets
Under valued assets
Diversification
Rewards to management

65. De-merge
What is this?
Some businesses become smaller because they think it will make them more profitable.
Some large public limited companies DEMERGE.
DEMERGE: split up into two or more smaller independent companies.

66. Why demerge? Some parts of company performing poorly
A company may have debt
Some companies specialise in start ups
Allows management to concentrate on running a smaller more focused business
PLC can split and combine share prices

67. Summary: How do businesses grow?
There are two ways in which a business can increase its size. Most firms will grow slowly through internal growth; other businesses who wish to grow more rapidly may choose to use external growth this is also known as INTEGRATION
Internal growth can be achieved through:
Producing and selling more products in its existing markets
Selling its products in New markets (eg. overseas)
Making and selling new products.
External growth can take the following forms:
Horizontal integration
Vertical integration
Lateral integration
Conglomerate integration

68. Franchises
Another common way through which businesses expand is by franchising.
Good way to grow nationally and internationally.
Rely on the know-how, brand recognition and trust of the parent company.

69. Franchises
Another common way through which businesses expand is by franchising.
If one is looking to start a business with lower start-up costs, he or she may consider starting a franchise by buying the rights to using a particular business’ already established brand name and products from the franchisor.
However, there are many advantages and disadvantages to starting a franchise for both parties.

70. Benefits
Disadvantages
Franchisor
- rapid growth with less risks than organic growth - national/international presence - growth and expansion --> economies of scale - no need to worry about running costs (e.g. staff wages, purchase of stocks) - receive royalty payments - local franchisees more aware of local market conditions & cultural differences
- difficult to control franchisees’ activities to control their quality standards - huge risk in nominal franchising; reputation may be soiled - slower than mergers/acquisitions
Franchisee
- lower risks - lower start-up costs - franchisor will provide added-services (e.g. advice on $ management) - ‘free’ large scale advertising by parent company
- expensive to buy franchise - royalty payments - less flexibility (e.g. prices, promotional campaigns)

71. A great example of a franchise would be Burger King, the second largest fast food chain in the world. 11,000 outlets, 90% franchises.

72. Constraints to Growth Finance needed for expansion
Limited size of market (might need to grow overseas or diversify products)
Borrowing money from banks (makes you vulnerable to unfavorable trading periods/paying your debt.

73. Competitive Advantage

74. Porter’s Generic Strategies
Help business to determine a stratgy to growth or evolve.

75. Porter’s Generic Strategies
Generic Strategies – They outline the ways that any business can gain a competitive advantage. As businesses face harsh competition people are always trying new strategies to sustain a competitive advantage. - Cost leadership This strategies means to become the lowest cost supplier of a product within the market. Companies that use such strategy are McDonalds or Ikea. Although they have low cost products they are very profitable and market leaders.
The only way to compete with such strategy is by using penetration or predatory pricing strategies that may be prohibited by certain governments.

76. Porter’s Generic Strategies
Differentiation This strategy means the firm makes its mass-market products distinct form those of its competitors. Whether is it usage of packaging or branding to make the product seem unique, the focus of this strategy is quality. Apple is a very good example of this strategy as they use their unique style to maintain their competitive edge.
Although this strategy may be rewarding, it is very expensive to promote.

77. Porter’s Generic Strategies
- Focus When a firm targets a niche or single segment of the market. Due to the lack of competition focus can be highly profitable.
However focus doesn’t just apply for high pricing firms, it may also be used by low-cost businesses that cater for a certain market segment, such as discount bric-a-brac stores.
The drawback of focus as a strategy is that the market size is very limited.
- These strategies are meant for firms to use alone. If any firm tried to use a mixture of these strategies, it will not survive the long term. Firms cannot expect to be highly profitable and to have an image of outstanding quality by charging low prices.

78. Analytical Tool

79. The Ansoff matrix
Ansoff matrix – provides four strategies for enlarging a business.

80. Growth and Evolution:
Internal Growth – Maintain control, requires finance, slower
External Growth – quicker, can lose control
Why grow – economies of scale
How Grow? – USP, first mover advantage, market leader (customers willing to pay more – cost leadership or product differentiation also), branding, diversification
Ansoff matrix – provides four strategies for enlarging a business.

81. Question 1 & 6 of pre-release