1.5

• Business does not have to grow and be large to become successful
• Five assessment objectives


  • Feel free to pause and have a closer look at them
• Economies of scale


  Decreasing average cost of production as an organization increases the scale of operations and improves its production efficiency
• Diseconomies of scale


  Increasing average costs per unit as the scale of operations increases
• Economies of scale can be internal and external
• Fixed costs


  Costs that do not change in relation to output
• Variable costs


  Costs that rely on how much is produced
• Economies of scale means decreasing average costs per unit as output increases
• Diseconomies of scale means increasing average costs per unit as output increases
• Internal economies of scale

  • Purchasing
  • Marketing
  • Risk bearing
  • Managerial
• External economies of scale

  • Technological progress
  • Educated workforce
  • Regional specialization
  • Infrastructure
• Internal diseconomies of scale

  • Bureaucracy
  • Inert organizational culture
  • Complacency
  • Marketing failure
• External diseconomies of scale

  • Infrastructure
  • Educated workforce
  • Increased rents
  • Pollution
• Business growth


  Increase in the size of the business, can be measured by market share, revenue, profit, workforce, capital employed
• Internal growth


  Organic growth using own resources and capabilities
• External growth


  Inorganic growth by acquiring other businesses
• Differences between internal and external growth

  • Internal has lower risk, lower potential benefits, is inexpensive, retains full control, strengthens corporate structure

  External has higher risk, higher potential benefits, requires significant finance, challenges corporate structure
• Reasons for business growth

  • Achieve economies of scale
  • Increase market share
  • Build brand loyalty
  • Increase revenue and profits
• Reasons for business to stay small

  • Sense of uniqueness
  • Avoid bureaucracy
  • Maintain flexibility
  • Owner control
• Charge lower prices


  More people will be more likely to buy from you because price is so attractive
• Charging lower prices


  Increases market share because more people buy from you
• More people buy from business


  More people know the business, can trust it, do repeat purchases, develop brand loyalty
• Higher revenues


  Higher profits if costs are kept low
• Reason to stay small

  Sense of uniqueness, VIP feeling, ability to add more value and charge higher prices
• Businesses that grow lower costs and keep prices the same, businesses that stay small keep costs the same but increase prices
• Reasons unrelated to market share/sales/costs to stay small: easier to control, focus on niche markets with less competition
• Regardless of growth or staying small, the ultimate reason is higher profitability
• Company that prefers growing

  • Coca-Cola
• Company that prefers staying small

  • Basecamp (37 Signals)
• Business growth


  Increase in size, can be measured in different ways
• Types of business growth

  • Internal/organic growth
  • External/inorganic growth
• Mergers and acquisitions (M&A)

  • Two or more companies form one larger company (merger)
  • One company takes ownership of another (acquisition)
• Hostile takeover


  Undesired or forced acquisition of a publicly held company
• Integration


  Growth of a company through M&A, expressed via sectors of industry or supply chain
• Types of integration


  • Horizontal integration
  • Vertical forward integration
  • Vertical backward integration
• Conglomerate merger/integration


  M&A between unrelated businesses with diverse product portfolios
• Advantages of M&A


  • Economies of scale
  • Minimizing risk
  • Synergy
  • Market leadership
• Disadvantages of M&A


  • Managerial diseconomies of scale
  • Cultural clash
  • Government control and anti-monopoly issues
  • Redundancies
• Takeovers


  • Google taking over Android
  • Walt Disney taking over Marvel and Pixar
• Mergers


  • ExxonMobil and Kraft Heinz