growth and evolution

• Business does not have to grow and be large to become successful
• Assessment objectives for this class

  • Distinguish between economies and diseconomies of scale
  • Understand what economies and diseconomies of scale are
  • Learn about internal and external economies and diseconomies of scale
  • Evaluate reasons for businesses to grow or stay small
  • Distinguish between internal and external growth
• Economies of scale


  1. Average costs decrease as output increases

  2. Average costs increase as output increases
• 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 and diseconomies of scale can be internal and external
• Types of costs


  • Average/total
  • Fixed
  • Variable
  • Quantity
• Fixed costs


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


  Costs that rely on how much is produced
• Scale


  How much output is produced or how large the facility is
• Efficiency


  Decrease in average costs or costs per unit
• Increasing output


  Decreases average costs per unit (economies of scale)
• Increasing output


  Increases average costs per unit (diseconomies of scale)
• Internal economies of scale

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


  Suppliers provide a discount for buying more
• Marketing economies of scale


  Increasing markets and advertising budgets to sell more
• Risk bearing economies of scale

  Diversifying product portfolio to have a backup plan
• Managerial economies of scale

  Hiring experienced and efficient managers to save costs
• 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

  • Poor infrastructure
  • Highly educated workforce
  • Increasing rents
  • Pollution
• Purchasing economies of scale is the most common type of internal economies of scale
• Business growth


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


  Organic growth using a business's own resources and capabilities
• External growth


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

  • Lower risk vs higher risk
  • Lower potential benefits vs higher potential benefits
  • Slower and steady vs faster and rapid
  • Less expensive vs more expensive
  • Retains full control vs challenges corporate structure
• Reasons for businesses to grow

  • Achieve economies of scale
  • Charge lower prices and increase market share
  • Increase brand recognition and loyalty
  • Increase revenues and profits
• Reasons for businesses to stay small include a sense of uniqueness and VIP service
• 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, they can trust you, they can do repeat purchases, they can develop brand loyalty
• Higher revenues


  If costs are kept low, results in higher profits
• Reason to stay small

  Sense of uniqueness, VIP feeling, ability to add more value and charge higher prices
• Businesses that decide to grow lower costs and keep price the same, businesses that decide to stay small keep costs the same but increase price
• Niche market


  Opposite of mass market, very limited customer group but less competition
• Regardless of whether a business wants to grow or stay small, the ultimate reason is higher profitability
• Business growth


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

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


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


  Undesired or forced acquisition of a publicly held company