1.5 Growth and evolution

• Economies of scale


  Enables a business to benefit from lower average costs (the cost per unit) by increasing the size of its operations
• Economies of scale

  • Bulk buying
  • Management economies of scale
• Diseconomies of scale


  Occur if the firm grows beyond its ability to operate efficiently
• Optimal output level


  The level of output where the average cost of production is at its lowest value
• At the optimal output level, profit is maximised
• Average cost (AC)


  The cost per unit of output
• Average fixed costs (AFC)


  AFC=TFC ÷ Q
• Average variable costs (AVC)

  AVC= TVC ÷ Q
• The average fixed cost of a firm will decline continuously with larger levels of output
• As a business can spread its fixed costs of production over a larger quantity of output, average costs should fall, allowing the firms to benefit from economies of scale
• Internal economies of scale

  Cost savings generated within the business by operating on a larger scale
• Internal economies of scale

  • Financial economies
  • Marketing economies
  • Managerial economies
  • Technical economies
  • Purchasing economies
  • Risk bearing economies
  • Specialisation economies
• External economies of scale


  Occur when a firm's average cost of production falls as the industry as a whole (rather than itself) grows
• External economies of scale


  • Improved infrastructure
  • Specialist labour
  • Specialist R&D facilities
  • Relocation of suppliers and support services
  • New production processes and techniques
• External diseconomies of scale


  Occur when issues outside of the organization raises the average costs of production for all businesses in the industry
• External diseconomies of scale


  • Traffic congestion
  • Increasing costs of rent
  • Higher costs of labour
• Internal growth (organic growth)


  Occurs when a business grows using its own capabilities and resources to increase the scale of its operations and sales revenue
• Methods of internal growth

  1. Changing prices

  2. Improved/Effective promotions

  3. Product innovation

  4. Increased distribution

  5. Preferential credit for customers

  6. Increase capital expenditures

  7. Improved training and development
• Capital expenditures


  Money or man-made resources invested/spent in order for the business to grow
• Business organisations pursue internal growth for several reasons: to foster brand awareness and brand loyalty, increase market share, maintain corporate culture, and maintain ownership and control
• Advantages of internal growth

  • Better control and coordination
  • Relatively inexpensive
  • Maintains corporate culture
  • Less risky
• Disadvantages of internal growth

  • Diseconomies of scale
  • Requires restructuring of positions
  • Dilution of control and ownership
  • Slower growth
• External growth (inorganic growth)


  Occurs when a business grows and evolves by collaborating with, buying up or merging with other organisations
• External growth takes place when an organisation needs the support of a partner organisation for growth
• Culture


  The beliefs, values, and traditions of the particular business
• Reasons to maintain ownership and control of the organisation

  • Avoid the comparatively high expenses and risks associated with external growth
  • Reason why you value internal instead of external, ex. may change corporate culture
• Advantages of internal growth

  • Better control and coordination
  • Relatively inexpensive
  • Maintains corporate culture
  • Less risky
• Disadvantages of internal growth


  • Diseconomies of scale
  • Requires restructuring of positions (takes time and money)
  • Dilution of control and ownership - growing as a small business but losing control of everything as you need to hire employees, but the work is divided, decreasing the workload
  • Slower growth
• Organic Growth

  Increase in sales revenue<|>Reducing cost<|>Improving operational efficiency
• External growth methods


  • Merger and acquisitions (M&As)
  • Takeovers
  • Joint ventures
  • Strategic alliances
  • Franchising
• Reasons for business to pursue external growth

  • Grow at a faster pace
  • Diversify their product portfolio
  • Gain market share
  • Gain customers in new and existing markets
  • Reduce competition in the industry
• Advantages of external growth

  • Quicker than organic
  • Creates synergies
  • Reduces competition
  • Economics of scale
  • Spreading of risk
• Disadvantages of external growth

  • More expensive than internal
  • Could create more risk (uncertainty)
  • Regulatory barriers
  • Potential diseconomies of scale
  • Organisational culture clash
• Businesses operating in different markets have varying optimal sizes
• Examples of businesses with varying optimal sizes


  • A multinational clothing retailer such as Zara will want to expand its operations in retail outlets and shopping malls across the globe
  • Some businesses prefer to operate in niche markets selling specialised products to a small market segment
• Ways to measure business size

  • Sale turnover
  • Market share
  • Gross profits (before deductions)
  • Profits after interest and tax
  • Market capitalisation (value of the business)
  • No. of Customers
  • No. of Employees
  • No. of Retail outlets or stores
• A common business objective of many organisations is growth
• Example of a business pursuing growth


  • McDonald's is the world's largest fast-food restaurant as measured by sales revenue and strives to grow in order to maintain or increase its market share, sales revenues, profits, and shareholder value
• Reasons for business to pursue growth

  • Grow at a faster pace
  • Diversify their product portfolio
  • Gain market share
  • Gain customers in new and existing markets
  • Reduce competition in the industry
• Reasons for business to stay small

  • Owners don't want the additional costs, challenges and pressures associated with growing their business or operating on a larger scale
  • Many businesses actually prefer to serve a smaller number of familiar or loyal customers
  • Privacy
  • Ownership and control
  • Autonomy
  • Individuality
  • Maintenance
  • Specialisation