1.5 Growth and Evolution

• Economies of scale are when organisations average costs of production decrease as the organisation's size grows.
• Diseconomies of scale are when organisations average costs increase as the organisation becomes too large.
• Internal economies of scale occur inside the firm and are within the firm's control.
• Technical economies are a type of internal economy of scale and are when sophisticated capital is used with the fixed costs spread over the large output lowering average costs of production.
• Financial economies are a type of internal economy of scale and describe an organisation's ability to borrow large sums of money for low interest reducing costs of finance.
• Managerial economies are a type of internal economy of scale which result in lower average costs as large organisations increase productivity with specialist managers employed.
• Specialisation economies are a type of internal economy of scale and lower average costs as specialised labour use increases productivity.
• Marketing economies are a type of internal economy of scale and lower average costs by selling in bulk with the costs of advertising reduced as the same campaign can be used around the world.
• Purchasing economies are a type of internal economy of scale and lower average costs as organisations can purchase resources in bulk and receive the biggest discounts for those materials.
• Risk-bearing economies are a type of internal economy of scale and lower average costs as conglomerates can spread fixed costs over a range of business operations with unfavourable trading offset by areas of favourable trading.
• Examples of internal diseconomies of scale include lack of control and coordination, poor working relationships, lower productive efficiency from outsourcing, bureaucracy and complacency.
• Technological progress is a type of external economy of scale and is when average costs reduce as technology improves increasing productivity and lowering costs.
• Improved transportation networks are a type of external economy of scale and are when average costs reduce as transport networks for raw material and finished goods become cheaper.
• Abundance of skilled labour is a type of external economy of scale and is when average costs reduce as businesses benefit from large pool of trained and educated workforce.
• Regional specilisation is a type of external economy of scale and is when average costs reduce as firms benifit from specilised labor and supplies in the region.
• Examples of external diseconomies of scale include higher rents, local market conditions for pay and rewards, traffic congestion and context specific problems.
• Internal growth is when a business grows using its own capabilities.
• External growth occurs through dealings with outside organisations such as alliances or mergers.
• Methods of internal growth include changing prices, effective promotions, product innovations, increased distribution, preferential credit for customers, capital expenditure, staff training and development and providing overall value for money.
• Advantages of internal growth include better control and coordination, limited expense, maintained of corporate culture and reduced risk. Disadvantages include diseconomies of scale, restructuring of ownership, dilution of control and ownership and slower method of growth.
• Advantages of external growth include speed, synergies, reduced competition, economies of scale, and the spreading of risks. Disadvantages include the fact it is more expensive than internal growth and the fact there is greater risks, regulatory barries, potential for diseconomies of scale and organizational culture clash.
• A business can be measured by their market share, total sales revenue, size of workforce, profit or capital employed.
• Benefits of being a large business include economies of scale, lower prices, brand recognition, brand reputation, value-added services, greater choice and customer loyalty.
• Benefits of being a small business include cost control, loss of control, financial risks, government aid, local monopoly power, personalised services, flexibility and small market size.
• Mergers are a type of external growth and is when two firms agree to form a new company with its own legal identity.
• Acquisitions are a type of external growth and is when a company buys a controlling interest in another firm with the agreement of its board.
• Benefits of mergers and acquisitions include greater market share, economies of scale, synergy, survival, diversification and the ability to gain entry into new markets. Drawbacks include redundancies, conflict, culture clash, loss of control, diseconomies of scale and regulatory problems.
• Takeovers are when a company purchases a controlling stake in another company without agreement of its board. They are also known as hostile takeovers.
• Joint ventures are when two or more businesses split the responsibilities for a business project setting up a new legal entity.
• Strategic alliances occur when two or more businesses cooperate on a business venture for mutual benefit sharing responsibilities yet remaining as independent organisations unlike a joint venture.
• Benefits of joint ventures and strategic alliances include synergy, spreading of costs and risks, entry into new markets, lower cost, competitive advantages and high success rate. Drawbacks include reliance on partners for goodwill, enormous expenditure on brand development and possible culture clashes.
• A franchise is a form of business where an individual known as a franchisee buys a license to trade using another firm's name, logos, brands etc from a franchisor.
• Benefits for franchisors of franchises include that it is a cheaper and faster way of internal growth, the ability to enter new markets, income from royalty payments and motivation of franchisees. Drawbacks include brand damage, quality standard management and slower growth than M&As.
• Benefits for franchisees of franchises include low risk, low startup costs, training and advice, low marketing costs, greater success likelihood. Drawbacks include stifled creativity, large initial expense, royalty payment.