1.6 Growth & Evolution

Scale of Business

  • Most output that can be made with available resources

  • Scale of Business can be increased by increasing inputs

  • Producing more ≠ Increasing Scale of Business

    • Only refers to max output not efficiency of production

Economies of Scale

  • Improves efficiency of production, marketing and development

    • Cost per unit = (total variable costs + total fixed cost) / units produced

    • Cost per unit decreased

    • Total fixed cost spreads over an increased units produced

    • Total variable costs may increase disproportionally less than units produced

      • Lowers price or increases profit

            • Customers become happier

            • increased Market share

          • Increased profit

        • Shareholders become happier

        • Increased budget for R&D, marketing, etc.

Diseconomies of scale

  • Average unit costs rise as the business grows larger

  • Diseconomies of scale tend to occur because it is more difficult to manage a large business than a small one

  • Large businesses may experience issues such as high supply and low demand leading to higher overhead costs or supply chain issues

  • Smaller businesses are more likely to be able to handle and balance supply and demand issues better due to their smaller scale

Internal Economies of Scale

  1. Purchasing

      • Whole sale discounts

      • Examples:

        • In 6 pack of coke, each individual coke costs less

  2. Technical

      • Larger businesses have a large workforce

        • Workers may have new skills to bring to the business

      • Businesses has access to a wide variety of skills

  3. Financial

      • Banks are more likely to give loans

      • Providers more likely to allow for debt

      • Business likely has more capital to expend

  4. Marketing

      • Advertising products becomes more efficient due to larger volume

  5. Managerial

      • Larger firms are more likely to be able to hire more managers

  6. Risk Bearing

      • Larger businesses have a larger amount of cash to fall back on even if a product fails

        • Samsung Note 7 disaster

          • Despite this massive failure, Samsung was able to relaunch the Note 7 and even after it failed a SECOND TIME they did not suffer significantly in the long run.

External Economies of Scale

1. Technological Processes:

      • Increases the productivity within the industry

          • E.g internet has allowed e-commerce

2. Improved Transportation Networks:

      • Helps to ensure prompt deliveries.

      • Employees who are late to work due to poor transportation links cost the business money.

3. Access to Skilled Workforce:

      • Can easily recruit other workers trained by other firms in the same industry

4. Ancillary Firms:

      • Can be located nearby large firms to provide them with service/equipment they require

Internal Diseconomies of Scale

Becoming too large of a business

  • As a firm becomes larger, managers may lack control and coordination as the span of control is likely to increase which causes communication problems

  • Workers of larger organizations feel alienated which can harm staff morale

Types of Business Growth (Case Examples)

Mergers & Acquisitions

Franchising

Strategic Alliances

Joint Ventures