The learning outcomes (or assessment objectives) for this section of the IB Business Management syllabus are:
Internal and external economies and diseconomies of scale (AO2)
The difference between internal and external growth (AO2)
Reasons for businesses to grow (AO3)
Reasons for businesses to stay small (AO3)
External growth methods (AO3):
Mergers and acquisitions (M&As)
Takeovers
Joint ventures
Strategic alliances
Franchising
External Growth strategies to share with each other in class (write answers down in a table):
mergers
acquisitions
takeovers
joint ventures
strategic alliances
franchising
Questions
Define your assigned growth strategy
What are the advantages and disadvantages?
Please find a real life example
Why did they grow this way and was there any risk (advantages, disadvantages)?
What was the end result for different stakeholders? (minimum three - Management, Employees, Customers, Shareholders, etc)
Questions:
A, B, C, D, E
Question:
F
FlipGrid Video: https://flip.com/2ec06d40
The Ansoff Matrix in Practice:
For an organization of your choice, research and construct a fully labelled Ansoff matrix identifying at least one example of a strategy the business has adopted in each of the quadrants. Your findings must be original rather than from a pre-prepared analysis.
Be prepared to present your findings to the rest of the class, explaining why you have placed the strategies in the particular quadrants of the matrix.
*Note: Splitting up related and unrelated diversification is optional
Construct a Force Field Analysis - Choose 1 Option
What is an issue or change under consideration? What are the forces driving that change or restraining that change? How powerful are each of those forces from 1-5?
Option 1) Business
Option 2) School
Option 3) Society
Option 4) Personal
What you should know
By the end of this subtopic, you should be able to:
define the following terms: (AO1)
economies of scale
diseconomies of scale
internal growth
external growth
merger
acquisition
takeovers
joint venture
strategic alliance
franchising
explain why businesses are interested in growing (AO2)
discuss the impact of growth for companies and countries (AO3)
explain different types of internal and external economies and diseconomies of scale (AO2)
distinguish between internal and external growth (AO2)
examine different types of external growth (AO3)
explain why businesses decide to stay small or to grow (AO2)
evaluate advantages and disadvantages of growing and/or staying small (AO3)
describe generative business practices (AO1)
apply an Ansoff Matrix in a given context (AO2)
apply a Force Field analysis in a given context (AO2)
https://quizlet.com/pa/724168055/15-growth-and-evolution-flash-cards/?i=4jrhob&x=1jqt
https://www.gimkit.com/view/63291afa60cb4c00213f870c
Acquisition
A method of external growth that involves one company buying a majority stake in another company with the agreement and approval of the target company’s Board of Directors.
Backwards vertical integration
A method of external growth that involves a company buying another company that is further away from the consumer in the chain of production.
Conglomerate
This form of external growth occurs when two or more businesses in unrelated industries integrate through a merger, acquisition, or takeover.
Demerger
This occurs when a company sells off a part of its business, thereby separating into two or more separate entities. This often happens due to conflicts and inefficiencies of two or more firms previously in a merger agreement, such as culture clashes.
Diseconomies of scale
Growth that is excessive results in inefficiencies and higher average costs of production, perhaps due to problems such as miscommunication, misunderstandings, and poor management of resources.
Economies of scale
These are cost-saving benefits enjoyed by a business as it increases the size of its operations, i.e. lower average costs (the cost per unit).
External economies of scale
Category of economies of scale that occurs when a firm’s average cost of production falls as the industry grows, i.e., all firms in the industry benefit.
External diseconomies of scale
This occurs when an individual firm has higher cost per unit of output due to factors beyond its control as the industry as a whole grows.
External growth
Also known as inorganic growth, this takes place when an organization requires the support of a partner organizations for its growth.
Financial economies of scale
Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages as they represent lower risk.
Forward vertical integration
This external growth method occurs when one company buys another business that is closer to the consumer in the chain of production.
Franchise
This growth strategy involves the right to trade using another company’s products, brand name and corporate logo.
Franchising
A growth method that involves two parties, with the franchisor giving the licensing rights to a franchisee to sell goods and services using the franchisor’s brands and products.
Horizontal integration
This external growth strategy occurs when a merger, acquisition, or takeover takes place between two or more companies operating within the same industry (thereby reducing competition).
Internal diseconomies of scale
Higher unit costs of production that occur due to internal problems of mismanagement as a business organization grows.
Internal economies of scale
Category of economies of scale that occurs for and within a particular organization (rather than the industry in which it operates) as it grows in size.
Internal growth
Also known as organic growth, this takes place when an organization expands without the help of an external partner firm.
Joint venture
An external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time.
Lateral integration
An external growth method that involves two or more firms in a merger, acquisition, or takeover that have similar operations but do not directly compete with each other.
Managerial economies of scale
Larger businesses can afford to hire specialist functional managers, thus improving the organization’s efficiency and productivity.
Marketing economies of scale
Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.
Merger
This form of external growth involves two or more companies agreeing to form a single, larger company thereby benefiting from operating on a larger scale.
Optimal output level
The level of output where the average cost of production is at its lowest value, so at this level of output, profit is maximized.
Purchasing economies of scale
Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).
Risk bearing economies of scale
Large businesses can bear greater risks than smaller ones due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.
Specialization economies of scale
Larger firms can afford to hire and train specialist workers, thus helping to boost output, productivity, and efficiency (thereby cutting average costs of production).
Strategic alliances
These are formed when two or more organizations join together to benefit from external growth without having to set up a new separate legal entity.
Synergy
Often referred to as “1 + 1 = 3”, this is a key benefit of growth which occurs when the whole is greater than the sum of the individual parts. A larger company, with synergy, through a merger, acquisition, or takeover creates greater levels of output and improved efficiency.
Takeover
Also referred to as hostile takeover) occurs when a company buys a controlling interest in another firm without the prior agreement or approval of the target company’s Board of Directors.
Target company
The business that is the focus of being bought out by the purchasing company in an acquisition or takeover.
Technical economies of scale
Cost savings by greater use of large-scale mechanical processes and specialist machinery, e.g., mass production techniques.
Vertical integration
When an acquisition or takeover occurs between two companies operating in different industries.
Generative (Regenerative) Businesses
A business that aims to strengthen its social and environmental ecosystems by creating opportunities for other businesses and communities to develop, and by restoring the natural environment. The business enjoys a network of mutual benefits and increased resiliency.
Ansoff matrix
Grouping of the different options for growth into four categories, based upon combinations of two criteria: products and markets
Market Penetration
A low-risk growth strategy that involves selling more of the same products and services to the same customers, or to the same types of customers; achieved through changes to price, promotion or distribution.
Product Development
A medium-risk growth strategy that involves selling new products to the same customers.
Market development
A medium-risk growth strategy that involves selling existing products in new markets (new geographic market/target market, new demographic group).
Diversification
A high-risk growth strategy that involves selling new products in a new market
Related Diversification
When a business enters a new industry that has similarities with the company's existing industry.
Unrelated Diversification
The riskiest growth strategy of all when a business enters a new industry that has no similarities with the company's existing industry.
Force Field Analysis
Can be used to study the factors that support or promote change (driving forces), and those that oppose or resist change (restraining forces). Each force is assigned a number, which is meant to indicate whether the force is relatively powerful (5) or weak (1).
Driving Forces
Factors that support or promote change.
Restraining Forces
Factors that resist change.
Economies of Scale:
Economies of scale refers to a situation where the unit (average) cost of production decreases as the level of output increases. Economies of scale can be either internal or external.
Diseconomies of Scale:
The increase in the per-unit production cost as a business grows.
Definition: when a firm’s average cost of production falls as the industry as a whole (rather than the firm itself) grows. This means that all firms in the industry benefit.
Innovation
Infrastructure
Specialization
✅ Skilled labour pool — As an industry grows in a region, more workers with specialized skills become available, reducing training costs for businesses.
Example: The tech industry in Silicon Valley benefits from a large pool of skilled software engineers.
✅ Supplier networks — When many suppliers set up near a cluster of businesses, firms get easier access to high-quality inputs and faster delivery.
Example: Car manufacturers in Detroit benefit from local parts suppliers nearby.
✅ Infrastructure improvements — Government or private investments improve roads, ports, or communication systems, lowering transport and communication costs for all firms in the area.
Example: A new airport expansion boosts export capacity for all local electronics manufacturers.
✅ Research and development (R&D) hubs — Universities or research institutions working near businesses provide innovations and new technologies the entire industry can use.
Example: Pharmaceutical companies near major research universities benefit from cutting-edge medical research.
✅ Reputation/industry image — An area becomes famous for a certain product, attracting more customers or investment.
Example: French luxury fashion brands benefit from Paris’s global reputation for high-end design.
Definition: The increased unit cost of production for a business due to the expansion of the industry in which the business operates.
Limited natural resources
Limited infrastructure
Increased regulation
Pollution
Definition: cost reductions that can be achieved inside the company when it expands its output.
Purchasing economies of scale: Lower costs of production that occur when a business is able to buy large quantities of inputs and negotiate lower prices for the inputs.
Marketing economies of scale: Lower costs of production that occur when the cost of a marketing campaign is spread over a larger quantity of output, thus lowering the average cost of the campaign.
Managerial economies of scale: Lower costs of production that occur when the cost of hiring a manager or being able to hire specialists are spread over a larger output.
Technical economies of scale: Lower costs of production that occur when a large business is able to purchase equipment that makes the business more efficient.
Definition: The increase in per-unit production cost as a business grows, usually explained by the difficulty of managing internally large operations.
Managerial Issues
Increase in size of the workforce
Communication
Definition: Expansion of a business with its own resources.
Increasing production and gaining market share
Developing new products
Finding new markets
Definition: Expansion of a business by relying on external resources, typically with another organisation.
Mergers: A form of external growth where two businesses combine to form a new business; the new business replaces the two that existed before the merger.
Acquisitions: implies that one company purchases another company with permission of the board of directors
Takeover: A form of external growth where one company purchases another company; typically hostile, or not wanted by the company being taken over.
Joint Ventures (JV): an external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time. The newly created business is funded by its parent companies.
Strategic Alliance: A form of external growth where two or more businesses work together to achieve common objectives but do not create a new enterprise.
Franchising: A form of external growth where a franchisee buys the rights to use the name and business model of a franchisor.
Internal Growth Benefits
To foster brand awareness and brand loyalty
To increase market share
To maintain its corporate culture
To maintain ownership and control of the organization
To avoid the comparatively high expenses and risks associated with external growth.
External Growth Benefits
To grow at a faster pace
To diversify their product portfolio
To gain market share
To gain customers in new and existing markets
To reduce competition in the industry.
Mergers and acquisitions (M&As)
Takeovers
Joint ventures
Strategic alliances
Franchising
A form of external growth where two businesses combine to form a new business; the new business replaces the two that existed before the merger.
A merger is where two companies agree to fuse together.
Example:
Merger: Exxon and Mobil
Explanation: Exxon and Mobil merged in 1999 to form ExxonMobil, creating the largest publicly traded oil and gas company in the world. The two companies combined completely under the new name, with unified management and operations
AOL & Time Warner $350 Billion Dollar Failed Merger in 2003 (Largest failed merger)
Merger Advantages and Disadvantages
Advantages:
Synergy: Combined resources can create a stronger business entity.
Diversification of risk.
Access to new markets or technologies.
Access to assets and talent: Acquiring a company can provide valuable assets, patents, and talent that may not be easily developed in-house.
Increases market share: Combined resources allow the merged company to have a larger market share, potentially dominating the sector.
Economies of scale: Mergers can reduce costs through shared operations, technology, and resources.
Disadvantages:
High costs and complexity of integration.
Cultural clashes between merged businesses can lead to internal conflicts.
Job losses: Redundancies in the workforce often occur after mergers, leading to job cuts and employees feeling uneasy.
Reduced competition: A merger can reduce competition, potentially leading to monopolistic behavior and increased prices.
Integration difficulties: Aligning technology, operations, and personnel may take longer than expected, hampering synergy.
Implies that one company purchases another company with permission of the board of directors.
An acquisition, where Company A acquires Company B.
Acquisition Advantages and Disadvantages (similar to mergers)
Advantages:
Rapid market entry: Acquisitions allow companies to quickly enter new markets or industries by buying an established player.
Access to assets and talent: Acquiring a company can provide valuable assets, patents, and talent that may not be easily developed in-house.
Improved innovation: Acquisitions often bring new technologies or innovations that can drive further growth.
Eliminates competition: Acquiring a competitor directly eliminates threats in the market.
Disadvantages:
High costs: Acquisitions require significant capital, often leading to debt or financial strain on the acquiring company.
Regulatory hurdles: Antitrust laws or government regulations can delay or prevent acquisitions.
Cultural misalignment: The acquired company’s culture may differ dramatically from the buyer’s, making integration difficult.
Overestimation of synergy: Acquisitions can fail if the expected synergies and value are overestimated.
Acquisition Announcement: Disney announced its acquisition of Pixar on January 24, 2006, and completed the deal in May 2006. The acquisition was valued at approximately $7.4 billion in an all-stock transaction.
Background: Before the acquisition, Pixar was already a successful animation studio known for its innovative films like "Toy Story." Disney had previously collaborated with Pixar on several projects, which laid the groundwork for the acquisition.
Impact: The acquisition allowed Disney to enhance its animation capabilities and leverage Pixar's advanced technology and creative talent. Following the acquisition, Disney and Pixar produced numerous successful films, including "WALL-E," "Up," and "Toy Story 3," which significantly contributed to Disney's revenue
LVMH acquires Tiffany & Co. 2020
Moët Hennessy Louis Vuitton (LVMH) is a diversified French multinational corporation that specializes in the luxury goods industry. The company is headquartered in Paris, France. In 2020, LVMH bought American jeweller Tiffany & Co for $16.2 billion. This is the largest luxury brand acquisition in history, which adds Tiffany & Co. to LVMH’s huge product range including brands such as:
Bulgari
Christian Dior
Fendi
Givenchy
Kenzo
Louis Vuitton
Marc Jacobs
Moët & Chandon
Sephora
TAG Heuer
Why?
WhatsApp had a large and rapidly growing user base
Facebook wanted to diversify its services and strengthen its market position against competing platforms like Snapchat and other messaging services.
Facebook acquired Instagram in 2012 for $1 billion, which was agreed on by both parties.
Strategic move for Facebook to expand its social media platform and enhance its offerings in the mobile photo-sharing space.
The acquisition aimed to leverage Instagram's growing user base and innovative features to bolster Facebook's market position against competitors
A takeover is where one company purchases another company; typically hostile, or not wanted by the company being taken over. This is done by buying a majority of its shares (which can be less than 50% as long as it is the majority shareholder)
Hostile Takeover Example: Kraft bought Cadbury
Example: Kraft Foods bought Cadbury in 2010 for $19 Billion
What Happened: In 2010, Kraft Foods, an American company, tried to acquire the British company Cadbury, known for its chocolates and snacks. This attempt was considered a hostile takeover because Cadbury's management did not want to sell the company.
Initial Offers: Kraft made several offers to buy Cadbury, but each time, Cadbury's board of directors rejected these offers because they believed the price was too low.
Going Public: After being turned down, Kraft decided to appeal directly to Cadbury's shareholders (the people who own shares in Cadbury) by increasing its offer to make it more attractive.
Motivation: Kraft wanted to acquire Cadbury to expand its product range and gain a larger share of the global snack market. They believed that combining their businesses would lead to more profits and better products.
Stakeholder Impact:
Shareholders: Cadbury's shareholders had the chance to make money from Kraft's offer.
Employees: Workers at Cadbury faced uncertainty about their jobs and changes to the company culture.
Consumers: Some customers were worried about how Kraft would manage Cadbury's brand and the quality of its products.
Outcome: After much negotiation, Kraft successfully acquired Cadbury for about $19 billion. This takeover showed how complicated and impactful such business decisions can be.
Takeovers Advantages and Disadvantages
Advantages:
Quick access to new markets and customers.
Increased market share and reduced competition.
Immediate access to resources, expertise, and infrastructure.
Disadvantages:
Can be expensive to execute and manage.
Risk of cultural clashes between the two companies.
Potential for job losses and employee dissatisfaction.
an external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time. The newly created business is funded by its parent companies.
One possible configuration of a joint venture.
JV Examples
Caradigm – formed by Microsoft and GE (General Electric)
Fiat-Tata – formed by India’s Tata Motors and Italy’s Fiat Automobiles
Galvani Bioelectronics – formed by Google and GlaxoSmithKline
Hisun-Pfizer – formed by China’s Hisun and America’s Pfizer
Hong Kong Disneyland – formed by the Hong Kong SAR government and the Walt Disney Company
Sony–Ericsson – formed by Sweden’s Ericsson and Japan’s Sony.
Joint Venture Advantages and Disadvantages
Advantages:
Shared investment costs and risks.
Access to the partner’s local market knowledge and expertise.
Flexibility to exit the venture once the project is completed.
Disadvantages:
Conflicts between partners in decision-making.
Limited control over the venture compared to full ownership.
Dependence on Partner: One partner’s poor performance can negatively impact the venture.
A form of external growth where two or more businesses work together to achieve common objectives but do not create a new enterprise.
Explanation: Uber partnered with Spotify to allow riders to control the music during their ride through Spotify. This strategic alliance benefited both companies by enhancing customer experience without forming a new entity.
The Starbucks and Spotify strategic alliance, established in 2015, connected coffee and music lovers by integrating Spotify's music streaming platform into Starbucks stores. This collaboration allowed customers to influence in-store playlists, creating a personalized experience. Spotify users could earn Starbucks loyalty rewards (“Stars as Currency”) by subscribing to Spotify Premium, which helped drive customer engagement for both brands. The alliance benefited Starbucks by enhancing the in-store ambiance with curated music, while Spotify gained visibility through Starbucks’ vast customer base and brand loyalty
Strategic Alliances Advantages and Disadvantages
Advantages:
Maintain Independence: Companies remain separate entities but collaborate for specific goals.
Shared Resources: Access to partners’ knowledge, technology, and distribution channels.
Increased Market Access: Can lead to entry into new markets without large investments.
Disadvantages:
Potential for unequal commitment or resource sharing.
Limited to specific projects or time frames, reducing long-term control.
Risk of Information Leakage: Sharing sensitive data may lead to future competition from the partner.
A form of external growth where a franchisee buys the rights to use the name and business model of a franchisor.
Franchising refers to an arrangement between two parties: the franchisor and the franchisee.
Franchising Advantages and Disadvantages
Advantages:
Quick expansion with lower capital requirements.
Franchisees take on operational risks, reducing risks for the franchisor.
Steady Revenue: Franchisors earn ongoing royalties and fees.
Local Expertise: Franchisees bring local market knowledge, improving success in specific areas.
Disadvantages:
Loss of Control: The franchisor has limited control over how franchisees run the business.
Brand Damage Risk: Poor management by franchisees can harm the overall brand.
Conflicts with Franchisees: Disputes can arise over fees, support, and operational decisions.
Advantages and Disadvantages of External Growth
Economies of scale - Large organizations benefit from economies of scale (cost-saving benefits of operating on a larger scale). This reduces their unit costs of production, so the large firm is in a position to charge lower prices to their customers, yet be able to offer more choice for their customers. This makes larger firms more competitive and attractive to customers. For example, the Volkswagen group gains economies of scales in the production of components for the various divisions it owns brands, including Audi, Bentley, Bugatti, Lamborghini, and Porsche.
Sources of finance - Large organizations have greater access to a wider range of sources of finance, such as share issues and the ability to borrow funds at a cheaper rate due to their reputation and size. Having more sources of finance can enable these organizations to become even larger as they pursue their growth objectives.
Recruitment and retention of employees - Larger organizations tend to be able to pay their workers higher wages and salaries. This will help to attract and retain better skilled workers, thereby improving the larger firm’s productivity and profitability in the long-term.
Large firms can pay their workers better
Brand awareness and brand loyalty - Customers are generally attracted to well-known brands of larger companies, due to brand recognition and brand loyalty. The power of branding suggests that customers trust well-established brand names and are prepared to pay a premium price for them. In many cases, larger firms have the resources to provide better customer services, such as after-sales care.
Spreading risks - Large organizations tend to be less of a risk for the owners, investors and creditors (such as banks and suppliers). By contrast, smaller firms are far more likely to fail, so are a higher risk for owners, investors and creditors. For example, small organizations are more at risk of failing during a recession.
Privacy - The owners of small businesses can enjoy greater privacy as their financial accounts do not have to be made public. By contrast, the rivals of a large company have access to their balance sheet and profit and loss account.
Ownership and control - Many small business owners may not want to expand so that they can retain ownership and control of their own business. Becoming a much larger organization often involves selling shares on a stock exchange, and whilst this can raise a significant amount of finance, it dilutes ownership and control of the company. There might even be a threat of a hostile takeover bid if the company is publicly listed on the stock exchange.
Autonomy - The owners of small organizations enjoy autonomy (independence in decision making). They have complete control and ownership of the business, so can make their own, independent decisions. Unlike large companies, the owners of small organization do not face pressures from a board of directors and shareholders.
Individuality - Small businesses tend to be able to provide a more personalised service for their customers. Hence, they generally have a closer relationship with their clients, which can provide smaller firms with competitive advantages over their larger rivals.
Maintenance - Small organizations are easier and cheaper to set up and maintain. They also tend to have lower running costs. Furthermore, the business owner may not want the risks, responsibilities, and burdens that come with managing a larger organization. This also includes wanting to avoid the increased workload associated with business growth.
Specialization - Smaller firms can specialise in providing goods and services that larger organization find unprofitable to supply. Small firms that specialise in niche markets, such as sporting equipment for paddle boarding or fencing, can be highly profitable and earn extremely high profit margins. Operating in niche markets also means the firm benefits from very limited competition.