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.

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.

• 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.

• 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.

Example: 

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

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

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. 

• 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)

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.

• 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.

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 

• 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.