GROWTH AND EVOLUTIONReasons why b.seek to grow:

-they can benefit from economies of scale

-larger market share=better marker power=may allow the b.to charge higher prices

-as a means of survival against rivals in the industry

-to spread risks by diversifying into new markets and industries

Economies of scale refer to the lower average costs of production as a firm operates on a larger scale (cost-reducing benefits enjoyed by firms engaged in large scale operations)

INTERNAL ECONOMIES OF SCALE

Those that are within the organization’s control and occur within the firm.

*technical economies:large firms can use sophisticated machinery in an intensive way to mass produce their products.The high fixed costs of their equipment and machinery are spread over the huge scale output,reducing the average costs

*financial economies:large firms can borrow massive sums of money at lower rates of interest than smaller rivals

*managerial economies:large firms split up management roles by employing specialist managers.The resulting increased productivity means that average costs of production still fall

*specialization economies:results from division of labour of the workforce rather than management

*purchasing economies:large companies negotiate with their suppliers for huge discounts on their large bulk purchases.these saving can be enjoyed by large firms that have strong buying power

*marketing economies:large firms can benefit from lower average costs by selling in bulk.Global marketing economies(McDonald’s,Nike)global firms can spread the high cost of advertising across the world using the same marketing campaign

*risk-bearing economies:these economies of scale can be enjoyed by conglomerates(firms that have a diversified portfolio of products in different markets)

EXTERNAL ECONOMIES OF SCALE

Those that occur within the industry that the b.operates and are largely beyond the control of the b.

*technological progress which increases the productivity of trading within the industry

*improved transportation and communication networks help to ensure that deliveries arrive on time

*more and better trained labour in an industry(government supported training programmes…)

*regional specialization means that an area or country may have a highly regarded and trustworthy reputation for producing a particular good or service

INTERNAL DISECONOMIES OF SCALE

There comes a tipping point when economies of scale can no longer be exploited.Diseconomies of scale are result of higher unit costs as a firm continues to increase the size of its operations.

*as a firm becomes larger,managers may lack control and coordination as the span of control(the number of subordinates that are controlled by a manager)is likely to increase and cause problems for management

*there are likely to be poorer working relationships in an oversized b.This can negatively affect communication flows and the morale of staff thereby reducing their productivity and leading to higher unit costs

*outsized org.are more likely to suffer from the disadvantages of specialization and division of labour=workers become bored

*the amount of bureaucracy(paperwork)is also likely to increase

Some b.prefer to grow via franchising without having to face higher unit costs of being too large

EXTERNAL DISECONOMIES OF SCALE

*too many b.locating in a certain area will result in land becoming more scarce thereby increasing market rents

*traffic congestion:deliveries are likely to be delayed due to the over crowding,this will increase transportation costs for b.

*since workers have a choice over the large number of employers in the local,b.may have to offer higher wages and financial rewards in order to attract new workers

DEALING WITH DISECONOMIES OF SCALE

Firms have 2 main options in dealing with diseconomies:

-to reduce their level of output

-or to introduce measures to remove productive inefficiencies

SMALL VERSUS LARGE ORGANIZATIONSThe size of a market can be measured:

-market share:a firm’s sales as a % of the industry’s total sales revenue

-total revenue:the annual sales of a b.

-size of workforce

-profit

-stock market valuation of a b.

-the amount of capital invested in the b.

Large org.may benefit from:

-economies of scale(cost savings from producing the same product on a larger scale)

-economies of scope(occurs when it becomes cheaper to produce a range of related products)

-brand recognition allows b.to market their products to a wider audience

-large firms tend to me more trusted due to their image

-larger firms are able to offer customers larger discounts through their ability to enjoy economies of scale.This leads to more customers and improved customer loyalty

-more choice is available from larger businesses

Small organizations can survive and flourish due to:

-cost control:expansion may require extra borrowing or a dilution of ownership and control..

-financial risk

-government aid(grants,subsidies)

-personalized services

-flexibility:more adaptive to change

There are 2 methods of growth:organic and external growth.

INTERNAL(ORGANIC)GROWTH

Occurs when a b.grows internally,using its own resources to increase the scale of its operations and sales revenue.A b.can grow internally:

-changing price:more customers tend to buy a product at lower prices.Whether a firm should reduce or raise prices depends on the price elesticity of demand for a firm’s product

-advertising and promoting:people are more likely to buy a product if they are informed,reminded or persuaded about the benefits of a product

-producing improved or better products

-selling in different locations

-offering customers preferential credit payment terms(buy now and pay later)

-increasing capital expenditure(investment):this can be in the form of expanding the b.in new locations or the introduction of new production processes and technologies to improve productive efficiency

-improving training and development:this can help to improve the level of customer service,thereby contributing to better customer loyalty and higher sales

Benefits of organic growth:

-better control and coordination

-relatively inexpensive:the main source of organic growth comes from retained profits

-maintains corporate culture

Limitations of organic growth:

-diseconomies of scale:internally,hierarchical structures may increase,thereby causing communication problems and slower decision-making as a firm grows

-overtrading:a firm may take too many orders and is unable to control its costs or manage its human resources as a result

-a need to restructure:requires time,effort and money

-dilution of control and ownership:if a firm grows by changing its legal status,for example from parnership to a plc.,then the original owners(the partners)will have to share decision-making with the new owners(the shareholders).With more owners,the decision-making process is prolonged and there is more likely to be conflict of interests between the different shareholders.