Unit 1.

6 Growth and evolution

1.5.1 Economies and diseconomies of scale

Define the two terms:

(a) Economies of scale-

(b) Internal economies of scale -
(c) Optimum quantity level shown by Q in the diagram below-

1.5.1a: Internal economies of scale

Describe the following internal economies of scale:

 (i) Technical economies of scale.
(ii) Managerial economies of scale.
(iii) Financial economies of scale
(iv) Specialisation economies of scale
(v) Marketing economies of scale
(vi) Purchasing economies of scale
(vii) Risk-bearing economies of scale.

Explain the benefits to a business of having significant internal economies of scale.

(b) Internal diseconomies of scale

These results from mismanagement leading to inefficiency and higher unit cost of production.

Describe the following internal diseconomies of scale:

(a) Lack of control and coordination.

(b) Poorer working relationships
(c) Boredom from over-specialisation
(d) Bureaucracy
(e) Complacency

1.5.1b: External Economies of scale

Define the term external economies of scale.

Describe the following external economies of scale:

(i) Technological progress.

(ii) Improved transportation network.
(iii) Abundance of skilled labour.
(iv) Regional specialisation
External diseconomies of scale

(i) Higher rent

(ii) Rising wages and financial rewards
(iii) Traffic congestion-
(Although there is no study about the economic loss due to traffic congestion in Hong Kong,
the United States has suffered from the total cost of traffic congestion of US$121 billion in
2011 . One of the major reasons is that employee productivity is greatly reduced after
encountering traffic jams.)

1.5.2 Internal vs External growth

1.5.2a: Internal growth (organic growth)

Describe the term internal growth.

How is it financed?

Using the Ansoff’s matrix, describe the strategies a business can use to grow internally.

1. Market penetration-More outlets; marketing; expand output; hire more resources (capital;
land; workers)
2. Market development- Sell other countries (exporting; subsidiaries; agents)
3. Product development- Create new products through R&D.
4. Diversification- New products in new markets

https://www.business-to-you.com/ansoff-matrix-grow-business/

Explain the advantages and disadvantages of internal growth

Advantages of internal growth Disadvantages of internal growth

1.5.2b: External growth (inorganic growth)

Describe external growth.

List external growth methods

Explain the advantages and disadvantages of external growth

Advantages of external growth Disadvantages of internal growth

What 5 factors influence the size decisions of a business?

Types of external growth

(i) Mergers and Acquisitions (M&A)

(ii) Takeovers
(iii) Joint Ventures
(iv) Strategic Alliances
(v) Franchising

(a) Mergers and acquisitions

 Distinguish between a merger and an acquisition.

RWEs of M&A

CNBC: Spirit shareholders approve takeover by JetBlue after long battle for discount airline.
https://www.cnbc.com/2022/10/19/spirit-jetblue-takeover-wins-shareholder-approval.html

CNBC: Frontier and Spirit to merge, creating fifth-largest airline in U.S. in $6.6 billion deal.
https://www.cnbc.com/2022/02/07/frontier-and-spirit-to-merge-creating-5th-largest-airline-in-us.html

https://www.bbc.com/news/business-50541004

https://www.bbc.com/news/business-50549048

Ericsson to buy Vonage for $6.2 billion - CNN

Describe the following types of M&As:

(i) Horizontal integration-

RWEs: Two of the largest supermarkets in America are merging

https://www.cnn.com/2022/10/14/business/kroger-albertsons-merger/index.html

http://money.cnn.com/2015/10/13/investing/ab-inbev-sabmiller-beer-merger/index.html?
iid=surge-stack-intl

(ii) Vertical integration-

(iii) Lateral integration-

(iv) Conglomerate integration-

 4 Biggest Merger and Acquisition Disasters (investopedia.com)

(b) Takeovers
 Define the term takeover.

https://www.tutor2u.net/business/reference/takeovers

RWEs of takeovers

JetBlue launches hostile takeover for Spirit

https://www.cnn.com/2022/05/16/investing/jetblue-spirit-takeover/index.html

Just Eat rejects hostile £5bn takeover from South Africa’s Naspers

https://finance.yahoo.com/news/south-africas-naspers-makes-hostile-5-bn-bid-for-just-eat-094619231.html?
soc_src=community&soc_trk=ma

Xerox trade deal: Xerox considers $27-billion takeover offer for HP

https://m.economictimes.com/news/international/business/xerox-considers-takeover-offer-for-hp-for-27-billion/
articleshow/71933870.cms

(c) Joint ventures (JVs)

A joint venture (JV) is a separate business entity created by two or more parties, involving
shared ownership, returns and risks

Sony and Honda are starting a new company to make electric vehicles

https://www.cnn.com/2022/03/04/business/sony-honda-new-ev-company-intl-hnk/index.html
Explain the benefits and risks of JVs.

Joint Ventures | Business | tutor2u

http://asia.nikkei.com/Business/Companies/VW-leans-heavily-on-China-in-wake-of-emissions-
scandal

(d) Strategic alliances (SAs)

(227) Strategic Alliances - YouTube

Strategic alliances are business to business partnerships in which two or more companies work
together to achieve objectives that are mutually beneficial. Companies may share resources,
information, capabilities and risks to achieve this.
While companies have used acquisition to accomplish some of these goals in the past, forming a
strategic alliance is more cost-effective.

Key stages to the formation of a Strategic Alliance

Examples of successful strategic alliances

GAME OVER! Elon Musk & Google's INSANE Partnership Will Change EVERYTHING 🔥🔥🔥 - YouTube

Pfizer and BioNTech Announce Further Details on Collaboration to Accelerate Global COVID-19 Vaccine
Development | Pfizer

BioNTech profile: Firm working with Pfizer for COVID-19 vaccine (yahoo.com)

https://www.allbound.com/blog/successful-strategic-alliances-5-examples-of-companies-doing-it-right

http://smallbusiness.chron.com/examples-successful-strategic-alliances-13859.html

https://www.google.com.hk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=airline+alliances+list

Photos Show Yacht Design Inside a Boeing 737 MAX Private Aircraft (businessinsider.com)

Delta Launches New Facial Recognition Technology for Security Lines With TSA | Travel + Leisure
(travelandleisure.com)

Discuss the advantages and disadvantages of strategic alliances.

Advantages and Disadvantages of Strategic Alliance (universalteacher.com)

Alliances - benefits of scale without the risks? | Business | tutor2u

(e) Franchising
https://www.youtube.com/watch?v=EmjA6O2HIus

Describe and give examples of a franchise

Franchising arises when a franchisor grants a license (franchise) to another business

(franchisee) to allow it trade using the brand / business format.

The franchisor is the business whose sells the right to another business to operate a franchise –
they may run a number of their own businesses, but also may want to let others run the business
in other parts of the country.
A franchise is bought by the franchisee. Once they have purchased the franchise, they have to
pay a proportion of their profits to the franchisor on a regular basis. Depending on the business
involved, the franchiser may provide training, management expertise and national marketing
campaigns. They may also supply the raw materials and equipment.
Identify potential benefits and problems with franchise arrangements
Advantages and disadvantages of franchising | nibusinessinfo.co.uk
Quiz on external growth

https://www.tutor2u.net/business/reference/external-growth-methods-revision-quiz

Further reading on growth

Internal and External Growth Strategies EXPLAINED with EXAMPLES | B2U (business-to-you.com)

Growth and evolution and the concepts