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IB Business Unit 1: Business Organisation and Environment 1.6: Growth and Evolution
IB Business Unit 1: Business Organisation and Environment 1.6: Growth and Evolution
IB Business
Unit 1: Business Organisation and
Environment
1.6: Growth and evolution
2
Chapter Outline: 1.6
types of economies and
diseconomies of scale
role and impact of
globalisation
difference between internal
and external growth
There is a huge difference between the scale of operations of a small business and the
largest companies in the world
scale of operation: the maximum output that can be achieved using the available inputs
(resources) – this scale can only be increased in the long term by employing more of all
inputs
Firms expand capacity by increasing the scale of production to avoid turning business
away and to increase market share, but they also benefit from the advantages of large-
scale production – these are called economies of scale.
economies of scale: reductions in a firm’s unit (average) costs of production that result
from an increase in the scale of operations
The combined effect of economies of scale and diseconomies of scale on unit (average) costs of production is
shown in Figure 1.6.1.
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Small versus large organisations
The advantages and disadvantages of small and large business organisations are summarised in Tables 1.6.2 and 1.6.3.
There is no rule that can be applied when deciding on the most appropriate scale of operation.
Business owners must weigh up and assess:
owners’ objectives – they may wish to keep the business small and easy to manage
capital available – if limited, growth is less likely
size of the market the firm operates in – very small markets do not need large-scale production
number of competitors – the market share of each firm may be small if there are many rivals
scope for economies of scale – if these are substantial, as in water supply, each business is likely to operate on a large scale
Why do other business owners and directors of companies seek growth for their business?
There are a number of possible reasons including:
increased profits
increased market share
increased economies of scale
increased power and status of the owners and directors
reduced risk of being a takeover target.
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horizontal integration: integration with a firm in the same industry and at the same stage
of production
forward vertical integration: integration with a business in the same industry but a
customer of the existing business
conglomerate integration: merger with or takeover of a business in a different industry
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Joint ventures, strategic alliances and franchising: 20
Joint ventures
joint venture: two or more businesses agree to work closely together on a particular project and create a separate business division to do
so
The reasons for joint ventures are:
Costs and risks of a new business venture are shared – this is a major consideration when the cost of developing new products is
rising rapidly.
Different companies might have different strengths and experiences and they, therefore, fit well together.
They might have their major markets in different countries and they could exploit these with the new product more effectively than if
they both decided to ‘go it alone’.
franchise: a business that uses the name, logo and trading systems of an existing successful
business
decide which form of legal structure to adopt.
rapidly expanding form of business operation.
Buying products from other nations (importing) means consumers are offered a much wider choice of goods and services.
Imports of raw materials can allow a developing economy to increase its rate of industrialisation.
Importing products creates additional competition for domestic industries and this should encourage them to keep costs and
prices down and make their goods as well designed and of as high quality as possible.
Countries can begin to specialise in those products they are best at making if they import those that they are less efficient at a
compared to other countries. This is called comparative advantage.
Specialisation can lead to economies of scale and further cost and price benefits.
By trading in this way, the living standards of all consumers of all countries trading together should increase as they are able
to buy products more cheaply than those that were produced just within their own countries.
- Movements of international capital have increased foreign investment in both developed and
developing countries.
- Businesses can more easily recruit workers/managers from other countries, increasing he
pool of skilled labour to draw from.
In recent years, there have been moves towards free trade by reducing international trade
restrictions such as tariffs (taxes on imports) and quotas (quantity limits on import). These
measures have been a major factor driving the ‘globalisation’ process.
The expansion of multinational corporations into a country could lead to the following drawbacks:
Exploitation of the local workforce might take place
the absence of strict labour and health and safety rules in some countries, multinationals can employ cheap labour for
long hours with few of the benefits that the staff in their ‘home’ country would demand.
Pollution from plants might be at higher levels than allowed in other countries
Local competing firms may be squeezed out of business due to inferior equipment and much smaller resources than the
large multinational.
could lead to a reduction in cultural identity.
Profits may be sent back to the country where the head office of the company is based, rather than kept for reinvestment
in the host nation.
Extensive depletion of the limited natural resources of some countries has been blamed on some large multinational
corporations.
Thank you!