IB Business and Management

Unit 1.7
Growth and Evolution
Pages 112-136
 1. Focus Questions
• 1. What is the difference between
economies and diseconomies of scale?
• 2. What are the merits of small vs. large
organizations?
 2. An Overview
• What is a continual aim of a business?
– To grow.
• What does growth refer to?
– The expansion of size of its operation.
• How can an organization’s growth be measured?
– Sales turnover = sale revenue
– Market share
– Capital employed
– Employees
• So, why do businesses seek growth?
– Benefits of economies of scale
– Market share / market standing
– Survival in an industry
– To spread risks by diversifying.
– And in the long run…$$$ PROFIT $$$...
3a. Economies & Diseconomies of Scale
• As discussed before, a major reason to grow is to benefit
from economies of scale.
– What does economies of scale refer to?
• The lower average cost of production.
• An improvement in productive efficiency.
• Operating on a larger scale.
• Can you give examples of economies of scale?
• Sometimes economies of scale refers to increasing returns to
scale.
– A firm can gain a competitive cost advantage over
smaller firms.
• How is this possible?
• Lower average cost = lower prices being charged to
customers + higher profit margin made per unit.
• Confused yet??? …
 4. Internal Economies of Scale
• There are two categories of economies of scale:
– You guess it…internal and external 
• Internal economies of scale: within the company’s control.
• External economies of scale: beyond the control of the company.
• With regards to the internal economies of scale, the more you produce the more
you will be able to lower your average costs of production.
– This is possible due to several factors:
• Technical economies: using sophisticated machinery
• Financial economies: lower rates when borrowing
• Managerial economies: specialization leads to higher productivity
• Specialization economies: division of labour, mass production.
• Marketing economies: global marketing economies, selling in bulk
• Monopsony economies: strong buying power, gain big discounts
• Commercial economies: buying in bulk (purchasing economies / buying
economies)
• Risk-bearing economies: where conglomerates, have a diversified
portfolio of products.
 5. External Economies of Scale
• External Economies of Scale:
– arise outside the firm due to its location or growth.
– Four factors which may create external economies of scale:
1. Technological progress – increases trading; e-commerce.
2. Improved transportation and communication networks – things
arriving on time.
3. Better trained labour – training programs, education in an area.
4. Regional specialization – highly regarded and trustworthy
reputation.
…
 6a. Diseconomies of Scale
• Internal Diseconomies of Scale:
– Is where you can no longer exploit economies of scale.
– Also called decreasing returns to scale, result from higher unit costs as a firm
increases the size of its operation.
– There are several reasons for this:
• Lack of control and coordination – managers are no longer able to handle the
demands of a larger company.
– May harm staff morale.
• Poorer working relationships – with a larger workforce, senior management
will become detached with the workers.
– May harm staff morale and productivity.
• Workers becoming slack – larger workforce, due to specialization, may
become bored and less productive.
• Amount of bureaucracy – will make communication more difficult, may
reduce productivity.
• Complacency – being a market leader may lead to reduced productivity and
raise unit costs.
– Large firms will prefer to grow via franchising. Do you know of any?
 6b. Diseconomies of Scale
• External Diseconomies of Scale:
– Refers to an increase in the average costs of production.
– They occur when there are too many firms in the market.
– Unit cost of production increase for all businesses in the industry.
– For example:
• Too many business in one area.
– Will result in increasing market rents because of landing becoming
scarce.
• Traffic congestion.
– Delays in delivery, will increase transportation costs.
• Supply of local labor.
– Since workers have a choice where to work; business will have to
offer higher wages.
– This will increase costs, not necessarily increase output.
 6c. Diseconomies of Scale
• So, how can we deal with these diseconomies of scale?
– Well, firms will have to take several measures to protect their
competitiveness.
• They have two options when dealing with diseconomies of
scale:
– 1. reduce their level of output.
– 2. remove productive inefficiencies.
• For example:
– If workers are slacking:
» Try outsourcing.
» Performance-related payment systems.
» Motivational strategies (training, empowerment, and
teamworking).
 7a. Small vs Large Organizations:
• All businesses have
an appropriate
scale of operation. Market share
• So, how can the
…Stock market
size of a market be Total Revenue
valuation
measured?
– An increase of
any of these
…Balance sheet Can be Size of
would result in valuation Measured by: the workforce
or suggest that
the firm is
getting larger.
Market value… Profit

Capital
employed
 7b. Small vs Large Organizations:
• If your firm becomes larger you may also enjoy economies of scope.
– What are economies of scope?
• When it is cheaper to produce a range of related products.
• So, how does this differ from economies of scale?
– Well…refers to cost savings from producing the SAME product on a
larger scale.
• Economies of Scope:
– Give businesses diversity.
– Gives businesses the opportunity to become active in other areas.
• Can you give me examples of economies of scope?
– When Amazon started out what did they first sell?
• Books!!!
– What are they selling now?
• Books, CDs, DVDs, you name it 
 7c. Small vs Large Organizations:
• What are some
other benefits of
being large? Brand
Recognition
Image
Barrier to entry And
reliability

Other benefits
of being large
More
Convenience
choice

Improved
Customer Discounts
loyalty
 7d. Small vs Large Organizations:
• What are some
benefits of being
small? Cost control
• Remember being
Small
small doesn’t Market
Financial
risk
mean you can not Size
survive and
flourish.
Other benefits
of being small
Government
Flexibility
aid

Local
Personalized
Monopoly
services
Power
 7e. Small vs Large Organizations:
• So, what is the best or optimum size?
– Well, it will depend on its internal structure.
– Its costs and size of the market.
– It will also depend on your aims and objectives.
• REMEMBER:
– If a firm operated beyond its optimum size the diseconomies of scale will
be experienced.
– And if this occurs…what will happen?
• Your unit costs will increase and…
• will REDUCE your $$$ PROFITS $$$.
• Which is NOT GOOD 
• Also, a firm may not run at its financially optimum level either.
– Due to a lack of resources or demand.
– No finances = no expansion = lack of production capacity
• Even if you are producing more…if there is no demand…guess
what??? …
IB Business and Management

Unit 1.7
Internal (Organic) Growth / External
Growth
Pages 119-128
 1. Focus Questions
• 1. What are the internal growth strategies?
• 2. What are the external growth strategies?
 2. Internal Growth
• Is one method of business growth, also
known as organic growth.
– It occurs when you use the firm’s resources to
increase the size of its operation.
– Thus increasing its sales revenue.
• This growth is financed through the profits of the
business and not from outside sources.
 3a. External Growth
• Business growth through M&A’s (mergers
and acquisitions).
– Also called amalgamation or inorganic growth.
–…
 3b. Can Grow in Several Ways :
• Business can
grow Changing price
organically …Stock market Advertising
or valuation And promoting

inorganically
. Training and Can grow in
Better products
development Several ways:

Capital Placements
expenditure (locations)
Credit
Payment terms
 3c. Benefits and Limitations of
Organic Growth
• Benefits: • Limitations:
– Better control and – Diseconomies of scale.
coordination. – Overtrading.
– Inexpensive. – Need to restructure.
– Maintain corporate – Dilution of control and
culture. ownership.
– …
 3d. External Growth
• Inorganic growth, which comes from M & A’s
• Benefits of external growth:
– A faster way to grow.
– Quick way to reduce competition.
– Greater market share.
– Can generate new ideas, skills and customers.
– Can spread risk to different markets.
• The only disadvantage is the cost.
• Take over bids and be in the billions of dollars.
• …
 4. Joint Ventures :
Other methods:
• Joint Ventures:
– When one or more
Synergy businesses decide
to split the costs,
High success Spreading of risks, control and
rate Costs and risks rewards.
• What are the
disadvantages?
– 1. rely on the
Joint Venture resources of your
Exploitation Advantages Entry of partner.
Of local Foreign – 2. Dilution of
knowledge markets brands.
– 3. Spending lots of
money to develop
brands.
Competitive
Cheap – 4. Organizational
advantage
culture clash.
– See case study
1.7.4 on page 124.
 5a. Strategic Alliances
• Similar to joint
venture.
• Where two or more
1. Feasibility
4.
study businesses form a
Implementation
business venture.
• The share the cost of
Four Key production, operations
Stages and marketing.
• They remain
independent
3. Contract 2. Partnership organizations.
Negotiation Assessment
• So, how are they
formed? …
 5b. Strategic Alliances
• The main goal of a strategic alliance is to gain synergy.
– So, what is synergy? How can it be beneficial to a company?
• From Webster: “ a mutually advantageous conjunction or compatibility of distinct business participants
or elements (as resources or efforts)”
• Such as:
– Pooling resources.
– Expertise.
– Financial support.
– Gain economies of scale.
– Value added services.
– Wider channels of distribution.
– …

Taken from:
http://www.maximizepossibility.co

m/RMGpictures/Synergy.jpg
 6a. Mergers and Takeovers
• M & A’s = Mergers and Acquisitions.
– The Merger:
• The combination if two or more businesses form one single company.
– So, why merge?
» The new merger will usually bring about economies of scale and larger market share.
• The Takeover (Acquisition):
– Occurs when a company buys a controlling interest in another company.
• That means; buying enough shares to hold a majority stake.
• Used as a method of business growth.
• See Box 1.7a, pg. 125
Reasons for Takeovers.
• Black knight = hostile takeover.
• White knight = friendly bidder.
• …

Taken from:
http://30gms.com/images/uploads/s
harks.jpg
6b. Mergers and Takeovers
1. Vertical
Integration
(different stages of
production)
1a. Forward
4. Conglomerate
Vertical
M&A
Integration
(diversification)
(towards consumer)
Four Types
Of
Integration
1b. Backward
3. Lateral
Vertical
Integration
Integration
(similar operations)
(towards supplier)
2. Horizontal
Integration
(same industry)
6c. Mergers and Takeovers
Greater
Market share

Economies
Diversification of
The Scale
Advantages
of
M & A’s

Synergy
Survival
1+1=3
6d. Mergers and Takeovers
Loss of
Control

Regulatory Culture
Problems Clash
The
Disadvantages
of
M & A’s
Diseconomies
of Conflict
Scale

Redundancies
 6e. Mergers and Takeovers
• They are very common in today’s business environment.
• With increasingly competitive markets, M & A’s are used to maintain growth
and competitiveness.
• Stock markets, deregulations, and globalization have made M & A’s more
attractive.
• The success of M & A’s depend on several factors such as:
– The level of planning.
• Communication to shareholders of the benefits.
– Aptitudes of senior management.
• Negotiation skills are important to handle problems that arise.
– Regulatory problems.
• Government interference, stopping a company from having too much
monopoly power 
– Running into diseconomies of scale.
• A demerger might take place (selling off a major part of a company’s
business).
• …
 6f. Mergers and Takeovers
• Management Buy-out (MBO):
– A defensive strategy to combat a hostile takeover.
– It involves the management team of the target business buying shares in
the company to become the owners, thus preventing the company from
being taken over.
– The team can also seek financial assistance from venture capitalists.
• This strategy can save jobs. Your job 
• Brand Acquisition:
– Instead of completely tasking over a company, you may buy one of the
brands from the firm.
• Why would firms sell off one or more of their brands?
– Maybe they have a liquidity problem ; they are short on cash
that it jeopardizes the survival of the firm.
– May also want to demerge or feel that the brand no longer suits
the corporate image.
–…
IB Business and Management

Unit 1.7
Franchises
Pages 128-136
 1. Focus Questions
• 1. What is a franchise
• 2. What is the Ansoff Matrix and how is it
used?
• …
 2a. Franchises
• What is a franchise?
– A form of business ownership.
– You buy a license to trade using
another firm’s name, logo,
brands, and trademarks.
• So, how does one buy into a
franchise?
– The franchisee (the purchaser),
pays a license fee to the parent
company; the franchisor.
– The franchisee pays a royalty
payment.
– Used as a means of growth.
– …
 2b. Franchises
• The benefits
Rapid growth of
Without huge
risks franchising
Allows for a
Greater local
Market
National or as a method
International
awareness
presence of growth for
the
Benefits of
Franchising
franchisor.
More incentives Economies of scale
• Pg. 129 read
• …
Receive a Less worry about
Royalty payment The running costs
 2c. Franchises
• The
Low risk
Advantages
High success for the
franchisee
• Pg. 129 read
Large scale
Advertising – Advantages for Lower start-up
• …
Reducing The franchisee costs
costs

Added services
 2d. Franchises
• The pitfalls
Difficult to of
Control
franchisees franchising
to the
franchisor.
• Pg. 129 read
The pitfalls
of franchising • …
Not a quick Huge risk to
Method of growth Reputation.
 2e. Franchises
• The
Can be very
disadvantages
expensive to franchisees
• Pg. 129 read
• …
Disadvantages
To franchisees

Pay large %
Less flexibility
To the franchisor.
3a. The Ansoff •Matrix
Developed in 1957, it is an
analytical tool.
• Helps managers to devise their
products and market growth
strategies.
• There are four growth
strategies…

• …
 3b. Advantages / Limitations
• 1. Market Penetration:
– Advantage:
• Focus on markets and products that the firm is familiar with.
• Safest of the four growth strategies.
– Limitation:
• Competitors will react to your firms trying to “steal” their customers and market share.
• Might cause price wars, could hurt profits in the short term.
• 2. Product Development:
– Medium-risk strategy.
– Suitable when products reach saturation or declining stage of product life cycle.
– Lower risks when launching a product under a well-known brand name.
• 3. Market Development:
– Medium-risk strategy.
– Advantage:
• Not high risk; using familiar products.
– Limitation:
• Success in one market does not guarantee success in other markets.
– Cell phones in Asia for example.
 3c. Advantages / Limitations
• 4. Diversification:
– High risk growth strategy.
– Involves marketing new products in new markets.
– Advantage:
• Trying to spread your risk.
• A good strategy when a firm has reached saturation in their markets and are seeking new
opportunities for growth.
• So, how do companies diversify?
– One way is to become a holding company.
• A holding company is a business that owns a controlling interest in other diverse companies.
• They are also known as parent companies.
– Advantage:
» Wide range of products and markets in different regions of the world.
– Another way is to create a SBU; a strategic business unit.
• Are very similar to subsidiaries.
– They have a separate vision and mission statement.
– They can handle different product lines.
» Japanese auto-manufacturers have SBUs.
• Limitation: it is the riskiest of the four options in the Ansoff Matrix. …
 Important sites

• http://www.icmrindia.org/casestudies