Business

Growth
Questions

1 Mention some multinationals operating in Indonesia?

2 What are characteristics of multinationals?
3 What makes large companies expand to other countries?
 Business Growth

A business may start as one store and grow over time.

The size of a firm can be measured in the following ways:
- The number of employees
- The size of the market (market share)
- The capital employed : total amount of capital/assets used to earn profits
- The sales turnover (sales revenue): it can seen by multiplying the unit price of a
product by the quantity sold.
How do firms grow?
Internal growth (organic growth)
- Increasing the number of branches (stores), a firm sells the product in a
greater number of countries and finance this expansion using profits earned
within the business
- Franchising, a firm purchases a licence from another firm to trade using the
name of the parent company

- Attract investment from larger business.

Gojek company expand to other countries through investment from Toyota.
External Growth

- Takeovers, a firm can instantly increase its size by buying a majority share in
another business.
Takeovers can be hostile, which means that the firm being taken over doesn’t
agree to the buyout. So the firm will offering a tender.

- Mergers, two firms can merge together to form one new company
Types of Integration
• Horizontal integration occurs when one business merges with or takes over another
one in the same industry at the same stage of production.
• Vertical integration occurs when one business merges with or takes over another
one in the same industry at the different stage of production.
• Conglomerate integration is when business merges with or takes over a business in
a completely different industry (diversification).
Quiz
Identify the form of business growth which is used in each of these situations.
1 A garage agrees to merge with another garage.
2 A bicycle retailer expands by buying a bicycle shop in another town.
3 A fruit juice business buys a fruit farm
4 A business making electrical goods agrees to join with a business with retail
shops specializing in electrical goods.
5 A mining company takes over a company supplying mining equipment.
6 A construction company buys a travel company.
Types of Integration
Advantages of Horizontal Integration

Getting an increased market share Taking advantage of economies of scale

Operating with fewer employees

Gaining skilled employees from one
Ex: they don’t have to hire two finance
another
departments
Disadvantages of Horizontal Integration

Duplication of resources result redundant staff The newly formed larger firm may face increasing
(demotivated and decrease in productivity) cost arising from diseconomies of scale (large firm
may experience inefficiency)

Clash culture of two businesses that very

different caused communication and
organisational problems.
Vertical Integration
Secondary sector industry
merge with primary sector
industry,
or
Tertiary sector industry
merge with secondary
sector industry
Example:
McDonald (secondary sector) bought a farm
(primary sector) to control the supply of
chicken and eggs directly sold to all
McDonald’s restaurants.
Primary sector industry
merges with secondary
sector industry,
or
Secondary sector industry
merges with tertiary sector
industry
Example:
Shell oil mine owns the whole chain of
production (oil mining, oil processing, oil
stations) to sell the product to its consumers.
Advantages of backward Integration

- The firm can control over the quality of raw materials.

- No wastage as all produce from primary sector can be used.
- The price of raw materials falls as the manufacturer doesn’t have to pay
another external firm for the raw materials.
Disadvantages of backward Integration
- Cost of running the farm in the primary sector increase total costs as more land,
labour and capital resources are required.
- Transport costs increase for the integrated firms as raw materials were previously
delivered by external suppliers.
Conglomerate Integration

Conglomerate integration is known as Diversification occurs when firms from different

sectors of industry, which operate in unrelated area of business, merge or are taken over
by another firm.

Tata Group merge Swire Group

Hotel, hospitality enterprises, Retailing, beverages,
mining and air conditioning aeronautical, property and car
trading

The conglomerate may become too diverse and

cause management problems and if the diversified
firm is under performing, it may drain resources
from other areas of the business.
Why do small firms co-exist beside large firms?

Large firms as able to take advantage of economies of Small groceries provide:

scale therefore their average costs of production are - A range of food that can’t be bought in a
lower than those of a small firm. supermarket.
Ex: - Personal shopping experience.
Supermarkets provide: - It easier to adapt the change of customer’s tastes.
- a wide choice of particular products and product - Run independently.
range.
- Facilities such as parking lot, a cash point (atm) and
one stop shopping.
Economies of scale
When more units of goods and services can be produced on a larger scale which reduce
average cost of production.
Small firms exist alongside large supermarket, but large supermarket are able to provide
wider range of products and achieve economies of scale. The factors affect large firms easier
to achieve economies of scale:

*Internal economies of scale – economies of scale that arise from factor inside of the firm
- It occurs when the cost of raw materials falls as they bought in large quantities.
- Large firms can afford to purchase expensive machine so they can produce in large quantities.
- Large firms are able to borrow money from banks because lower risky to repay the loan
- Large firms have ability to employ specialist.
- Risk bearing occurs large firms tend to produce a range of products and operate in many locations. They are
able to overcome this problem because the weak sale in one country can be supported by strong sales in
another.
- Large firms may be able to fund Research and Development to make innovations and being a leader in their
area of business.
- Large firms have a large advertising budget to promote their products
*External economies of scale – economies of scale that arise from the outside of the firm
- Proximity to related firms , having firms that related with the main business will bring
benefits such as an easier access to the supplier and reduce transportation cost. For
example, Indofood company produces Indomie and will benefit from having firms which
produce soybean sauce and flour.


*External economies of scale – economies of scale that arise from the outside of the firm
- Availability of skilled labour, greater supply of skilled labours can benefit the firms to
increase productivity and gain wider market size.

- Reputation of the geographical area, this provide all firms in the industry with free
publicity and exposure. For examples: Sillicon valley has a worldwide reputation as an
area for software creation, Paris with the worldwide reputation in fashion.

- Access to transportation networks – infrastructure is the main point to distribute goods

and services from producers to consumers. Better infrastructure will give competitive
advantage and efficient transportation in delivering goods and services to consumers.
Diseconomies of Scale Reasons of firms get diseconomies of scale:
- Communication Issue, large firms have many structure
it occurs when a firm gets too large, so its organisations and communication chain. So,
average cost of production start to rise as communication issue may arise and decision making may
output increases. be slow due to number of people in the communication
chain.
- A merger between firms may be unsuccessful due to a
clash culture. An example of a failed acquisition is
Microsoft and Skype due to leadership issue
- When the firm is getting larger, it may necessary to
employ more employees and this will add the average
cost of production.
- Workers within a large organisation may find it difficult to
feel part of a large firm, so this may lead to a lack of
motivation and reduce productivity
- When the firm is getting larger and operate in many
areas, controlling and coordinating issue may occur and
this can lead firms to be separated between one and
another.