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1.6 Growth & Evolution

Scale of Business

Most output that can be made with available resources
Scale of Business can be increased by increasing inputs
Producing more ≠ Increasing Scale of Business
- Only refers to max output not efficiency of production

Economies of Scale

Improves efficiency of production, marketing and development
- Cost per unit = (total variable costs + total fixed cost) / units produced
- Cost per unit decreased
- Total fixed cost spreads over an increased units produced
- Total variable costs may increase disproportionally less than units produced
  - Lowers price or increases profit
    - - Customers become happier
        increased Market share
      - Increased profit

- - - Shareholders become happier
    - Increased budget for R&D, marketing, etc.

Diseconomies of scale

Average unit costs rise as the business grows larger
Diseconomies of scale tend to occur because it is more difficult to manage a large business than a small one
Large businesses may experience issues such as high supply and low demand leading to higher overhead costs or supply chain issues
Smaller businesses are more likely to be able to handle and balance supply and demand issues better due to their smaller scale

Internal Economies of Scale

Purchasing
- - Whole sale discounts
  - Examples:
    - In 6 pack of coke, each individual coke costs less
Technical
- - Larger businesses have a large workforce
    - Workers may have new skills to bring to the business
  - Businesses has access to a wide variety of skills
Financial
- - Banks are more likely to give loans
  - Providers more likely to allow for debt
  - Business likely has more capital to expend
Marketing
- - Advertising products becomes more efficient due to larger volume
Managerial
- - Larger firms are more likely to be able to hire more managers
Risk Bearing
- - Larger businesses have a larger amount of cash to fall back on even if a product fails
    - Samsung Note 7 disaster
      - Despite this massive failure, Samsung was able to relaunch the Note 7 and even after it failed a SECOND TIME they did not suffer significantly in the long run.

External Economies of Scale

1. Technological Processes:

- - Increases the productivity within the industry
    - - E.g internet has allowed e-commerce

2. Improved Transportation Networks:

- - Helps to ensure prompt deliveries.
  - Employees who are late to work due to poor transportation links cost the business money.

3. Access to Skilled Workforce:

- - Can easily recruit other workers trained by other firms in the same industry

4. Ancillary Firms:

- - Can be located nearby large firms to provide them with service/equipment they require

Internal Diseconomies of Scale

Becoming too large of a business

As a firm becomes larger, managers may lack control and coordination as the span of control is likely to increase which causes communication problems
Workers of larger organizations feel alienated which can harm staff morale

Types of Business Growth (Case Examples)

Mergers & Acquisitions

Franchising

Strategic Alliances

Joint Ventures

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