Unit 1.5 - Growth and Evolution

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previous unit : stakeholders
Next unit : Multinational Companies (MNCs)

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Economies of Scale

What is Economies of Scale

• Occurs when the average cost of production decreases as the output increases
• It happens due to improvement in efficiency

What is Diseconomies of Scale

• Occurs when the average cost of production increases as the output increases
• It happens due to a decrease in efficiency

[ Internal ]

Technical

• Large business can buy costly and large-sized machinery and technology which is faster and / or more efficient and hence can produce higher output
  
• This decreases the average cost of production as the cost of machinery / technology is distributed over a large size of output

Financial

• Large firms require higher levels of finance hence they can negotiate a cheaper interest from the lender
  
• Large firms have lower risk of failure and hence lenders may be more willing to give a lower rate of interest

Managerial

• Large firms have specialization of the managerial and labour level. Manager may specialize in marketing, finance and labour in their respective skill set.
  
• Specialisation increase productivity / efficiency which decrease average cost of production

Purchasing

• Large firms place larger orders with the suppliers and can negotiate better terms like higher discount, faster delivery etc.

Marketing

• Large firms may be able to negotiate lower sales commission, lower credit card period, lesser profit margin from their customers.
  
• They are able to spread the communication cost across the output.

[ External ]

Infrastructure

• Improved infrastructure of the economies may lead to lower transportation costs, increased access to utilities and better connectivity

Education

• Improved education level and training in the locality may increase the productivity of labour

Clustering

• As businesses cluster together in the area, all the business benefit from access to specialized labour and other services

Technology

• Growth in the economy may lead to improved technology for supplier which would reduce the cost of raw materials

Diseconomies of Scale

[Internal]

Communication and Coordination

• As firms become larger, communication may not reach to all intended parties in the right time
  
• Coordination among employees / department may be difficult as different managers have different styles and preferences

Lack of Motivation

• Large firms may have increased level of hierarchy.
• This may make it hard for employees from interacting with their managers and the owners on a regular basis.
• This may demotivate them, which can reduce employee efficiency and the efficiency in the operation of the business.

Complancency

• Large firms may be complacent with their ways of working and may not identify threats or opportunities.
• Smaller rival firms may be able to do things better than the larger ones.

[External]

Higher Inflation

• There may be a high rate of inflation causing the resources to be costlier which may increase rental costs and salaries

Higher Taxes

• Higher trade protection in the form of import tax may result in higher cost of resources. Can be any tax.

Reasons for a business to grow

• Success is usually associated with growth and it’s highly satisfying for the owners / investors to grow their business
  
• A large business:
  • Is financially more sustainable and has lesser risk of failure
    
    
  • Benefits from economies of scale and is able to influence suppliers, customers, lenders, etc.
    
  • Attract potential investors and human

The two types of Growth

Internal Growth

• Refers to growth when the business uses it’s internal resources to grow
• Use retained profits and owners’ personal funds as a source of finance
• BM term - Organic Growth

External Growth

• Refers to growth when the business grows by taking large financial capital or resources from parties outside the business like other business or large investors
• BM term - Inorganic Growth

Differences between Internal and External Growth

Properties	Internal	External
Speed of growth	Relatively Low	Relatively High
Loss of Ownership	Less	More
Change in work culture	Less	More
Access to talent and ideas	Less	More
Causes of Failure	Lack of scale	Mismatch of culture
	Increased Competion	Failure to exploit