1.6 Growth and 1.6 Growth and EvolutionEvolution

Scale of Operations The maximum output that can be achieved using

the available resources. This scale can only be increased in the long term by employing more of all resources.

Economies of ScaleReduction in a firm's unit (average) costs of production that result from an increase in the scale of operations.

Diseconomies of ScaleFactors that cause average costs of production to

rise when the scale of operation is increased.

Economies of Scale◦ Purchasing economies

“bulk buying” – discounts for large orders◦ Technical economies

Production lines – produce products at a reduced cost because of efficiency Computer systems – afforded by large firmsthat can absorb greater fixed costs

◦ Financial economiesBanks show preference to large corporationsLarge firms can “go public” with their stock

◦ Marketing economiesAdvertising costs for large companies can be spread over a large product line

◦ Managerial EconomiesLarge firms can higher specialists

Diseconomies of Scale

◦Communication Problems

◦Alienation of Workforce

◦Poor Coordination and slow decision making

◦Large Scale production costs

Small Business VS Large Business

Can be managed and controlled by owners

Can afford to employ professional managers

Can adapt quickly to customer needs

Cost reductions due to large-scale production

Personal service Can set prices that other firms follow

Can know your staff Access to financing

Average lower costs due to low overhead and diseconomies of scale

Risks can be spread over diversification of markets and/or products

Easy to communicate with workers and customers

Likely to afford research to develop new products/processes

What size is appropriate?

Owner's objectivesCapital availableSize of the marketNumber of competitors

How can we grow?

Internal Growth External Growth

Mergers Takeovers

Business Expansion

Growth

Internal GrowthCompanies expand by creating new offices, opening new stores, growing existing business

External GrowthMerging with other firms, or acquiring other firms through purchase

Types of External Growth

MergerWhen companies agree to combine and

operate under one board of directors with shareholders in both businesses owning the newly merged company.

TakeoverWhen a company buys over 50% of the

shares of stock to gain controlling interest

How do we integrate?

Gas Station

Petrol Distributor

Whole SaleDistributorWhole SaleDistributor

Refinery

Drilling Company

Supply Chain

Gas Station

Integration Options

Horizontal – same industry and same stage of production

United Airlines & Continental AirlinesForward Vertical – same industry but a customer of the

existing business. Manufacturer owns distribution company and retailers.

Comcast Cable owns NBC TelevisionBackward Vertical – same industry but a supplier of the

existing business. Manufacturer owns suppliers; helps control and stabilize the supply chain.

Car manufacturer owns tire, glass, and metal fabricator.

Conglomerate – merger or takeover of a business in a different industry

GE owns finance, energy, technology, and consumer

companies

Integration Options

Horizontal – same industry and same stage of production

United Airlines & Continental AirlinesForward Vertical – same industry but a customer of the

existing business. Manufacturer owns distribution company and retailers.

Comcast Cable owns NBC TelevisionBackward Vertical – same industry but a supplier of the

existing business. Manufacturer owns suppliers; helps control and stabilize the supply chain.

Car manufacturer owns tire, glass, and metal fabricator.

Conglomerate – merger or takeover of a business in a different industry

GE owns finance, energy, technology, and consumer

companies

Types of Businesses

Franchise

A business that uses the name, logo, and marketing methods of the franchiser.

Example: McDonald’s, Dairy Queen, Wendy’s, Subway

NOT: Walmart, Target, Harris Teeter

Joint Venture

Two or more businesses agree to work closely together to further a common interest.

Costs are sharedDifferent companies have different

strengthsDifferent market shares that could be

combined

Examples of Joint Ventures

DowCorning Dow Chemical with Corning Glass WorksDow Chemical combined their chemical technology with Corning Glass Works glass products. Products: Solar Panels, “teflon” coatings

Sony Ericsson Sony – A Japanese electronics firm partnered with Ericsson a Swiss telecommunication company.Products: mobile phones

MillerCoorsSabMiller and Molson Coors Brewing Co. partnered to better compete with Anheuser-Busch InBev – a Dutch company- 7/2008

Ice Cream Partners USANestle – experience in specialty foods partnered with Haagen-Dazs an ice cream company to expand their markets and growth opportunity

Strategic Alliance

Agreements between firms to commit resources to achieve an agreed set of objectives

University research – NC State has Engineering campus with many companies represented.

Supplier – design new materials for the manufacturer. Soho Natural Soda worked with Anheuser-Busch for distribution.

Competitor – reduce risks entering a market that neither currently operate. Motorola And In-Focus created high performance video displays.

What is Globalization?

The growing trend towards world-wide markets in products, capital and labor, and unrestricted by barriers.

Why is this possible?

Increased international trade as barriers are reduced

Growth of multinational businesses in all countries as freedom of capital investments is allowed

Movement of workers between countries

Why would you become a multinational company?Closer to your markets means: Lower transportation costs Better market information – you are

closer to your customers May be considered a local company and

gain customer loyalty

BMW builds cars in South Carolina.

Why would you become a multinational company?Lower costs of production: Lower labor rates – compared to more

developed economies Cheaper rent / cost of production

facilities Government tax incentives to encourage

development

Why would you become a multinational company?Avoid import restrictions By producing locally you avoid import

duties (taxes) and other import restrictions

Why would you become a multinational company?Access to local natural resources These resources may not

be available in your country or very limited.

Why would you become a multinational company?Take advantage of expanding markets Increased sales, profits, and growth

opportunities