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1.7 Growth and evolution 1.9 Globalization. Norma Balderas Ana Marroquín Verónica Hinojosa. 1.7 growth & and evolution. 1.7 growth & and evolution. Economies and diseconomies of scale.
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1.7 Growth and evolution1.9 Globalization • Norma Balderas • Ana Marroquín • Verónica Hinojosa
Economies and diseconomies of scale • The term scale in business means size. Large-scale businesses use more resources and produce more output. They also have higher turnover, enjoy lower unit costs and generally make larger profits. • Productive Efficiency: The average cost per unit of output is at its lowest. • Economies of Scale: Range of output over which average costs fall as output rises.
Fig. 1 page 524 Q* represents the MINIMUM EFFICIENT SCALE and the business is then said to be productively efficient.
Internal Economies of Scale • Internal Economies of Scale are the benefits of growth that arise within the firm. They occur for a number of reasons: • Purchasing and marketing economies: Buying raw materials and components in bulk. Administration costs do not rise in proportion to order. • Technical economies: Larger plants are often more effective. Principle of increased dimensions. Law of multiples: machines that work in unison. • Specialization and managerial economies, if a business employs specialists in each field, efficiency may improve and average costs may fall. • Financial economies, Large firms have advantages when they try to raise finance. They will have a wider variety of sources from which to choose. • Risk bearing economies: Diversify to reduce risk.
External Economies of Scale • External Economies of Scale are the reductions in cost which any business in an industry might enjoy as the industry grows. They’re more likely to arise if the industry is concentrated in a particular region. • Labor: Training costs may be reduced if workers have gained skills at another firm in the same industry. • Ancillary and commercial services: Wide range of commercial and support services can be offered. • Co-operation: with other firms. • Disintegration: Production is broken up so that more specialization can take place.
Diseconomies of Scale • Average costs rise as output rise. • Internal Diseconomies of Scale: Most caused by the problem of managing large businesses. • Communication and co-ordination problems. • Motivation issues and poor relationships. • Technical diseconomies. • External Diseconomies of Scale: Overcrowding in industrial areas. For example when the price of land, labor, services, and materials might rise as firms compete for a limited amount.
Factors Influencing the Scale of Operation • The scale of operation differs widely from industry to industry. The reasons why they differ are related to the sources of economies of scale. • Technical economies • Specialization • Purchasing economies • Marketing economies
Business Size • A business might be measured by: • Turnover • The number of employees • The amount of capital employed • Profit • Market share • Market capitalization • Reasons for growth: • Survival • Gaining economies of scale • To increase future profitability • Gaining market share • To reduce risk
Methods of Growth • Internal Growth: When a business expands without involving other businesses. Organic Growth means that the firm expands by selling more of its existing products. Internal growth is likely to take longer. • External Growth: Acquisition, takeover or merging.
Reasons for Mergers and Takeovers • Exploit synergies: Synergies may arise from economies of scale, the potential for asset stripping, the reduction of risk through diversification or the potential for gains by management. • Quick and easy way to expand the business. • Buying a business is often cheaper than growing internally. • Way of using extra cash. • Mergers take place for defensive reasons: Consolidate its position in the market. • Entry into foreign markets. • Asset stripping.
Takeovers • Takeovers amongst public limited companies can occur when one business buys 51% of the shares. When a takeover is complete, the company that has been “bought” losses its identity and becomes part of the predator company. • Private limited companies cannot be taken over unless the majority shareholders invite others to buy their shares. • Takeovers of public limited companies often result in sudden increases in their share price.
Hostile and Friendly Takeovers • A hostile takeover means that the victim tries to resist the bid. Resistance is usually co-ordinated by the board of directors. • A takeover may be invited and the new company in control is sometimes referred to as the “white knight”. • Private limited companies cannot experience a hostile takeover.
Asset Stripping • Sometimes, takeovers result in asset stripping. • The asset stripper aims to buy another company at a market price which is lower than the value of the firm’s total assets. It then sells off the profitable parts of the business and closes down those which are unprofitable.
Reverse Takeovers • Reverse Takeovers usually occur when a smaller company takes over a larger company. • They tend to be friendly. • The larger company might allow this because of the smaller company’s expertise or future potential. • To obtain a stock market listing.
Mergers and Economies of Scale • Examples are: • The elimination of duplicated resources. • The reduction of risks. • The spreading of the fixed costs of production. • The ability to sell a wider range of products because of a wider sales network. • The fact that larger businesses are in a stronger position to negotiate with suppliers and can negotiate to reduce prices. • The fact that merged businesses may have complementary assets.
Joint Ventures and Alliances • A joint venture is where two or more companies share the cost, responsibility and profits of a business venture. The financial arrangements between the companies involved will tend to differ, although a many involve a 50:50 share of costs and profits.
Joint Ventures and Alliances • Advantages: • Greater turnover. • Both companies keep their identity. • Business can specialize in a particular aspect of the venture in which they have experience. • Less expensive than takeovers. • Joint ventures are friendly. • Competition may be eliminated. • Disadvantages: • There may be control struggles. • Disagreements over management. • Profit split between investors.
Joint Ventures and Alliances • Alliances may take looser forms than joint ventures. They are usually for three reasons: • Marketing. • Research and Development • Information • These may be seen as forward vertical integration.
Demerging • A demerger is where a company sells off a significant part of its existing operations. A company might choose to break up to: • Raise cash to invest in remaining sections. • Concentrate its efforts on a narrower range of activities. • Avoid rising costs and inefficiency through being too large. • Take advantage of the fact that the company has a higher share valuation when split into two components than it does when operating as one.
Franchises • The franchisor is a company which owns the franchise. It allows another business, the franchisee, to use its business ideas and methods to return for a variety of fees. • Franchisor to franchisees: • Gives a product that is already tried and tested in the market place • Provides a recognized brand name which costumers should recognize and trust. • Provides a start-up package • Provide materials to use to make the product • Provide marketing support • There should be an ongoing training • Operate exclusive area contracts. • The brand is developed by the franchisor
Franchises • Franchiseetofranchisor: • Therewillbeaninitialstart-up fee • Charge a percentage of sales • Franchisorswillalsomakeprofitonthesuppliestheyselldirectly • Feechargedformanagementservicesfor training
Ansoff Matrix • The Ansoff Matrix is a useful tool for businesses aiming for growth. Four possible marketing strategies to achieve growth are revealed by the Ansoff Matrix.
Globalization • Istheintegration of theworld’seconomy. • Factorsaffectingglobalisation: • Technologicalchange • Cost of transportation • Cost of communication • Deregulation (removal of foreignrestrictions) • The liberalisation of trade • Consumer tastes • Emergingmarkets
Multinational Companies • Are companies which have significant production or service operations in at least two countries. • Most multinational operate largely in developed countries. This is where their shareholders, their headquarters, their markets and their production facilities are located.
Multinational Companies • Reasons for multinational companies to exist: • Economies of scale • Knowledge and innovation • Branding and marketing • Market and political power • Advantages: • Home countries gain international competitiveness • Transfer of capital • Transfer of knowledge • Employment • Taxes • Consumer choice • Exports • Economic growth
Multinational Companies • Disadvantages: • Lack of accountability • Loss of national identity • Footloose capitalism • Destruction of the environment • Exploitation of poor countries
Noam chomsky
