1.7: Growth and evolution

2. 1.7: Growth and evolution • Introduction • Economies and diseconomies of scale • Methods of growth: internal and external • Direction of growth • Small vs. large firms • Ansoff matrix • Franchise

3. A. (i) What is growth? • The Growth of a business refers to its expansion in size and this can be measured in several ways:

4. (a) The value of the firm’s sales turnover. However larger turnover does not always mean larger profits • (b) The firm’s market share, i.e. the firm’s sales revenue as a percentage of total market sales revenue. • (a) The amount of capital employed invested or the value of assets. It is not easy to calculate the total value of assets as some assets such as goodwill have no market value

5. (d) The value of the firm’s annual profit. Although small firm cannot make very large profits, large firms can make losses. • (e) The number of employeesin the firm. However, a firm can still be big without employing many people.

6. A. (ii) Why do businesses grow in size? • There are many reasons why firms seek to grow: • (a) To earn more profit. Greater size may lead to greater profits. • (b) To gain a larger market share. Commanding a market may allow charging higher prices or driving out competitors.

7. (c) To spread riskby diversifying into new markets. Failure in one market can be compensated by success in another market. • (d) To gain power. Sometimes, directors are ambitious. They want the power and status of running a very large company. • (e) To benefit from Economies of Scale.This occurs when a firm operates on a large scale and unit cost is reduced.

8. B. Economies and diseconomies of scale • Hand out

9. C. Methods of growth • Internal growth • External growth

11. Internal growth • Organic or internal growth occurs when a firm increases production and sales using its own resources (i.e. own profits). This can be achieved by: • Changing prices to attract more customers • Increased advertising and promotion • Buying additional machineries • Opening additional branches, shops or factories.

12. Advantages of internal growth • The expansion can be planned in an efficient way. • Economies of scale can be achieved from using existing assets. • The company can use its existing staff and structure to create growth. • New business units can be started from scratch using the latest technology

13. Disadvantages of internal growth • The growth process is usually slow. • There will be less profit to distribute to shareholders as profits are being used for expansion. • There can be dilution of ownership and control as new owners are brought in • It is limited to the amount of capital available • It is an inefficient way to respond to new opportunities

14. External Growth •  External or inorganic growth takes place through dealings with other outside organizations. A firm can grow externally in different ways, mainly: - • i) Joint venture • ii) strategic alliance • iii) Merger or takeover (intergration)

15. Types of external growth • Hand out

16. D:Direction of growth • Mainly with mergers and acquisition • handout

17. E: Small vs. large organizations • Handout

18. F: Ansoff matrix • ppt