IB Business and Management

IB Business and Management Unit 1.7 Growth and Evolution Pages 112-136

HW: Due next class • Important and difficult chapter, please keep up with reading • Read p.112-116 • Review questions 1-4 on pg. 135

1. Focus Questions • 1. What is the difference between economies and diseconomies of scale? • 2. What are the merits of small vs. large organizations?

2. An Overview • What is a continual aim of a business? • To grow. • What does growth refer to? • The expansion of size of its operation. • How can an organization’s growth be measured? • Sales turnover = sale revenue • Market share • Capital employed • Employees • So, why do businesses seek growth? • Benefits of economies of scale • Market share / market standing • Survival in an industry • To spread risks by diversifying. • And in the long run…$$$ PROFIT $$$...

3a. Economies & Diseconomies of Scale • As discussed before, a major reason to grow is to benefit from economies of scale. • What does economies of scale refer to? • The lower average cost of production. • An improvement in productive efficiency. • Operating on a larger scale. • Can you give examples of economies of scale? • Sometimes economies of scale refers to increasing returns to scale. • A firm can gain a competitive cost advantage over smaller firms. • How is this possible? • Lower average cost = lower prices being charged to customers+ higher profit margin made per unit. • Confused yet??? …

4. Internal Economies of Scale • There are two categories of economies of scale: • You guess it…internal and external • Internal economies of scale: within the company’s control. • External economies of scale: beyond the control of the company. • With regards to the internal economies of scale, the more you produce the more you will be able to lower your average costs of production.

This is possible due to several factors: • Technical economies: using sophisticated machinery (Phillips, ….. ) • Financial economies: lower rates when borrowing (Dell, Nissan,…) • Managerial economies: specialization leads to higher productivity 1+1 = 3 • Specialization economies: division of labour, mass production.

Marketing economies: global marketing economies, selling in bulk…. • Monopsony economies: strong buying power, gain big discounts .. CC McD • Commercial economies: buying resources in bulk (purchasing economies / buying economies) (Newspaper, Clothes, furniture, etc.) • Risk-bearing economies: where conglomerates, have a diversified portfolio of products. ……………

5. External Economies of Scale • External Economies of Scale: • arise outside the firm due to its location or growth. • Four factors which may create external economies of scale: • Technological progress – increases trading; e-commerce. (OKBuy, Taobao, TMALL, ebay……) • Improved transportation and communication networks – things arriving on time. (HMMM .. that is why many subways in Beijing. ) • Better trained labor – training programs, education in an area. • Regional specialization – highly regarded and trustworthy reputation. …

6a. Diseconomies of Scale • Internal Diseconomies of Scale: • Is where you can no longer exploit economies of scale. • Also called decreasing returns to scale, result from higher unit costs as a firm increases the size of its operation. • There are several reasons for this: • Lack of control and coordination – managers are no longer able to handle the demands of a larger company. • May harm staff morale. • Poorer working relationships – with a larger workforce, senior management will become detached with the workers. • May harm staff morale and productivity. • Workers becoming slack – larger workforce, due to specialization, may become bored and less productive. • Amount of bureaucracy – will make communication more difficult, may reduce productivity. • Complacency – being a market leader may lead to reduced productivity and raise unit costs. • Large firms will prefer to grow via franchising. Do you know of any?

6b. Diseconomies of Scale • External Diseconomies of Scale: • Refers to an increase in the average costs of production. • They occur when there are too many firms in the market. • Unit cost of production increase for all businesses in the industry. • For example: • Too many business in one area. • Will result in increasing market rents because of landing becoming scarce. • Traffic congestion. • Delays in delivery, will increase transportation costs. • Supply of local labor. • Since workers have a choice where to work; business will have to offer higher wages. • This will increase costs, not necessarily increase output.

6c. Diseconomies of Scale • So, how can we deal with these diseconomies of scale? • Well, firms will have to take several measures to protect their competitiveness. • They have two options when dealing with diseconomies of scale: • 1. reduce their level of output. • 2. remove productive inefficiencies. • For example: • If workers are slacking: • Try outsourcing. • Performance-related payment systems. • Motivational strategies (training, empowerment, and teamworking).

7a. Small vs Large Organizations: • All businesses have an appropriate scale of operation. • So, how can the size of a market be measured? • An increase of any of these would result in or suggest that the firm is getting larger.

7b. Small vs Large Organizations: • If your firm becomes larger you may also enjoy economies of scope. • What are economies of scope? • When it is cheaper to produce a range of related products. • So, how does this differ from economies of scale? • Well…refers to cost savings from producing the SAME product on a larger scale. • Economies of Scope: • Give businesses diversity. • Gives businesses the opportunity to become active in other areas. • Can you give me examples of economies of scope? • When Amazon started out what did they first sell? • Books!!! • What are they selling now? • Books, CDs, DVDs, you name it 

7c. Small vs Large Organizations: • What are some other benefits of being large?

7d. Small vs Large Organizations: • What are some benefits of being small? • Remember being small doesn’t mean you can not survive and flourish.

7e. Small vs Large Organizations: • So, what is the best or optimum size? • Well, it will depend on its internal structure. • Its costs and size of the market. • It will also depend on your aims and objectives. • REMEMBER: • If a firm operated beyond its optimum size the diseconomies of scale will be experienced. • And if this occurs…what will happen? • Your unit costs will increase and… • will REDUCE your $$$ PROFITS $$$. • Which is NOT GOOD • Also, a firm may not run at its financially optimum level either. • Due to a lack of resources or demand. • No finances = no expansion = lack of production capacity • Even if you are producing more…if there is no demand…guess what??? …

Group Work: Due end of class • 1) Explain what economies and diseconomies of scale may occur for: • A) the local newspaper shop • B) A government run bus company • C) A state controlled airline 2) What might happen to average costs if a business located in Argentina sets up a second factory in China? Explain the possible economies and diseconomies of scale from this decision

IB Business and Management Unit 1.7 Internal (Organic) Growth / External Growth Pages 119-128

1. Focus Questions • 1. What are the internal growth strategies? • 2. What are the external growth strategies?

2. Internal Growth • Is one method of business growth, also known as organic growth. • It occurs when you use the firm’s resources to increase the size of its operation. • Thus increasing its sales revenue. • This growth is financed through the profits of the business and not from outside sources.

3a. External Growth • Business growth through M&A’s (mergers and acquisitions). • Also called amalgamation or inorganic growth. • …

3b. Can Grow in Several Ways : • Business can grow organically or inorganically.

Benefits: Better control and coordination. Inexpensive. Maintain corporate culture. Limitations: Diseconomies of scale. Overtrading. Need to restructure. Dilution of control and ownership. … 3c. Benefits and Limitations of Organic Growth

3d. External Growth • Inorganic growth, which comes from M & A’s • Benefits of external growth: • A faster way to grow. • Quick way to reduce competition. • Greater market share. • Can generate new ideas, skills and customers. • Can spread risk to different markets. • The only disadvantage is the cost. • Take over bids and be in the billions of dollars. • …

4. Joint Venture • Other methods: • Joint Ventures: • When Two or more businesses decide to split the costs, risks, control and rewards. • What are the disadvantages? • 1. rely on the resources of your partner. • 2. Dilution of brands. • 3. Spending lots of money to develop brands. • 4. Organizational culture clash. • See case study 1.7.4 on page 124. • Famous JV’s • CocaCola – San Migual Philippines • BMW with Brilliance auto China • Anshan with Stemcor

4a. Joint Ventures Advantages:

5a. Strategic Alliances • Similar to joint venture. • Where two or more businesses form a business venture. • The share the cost of production, operations and marketing. • They remain independent organizations. • So, how are they formed? … • Some Famous Alliances : • Chinese Telecom • Taiwan TeleCompanies • To step in new market

5b. Strategic Alliances • Investigating and establishing the rationale and objectives of alliances • Analyzing the potential of different partners • Determining each members contribution and reward. • Initiating the operations and contract with all parties. Four Key Stages

5b. Strategic Alliances • The main goal of a strategic alliance is to gain synergy. • So, what is synergy? How can it be beneficial to a company? • From Webster: “ a mutually advantageous conjunction or compatibility of distinct business participants or elements (as resources or efforts)” • Such as: • Pooling resources. • Expertise. • Financial support. • Gain economies of scale. • Value added services. • Wider channels of distribution. • …

Activity • China Railway is developing very fast in the High speed rail network. It has given them an opportunity to develop the high speed rail network in African countries. • Considering the fact that High speed rail are still in first phase of operation in China, which option would be the best for Chinese High speed rail development companies, to join an European alliance of high speed rail development, or making a JV with skilled European high speed rail manufactures?

6a. Mergers and Takeovers • M & A’s = Mergers and Acquisitions. • The Merger: • The combination if two or more businesses form one single company. • So, why merge? • The new merger will usually bring about economies of scale and larger market share. “BP and Amoco” • The Takeover (Acquisition): • Occurs when a company buys a controlling interest in another company. • That means; buying enough shares to hold a majority stake. • Used as a method of business growth. Aggressive nature, Google Youtube, Heineken……. • Any Chinese Names??????? • See Box 1.7a, pg. 125 Reasons for Takeovers. • … Taken from: http://30gms.com/images/uploads/sharks.jpg

Black knight White knight • Purchasing company in a hostile takeover bid. • Target company may seek an alternative by amalgamation. • A more likely to be a friendly partner or bidder for the target company. • The one quite the higher price is going to get the controlling power in a company

6b. Mergers and Takeovers

6c. Mergers and Takeovers

6d. Mergers and Takeovers

Activity • What are the strategic steps a business can take if finds itself in a position of Take over? • Discuss in group of 4 and conclude in 60 - 70 words

6e. Mergers and Takeovers • They are very common in today’s business environment. • With increasingly competitive markets, M & A’s are used to maintain growth and competitiveness. • Stock markets, deregulations, and globalization have made M & A’s more attractive. • The success of M & A’s depend on several factors such as: • The level of planning. • Communication to shareholders of the benefits. • Aptitudes of senior management. • Negotiation skills are important to handle problems that arise. • Regulatory problems. • Government interference, stopping a company from having too much monopoly power  • Running into diseconomies of scale. • A demerger might take place (selling off a major part of a company’s business). • …

6f. Mergers and Takeovers • Management Buy-out (MBO): • A defensive strategy to combat a hostile takeover. • It involves the management team of the target business buying shares in the company to become the owners, thus preventing the company from being taken over. • The team can also seek financial assistance from venture capitalists. • This strategy can save jobs. Your job  • Brand Acquisition: • Instead of completely taking over a company, you may buy one of the brands from the firm. • Why would firms sell off one or more of their brands? • Maybe they have a liquidity problem ; they are short on cash that it jeopardizes the survival of the firm. • May also want to demerge or feel that the brand no longer suits the corporate image. • …

IB Business and Management Unit 1.7 Franchises Pages 128-136

1. Focus Questions • 1. What is a franchise • 2. What is the Ansoff Matrix and how is it used? • …

2a. Franchises • What is a franchise? • A form of business ownership. • You buy a license to trade using another firm’s name, logo, brands, and trademarks. • So, how does one buy into a franchise? • The franchisee (the purchaser), pays a license fee to the parent company; the franchisor. • The franchisee pays a royalty payment. • Used as a means of growth. • …

2b. Franchises • The benefits of franchising as a method of growth for the franchisor. • Pg. 129 read • …

2c. Franchises • The Advantages for the franchisee • Pg. 129 read • …

2d. Franchises • The pitfalls of franchising to the franchisor. • Pg. 129 read • …

2e. Franchises • The disadvantages to franchisees • Pg. 129 read • …

Activity • Go for Question 1.7.6 on page 130

3a. The Ansoff Matrix • Developed in 1957, it is an analytical tool. • Helps managers to devise their products and market growth strategies. • There are four growth strategies… • …

IB Business and Management