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1.6: Growth and Evolution (Appropiate Scale of Operation (owner´s…
1.6: Growth and Evolution
Increasing Scale of Operations
scale of operation
: the max output using the available inputs
Economies of Scale
: reductions in a firm's average costs of production
cost benefits rise for
5 main reasons
:
Purchasing economies
known as bulk-buying economies
suppliers offer substancial discounts for large orders
Cause: it is cheaper to process & deliver one large order then several small ones
Technical economies
large firms are able to justify the cost of flow production lines
if worked at high capacity, it offers lower unit costs
Financial economies
Cost advantages
banks show preference for loans to big businesses
interest rates are lower for big firms than for small firms
raising finance by going public is very expensive
average cost of raising finance is lower for larger firms that sell millions of dollars woth of shares
Marketing economies
marketing costs rise with the size of a business
costs don't rise at the same rate
Managerial economies
small firms employ general managers
as a firm grows it should employ specialist managers
Diseconomies of Scale
: factors that cause average costs of production to rise when scale of production increases
keeps one or few firms from being able to completely dominate
factors that increase unit costs
related to management problems
3 main causes
:
Communication problems
large-scales lead to poor feedback to workers
excessive use of non-personal communication media
communication overload
distortion of messages
Alienation of the workforce
big organisations find it dificult to directly involve every worker
workers may feel insignificant in the overall plan
is a problem due to repetitive & boring tasks
Poor coordination & Slow decision-making
business expansion leads to many departments, divisions & products
number of countries a firm operates in also increases
Large-Scale Production
there is no point where economies diappear & diseconomies appear
combined effect of economies & diseconomies
Merits of Small & Large Organisations
Small & Micro-Businesses
employ few people
low turnover
MEDIUM
51-250 employees
SMALL
11-50 employees
MICRO
10 or fewer employees
important to economies
jobs are created
wider consumer choice
create competition to avoid large businesses to exploit the customer
supply specialist goods & services
low costs due to low wage rates
Small VS Large Organisations
SMALL
:check:
managed & controlled by owner
adapt quickly to meet changing needs
offer personal sevice
easier to know each worker
low average costs due to no diseconomies
easier communication with workers & customers
:red_cross:
limited access to finance
owner has to carry burden of responsibility if no managers
may not be diverse
unlikely benefit from economies of scale
LARGE
:check:
afford to employ specialist managers
cost reductions due to large-scale production
set prices other firms have to follow
acces to finance
diverse in markets & products
afford research & development for new products & processes
:red_cross:
difficult to manage
potential cost increases due to large-scale production
slow decision-making
poor communication
divorce between ownership & control
Appropiate Scale of Operation
owner´s objectives
capital available
size of market
number of competitors
scope of economies of scale
Business Growth
Internal & External Growth
Internal
organic growth
: opening new branches, shops or factories
External
merging & taking over another business
merger
: agreement by shareholders & managers of 2 businesses to bring firms together under comon board
takeover
: a company buys over 50% of shares of another company & becomes controlling owner
horizontal integration
: integration with firm in same industry & same stage of production
forward vertical integration
: integration with buisiness in same industry but customer of existing business
backward vertical integration
: integration with business in same industry but supplier of the existing business
conglomerate integration
: merger with or takeover a business in different industry
Joint Ventures, Strategic Alliances & Franchising
Joint Venture
may lead to merger
reasons
major markets in different countires
costs & risks are shared
different companies have different strenghts
2 or more businesses agree to work together on proyect
risks
styles of management & culture are very different
error lead to blaming war
business failure of one partner puts whole project at risk
Stretegic Alliances
agreements between firms where each agrees to commit resources to achieve objectives
university
finance by business
allow specialist training courses
supplier
join to desing & produce components & materials
reduce total development time
competitor
reduce risks of entering untouched markets
actions are not anti-competitive
Franchise
business that uses name, logo & trading systems of existing successful business
separately decide legal structure
less chance of failure
advice & training offered by franchiser
Globalization
the growing integration of countries throught global movement of goods, capital & people
reductions in barriers
free-trade
: no restrictions or trade barriers to limit trade between countries
protectionism
: barriers to free trade; tariffs & quotas to protect country's domestic value
benefits
buy products from other nations
wider choice of goods & services
import of raw material allow developing economy to increase industrialisation
aditional competition for domestic industries keeps costs down
comparative advantage
: countries can specialize in products they can make
recruit workers from other countries easier
Multinational Businesses
organisation that has HQ in one country but operates in other coutries as well
most HQs are in Western European countries or the USA
Reasons
Closer to main markets
lower transport costs
better market info
Lower costs of production
lower labour rates
cheaper rent & site costs
Avoid import restrictions
no import duties to pay
Access to local natual resources
may not be available in company's main operating country
Problems
poor communication links
language, legal & culture differences may lead to misunderstandings
Impact
:check:
employment opportunities
better general quality
bring foreign currency
:red_cross:
exploitation of local workforce
pollution from plants
local competing firms
impose culture and eventually reduce it
Cecilia Martínez A01197738