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1.4 Growth and the impact of globalisation. By the end of this chapter you should be able to: Apply concepts of economies and diseconomies of scale to business decisions Evaluate relative merits of small versus large organisations Explain the difference between internal and external growth.

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1 4 growth and the impact of globalisation

1.4 Growth and the impact of globalisation

By the end of this chapter you should be able to:

Apply concepts of economies and diseconomies of scale to business decisions

Evaluate relative merits of small versus large organisations

Explain the difference between internal and external growth.

economies and diseconomies of scale
Economies and diseconomies of scale

As businesses grow in size they begin to benefit in a number of ways from falling average costs. They can spread their costs such as rent, over a wider range of units and therefore the average costs begin to fall. This is economies of scale.

Task – I want each of you to pick a business and list some examples of where they could become more efficient and benefit from economies of scale.

As businesses grow in size there is a point where average costs begin to rise – inefficiency begins to appear – because of diseconomies of scale. This could happen for these reasons:

  • Communication breakdowns
  • Decision making process is slowed
  • Motivation drops through feeling of no importance
should a business grow or not
Should a business grow or not?

Why a business should stay small:

  • Small businesses can have a friendly atmosphere
  • May be more manageable levels of debt
  • Different skills are needed to run a small business and lead a large organisation.

Why a business should grow:

  • Business may become less dependent on one product, for example they might start exporting
  • Career opportunities grow and new managers appear
  • If business becomes tougher, sacking people is less of a concern
  • Owners can increase their wealth more significantly in a large business
  • ‘You can’t stay still’, a small business may be squeezed out of the market.

Task – Should the businesses in the following situations expand or stay small scale? Explain you reasons.

  • A scientist in Brazil discovers a local plant makes a good headache cure and he grows and sells it to a local shop. He is 51.
  • A café owner and shopkeeper in a small rural town in France is wondering whether to buy another café in the next town.
  • A director of a popular local newspaper is thinking of turning it into a national paper.
  • A diving instructor is thinking about expanding her business and hiring a second instructor.
e xternal growth
External growth
  • Joint Ventures – A business can work with a partner to pool resources and develop business opportunities. One business may have a skill in producing one product and the other business in a complementary product; if they produce together they will win most of the market as competitors cannot produce both. In the UK, RBS plc and Tesco plc formed a joint venture in personal banking. RBS had the expertise and Tesco had the retail customers.
  • Strategic Alliances – ‘Oneworld’ is an alliance between American Airlines, British Airways, Cathay Pacific, and several others. Aims of this are to make transfers speedier when using each other’s airports, share ticketing and reduce costs for customers through economies of scale.
external growth continued
External growth continued
  • Mergers and Acquisitions – Buying a competitor, supplier, or customer can increase the pace of growth. If a business buys a customer or supplier we call this ‘vertical integration’ whereas if a business buys a competitor, this is ‘horizontal integration’. If two companies of equal size join together we call it a merger; if the two are very different in size it’s usually an acquisition.

There are risks with acquisitions. To start with, organisations often pay too much to buy a business. Problems that arise could be differences in culture or unhappy staff.

Benefits emerge through cost savings associated with economies of scale.

Horizontal integration

Vertical integration

Suppliers

Competitors

Customers

by next week
By next week
  • Create your own case study demonstrating an example of external growth.
  • Use business news websites to investigate mergers and acquisitions.
  • Evaluate the acquisition in terms of:
    • Potential risks.
    • Potential advantages and reasons to do it.
    • Display findings in a SWOT analysis.
    • Overall decision on whether the advantages out way the risks.
british airways owner iag to buy bmi
British Airways owner IAG to buy bmi

http://www.guardian.co.uk/business/2011/nov/04/ba-buy-bmi-virgin-atlan