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Growth and Evolution
Economies of Scale
The fall in average costs of production as a firm increases its size
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Total costs are calculated by adding fixed costs to variable costs
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Therefore the high fixed costs can be spread over the large scale of output, thereby
reducing average costs
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Managerial Economies
Large firms can hire specialist managers that can ensure higher productivity and
efficiency, therefore reducing the average costs
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Workers can be more skilled and experienced in one particular
aspect over most workers, thus raising productivity and reducing average costs
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Purchasing Economies
When large firms buy resources in bulk, they often get discounts that reduces
average costs, so the higher the order, they greater fall in average costs
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External Economies of Scale
Technological Progress
The progress in the entire economy of technology increases the productivity of the
entire industry
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Skilled Labour Availability
If more skilled labourers are available in an economy, it would cut costs in looking
extensively for suitable options, as well as increase the overall productivity
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They could also
charge higher prices if the country is well known for the products
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Overspecialisation
If firms become too specialised, it might cause problems such as boredom of workers,
which leads to lower productivity and efficiency
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It might
also affect communication
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External Diseconomies of Scale
Examples:
Increasing Market Rents
This adds costs to the business without actually affecting the output positively
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Firms might have to offer larger wages and financial rewards if there are too many
competitors, to keep their workers and possible gain new ones from the competitors
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Traffic Congestion

If many businesses are located in one area, it might cause heavy traffic, which
increases transportation costs among others
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And of course, to gain higher profits
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The methods involve:
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Lower prices to increase sales
Effective promotion, to raise awareness and brand image
Producing improved and/or better products
Sell with a wider distribution network to reach more customers (ex: overseas)
Offer credit to incentivise customers to buy more
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Improved training and development (T&D) to create more skilled workers
Providing overall value for money

Advantages
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Better control and coordination than relying on external resources
Comparatively inexpensive, only require retained profits
Maintains corporate culture, avoiding disagreements/incompatibility with
external firms
Less risky and the easiest option
Encourages brand and customer loyalty

Disadvantages
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Diseconomies of Scale might be triggered
Creates a need to restructure, ex: a sole trader becomes public
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Slower Growth, and shareholders might prefer speed over low risk
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General benefits include:
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Faster than internal growth
Quick way to reduce competition
Greater market share and power
Businesses can share ideas after merging, creating new ideas and skills
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Types of Mergers/Aquisitions
Horizontal Integration
The most common type of integration, where two businesses in the same stage of
production merge together
Advantages:
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Increased market share
Might enable Economies of Scale
Reduces competitors in the industry

Vertical Integration
Where two business in different stages of production merge together
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Advantages:
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Assured supply of resources/outlet for product
Can prevent selling competitor’s products or supplying them with raw
materials
Absorbs the profit margin
Reliable method of researching consumer tastes

Lateral Integration
Integration between firms that have similar operations but do not directly compete
with each other
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Conglomerate Integration
When two business in completely different industries merge together
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This means that the businesses come together to create a new legal
entity
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Advantages
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Synergy (sharing of resources and ideas)
Spreading of costs and risks
Enable easier entry to foreign markets
Relatively cheap (compared to takeovers)
Competitive advantages (reduced competition , increased competitiveness)
Exploitation of local knowledge
High success rate

Strategic Alliances

Quite similar to joint ventures in the way that resources, costs and ideas are shared,
however they do not form a separate legal identity
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In return,
the purchaser of the license (franchisee) a license fee to the parent company
(franchisor)
Benefits for Franchisor

Drawbacks for Franchisor

Rapid growth is possible, without risking high
amount of money

Huge Risk, as franchisee can
damage reputation and image

Don’t pay for running costs such as salaries and
rents etc
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Franchisee keeps all the profits
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training and financial advice

Franchisees have to pay share of sales
revenue to the franchisor

Globalization

The growing integration and interdependence of the world’s economies, causing
national economies to integrate towards a single global economy, where consumers
have increasing similarity of habits and tastes
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Increase in customer base, especially for MNCs
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External growth opportunities increase
Increased sources of finance
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Multinational Companies
MNCs are organizations that operate in two or more countries
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Spread risks

Tariffs- tax on imports, adding price to foreign goods
Quotas- Quantitative limits imposed on the sale of imports, resulting in lower supply
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A host country is any nation that allows MNCs to set up in its country
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Disadvantages
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Can cause unemployment, as they pose a threat to domestic firms, forcing
some to close or become less competitive, both leading to job losses
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Lack of Social Responsibility leading to resource depletion among others
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