Introduction

• Scale of operation: maximum output that can be achieved using the available inputs (resources) - this scale can only be increased in the long term by employing more of all inputs.

Increasing the scale of operations

• Economies of scale: reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations.

  • Reasons for the cost benefits to arise:

    • Purchasing economies

    • Technical economies

    • Financial economies

    • Marketing economies

    • Managerial economies

• Diseconomies of scale: factors that cause average costs of production to rise when the scale of operation is increased.

  • Causes of management problems:

    • Communication problems

    • Alienation of the workforce

    • Poor coordination and slow decision-making

• Large-scale production - unit costs

Merits of small and large organizations

• Potential advantages of small and large businesses

  • Small businesses:

    • Can be managed and controlled by the owner(s)

    • Often able to adapt quickly to meet changing customer needs

    • Offer personal service to customers

    • Find it easier to know each worker and many staff prefer to work for a smaller, more “human” business

    • Average costs may be low due to no diseconomies of scale and low overheads

    • Easier communication with workers and customers

  • Large businesses:

    • Can afford to employ specialist professional managers

    • Benefit from cost reductions associated with large-scale production

    • May be able to set prices that other firms have to follow

    • Have access to several different sources of finance

    • May be diversified in several markets and products, so risks are spread

    • More likely to be able to afford research and development into new products and processes

• Potential disadvantages of small and large businesses

  • Small businesses:

    • May have limited access to sources of finance

    • May find the owner(s) has to carry a large burden of responsibility if unable to afford to employ specialist managers

    • May not be diversified, so there are greater risks of negative impact of external change

    • Unlikely to benefit from economies of scale

  • Large businesses:

    • May be difficult to manage, especially if geographically spread

    • May have potential cost increases associated with large-scale production

    • May suffer from slow decision-making and poor communication due to the structure of the large organization

    • May often suffer from i divorce between ownership and control that can lead to conflicting objectives

What is an appropriate scale of operation?

• Business owners must weigh up and assess:

  • Owners’ objectives

  • Capital available

  • Size of the market the firm operates in

  • Number of competitors

  • Scope for economies of scale

Business growth

• Internal growth: expansion of a business by means of opening new branches, shops or factories (also known as organic growth).

• External growth: business expansion achieved by means of merging with or taking over another business, from either the same or a different industry.

• Merger: agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business.

• Takeover: when a company buys over 50% of the shares of another company and becomes the controlling owner often referred to as “acquisition”.

• Horizontal integration: integration with a firm in the same industry and at the same stage of production.

• Forward vertical integration: integration with a business in the same industry but a customer of the existing business.

• Backward vertical integration: integration with a business in the same industry but a supplier of the existing business.

• Conglomerate integration: merger with or takeover of a business in a different industry.

Joint ventures, strategic alliances and franchising

• Joint venture: two or more businesses agree to work closely together on a particular project and create a separate business division to do so.

• Strategic alliances: agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives.

• Franchise: business that uses the name, logo and trading systems of an existing successful business.

• Globalization: growing integration of countries through increased freedom of global movement of goods, capital and people.

• Free trade: no restrictions or trade barriers exist that might prevent or limit trade between countries.

• Protectionism: using barriers to free trade, such as tariffs and quotas, to protect a country's own domestic industries.

Multinational businesses

• Multinational company/business: business organization that has its headquarters in one country, but with operating branches, factories and assembly plants in other countries.

• Why become a multinational?

  • Closer to main markets

  • Lower costs of production

  • Avoid import restrictions

  • Access to local natural resources