Unit 1 – Introduction to Business Management
1.5 – Growth and Evolution
Topics: Economies & Diseconomies of Scale, Mergers & Acquisitions, Takeovers, Joint Ventures, Strategic Alliances, Franchising
Economies & Diseconomies of Scale
Economies of Scale are cost advantages that businesses obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.
\[ \text{Average Cost (AC)} = \frac{\text{Total Cost (TC)}}{\text{Output (Q)}} \] Economies of scale cause AC to fall as Q rises (up to a point).
- Internal economies:
- Technical: Using advanced technology/machinery lowers per-unit costs.
- Managerial: Specialist managers improve efficiency.
- Financial: Larger firms get better interest rates, access to capital.
- Marketing: Bulk buying, spreading advertising over more units.
- External economies: Whole industry grows (skilled labor pools, supplier networks, improved infrastructure).
\[ \text{Average Cost (AC)} = \frac{\text{Total Cost (TC)}}{\text{Output (Q)}} \] Economies of scale cause AC to fall as Q rises (up to a point).
Diseconomies of Scale are disadvantages that result in rising unit costs as a firm becomes too large.
- Communication problems: Harder to coordinate/control with many employees.
- Bureaucracy: More layers of management slow decisions.
- Loss of morale: Workers may feel alienated or unimportant in very large organizations.
- Reduced flexibility: Responds more slowly to market changes.
Mergers & Acquisitions
- Merger: Two firms agree to join together and form a single new company. E.g., Glaxo + SmithKline = GlaxoSmithKline.
- Acquisition (Takeover): One firm buys another and takes control. E.g., Facebook acquired Instagram.
- Reasons: To grow quickly, access new markets/resources, diversify, gain synergies, reduce competition.
Note: Mergers are friendly, acquisitions can be friendly or hostile (“hostile takeover”).
Takeovers
A Takeover is when one company purchases a controlling stake (usually >50%) of another. It leads to a change in management/ownership—even if the acquired company didn’t agree.
- Can be hostile (against the wishes of acquired firm) or friendly.
- Motivations include gaining market power, eliminating rivals, rapid growth.
- Often used to refer to acquisitions.
Joint Ventures & Strategic Alliances
Joint Venture: Two (or more) companies create a new separate business to pursue a shared objective while remaining independent.
- Share costs, risks, resources and profits.
- Limited duration or project-focused (e.g., Sony Ericsson phones).
- Advantage: combine skills/knowledge, enter new markets faster.
- Usually no new company is formed.
- Can share skills, technologies, R&D, or market access (e.g., airline alliances SkyTeam, Star Alliance).
- Flexible; often for mutual benefit on projects too big for one firm alone.
Franchising
Franchising is an arrangement where a business (franchisor) allows others (franchisees) to operate using its brand, products, and methods.
- Franchisor: Owns the rights, brand, and business model.
- Franchisee: Pays fees/royalties to run business under franchisor's name.
- Examples: McDonald's, Subway, Marriott Hotels.
- Advantages for franchisor: Rapid business expansion with less capital risk.
- Advantages for franchisee: Proven model, support, branding, easier finance.
- Disadvantages: Loss of control, risk of inconsistent quality, franchisee must follow strict rules.
Summary Table
| Growth Method | Definition | Main Benefits | Main Drawbacks |
|---|---|---|---|
| Economies of Scale | Cost/unit falls as output rises | Lower costs, more competitive | May become too complex to manage |
| Mergers & Acquisitions | Firms join or buy others | Quick growth, synergy, access new markets | Culture clash, integration issues |
| Joint Venture | New company shared by firms | Share costs/skills; risk sharing | Disagreements, profit split |
| Strategic Alliance | Informal resource-sharing partnerships | No new firm formed, shared benefit | No clear control, may lose know-how |
| Franchising | Franchisor licenses brand/model to franchisees | Fast expansion, brand recognition | Less control, risk of reputation damage |
Key Takeaways for Growth & Evolution
- Growth brings opportunities and risks: economies of scale lower costs, but diseconomies (complexity, morale) can arise if unchecked.
- Mergers, acquisitions, takeovers, joint ventures, alliances, and franchising are strategies to grow, enter new markets, share resources or brands, and manage risks.
- Choice of method depends on goals, resources, risk tolerance, and legal/market context.