By the end of the chapter, you should be able to understand:

• internal and external economies and diseconomies of scale (AO2)
• the difference between internal and external growth (AO2)
• reasons for businesses to grow (AO3)
• reasons for businesses to stay small (AO3)
• external growth methods: mergers and acquisitions, takeovers, joint ventures, strategic alliances, franchising (AO3).

Learning Objectives:

• Describe internal and external economies and diseconomies of scale (AO1)
• Distinguish between internal and external growth (AO2)
• Discuss reasons for businesses to grow and to stay small (AO3)
• Examine external growth methods (AO3)
• Apply an Ansoff Matrix analysis in a given context (AO2)
• Apply a Force Field analysis in a given context (AO2)

Internal and external economies and diseconomies of scale

Internal

Economies of scale

Technical economies: Relevant when firm intends to adopt different production techniques to reduce overall unit cost. Or implemented through specialisation whereby a business splits series of tasks and have an individual focusing on a small part of it to increase efficiency.

Purchasing economies: Purchase of more resources as the business expands which allows them to negotiate better deals with suppliers to reduce price of materials. If a firm can become a big customer, the supplier will be eager to keep that deal and so be likely to offer better terms and conditions. The bargaining power of firms may mean lower unit costs and also better cash flow.

Marketing economies: Cost of media campaign will be divided over more unit of sales, thereby reducing unit cost and make bigger campaigns more feasible.

Managerial economies: Business’ growth allows employment of managers who specialise in different areas of the organisation which reduces the need to outsource services or force internal staff to cover such duties. Additionally, management cost does not rise at the same rate as the business grows. A department can grow from five employees to ten and still have one manager. This reduces the unit costs of management.

Financial economies: Bigger businesses may be able to borrow more money at lower interest as banks have higher trust in their ability to return the loans.

Diseconomies of scale

Such situations occur when mergers and takeovers happens. In practice, most takeovers and mergers lead to worse financial performance for the combined companies than they achieved individually.

Communication problems:

• Messages not communicated to the right person at the right time.
• Multiple timezones.
• Hundreds of people, difficult to host meeting to keep everyone updated.
• Quality of communication reduced as everything is online.

Coordination and control problems:

• Challenge in monitoring all the different activities.
• Cultural clashes and differences may appear as firms operate internationally.
• Values may be misaligned between managers causing resentment and inefficiency.
• This may also be linked to communication problems.

Motivation problems:

• Expansion of business reduces the chances that higher ups communicate with employee, leading them to feel unattended to or ignored.
• Isolation may also happen, thus, reducing their motivation.

Possible strategies to avoid DEoS:

• Unify business with a mission statement, outline shared central purpose.
• Managing by objectives.
• Conduct appraisals.
• Communicating regularly via newsletters, corporate videos or staff meetings.

External

• Innovation: This is when an industry becomes significant for society. Innovation allows businesses to collaborate with universities or other research institutions in order to improve and create new products, and at the same time reduce their own research costs.
• Specialisation: This takes place when companies, suppliers, and workers start to focus on a particular industry due to its size. As the number of companies in an industry increases, it becomes more profitable for suppliers to focus on supplying customers within that industry. It also becomes easier for specialised workers to find a job in their field because of the availability of jobs in the industry. This in turn makes it easier for companies to hire specialised workers, which can reduce costs associated with recruiting and training.