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1.6 Growth and evolution 2014

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Deborah Kelly

on 27 February 2017

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Transcript of 1.6 Growth and evolution 2014

1.6 Growth and evolution
economies and diseconomies of scale
the merits of small versus large organizations
internal (organic) and external growth
external growth methods - mergers and acquisitions (M&As) and takeovers, joint ventures, strategic alliances, and franchising
globalization, MNC's, impact of MNC's on the host countries

Small vs Large Organizations
There is a huge difference between the scale of operations of a small business - perhaps operated by just one person - and the largest corporations in the world.

It is assumed that all firms should grow and evolve.
larger organizations have more financial muscle and can withstand changes in the external environment more than a smaller firm.
greater risks that will yield much higher rewards can be taken.
increased profitability can not only provide security but also entice investors and capital this reinforcing growth as success.

So it seems.

Currently serious questions are being asked about the virtue of being a large organization. Issues of management control, and communication are now being voiced by some of the biggest and most successful industry leaders.
What is small?
The legal definition of small often varies from country and industry.

In the US a small business is one which employs fewer than 100 employees, in the EU the figure is 50 employees and in Australia, fewer than 20.

Other indicators of size such as sales revenue could also be used.

Think of it as firms that employ fewer people and have lower sales compared to other firms.
Economies of Scale
The advantages of large scale production are called economies of scale. Economies of scale are reductions in a firms average costs of production that result from an increase in the scale of operations.
The cost benefits arise for five main reasons:

1.
Purchasing economies
. These economies are often known as bulk-buying economies. Suppliers often offer substantial discounts for large orders. This is because it is cheaper for the supplier to process and deliver one large order rather than several smaller ones.

2.
Technical economies
. There are two main sources are technical economies. Large firms are more likely to justify the cost of flow production lines and the latest and most technologically advanced equipment. These expenses can only be justified and are affordable by larger firms.
3.
Financial economies
. Large organizations have two cost advantages when it comes to raising finance. First, banks often show preference for lending to big business and interest rates offered are often lower than the rate charged to small business. Second, raising finance by "going public" or further issue of shares is very expensive.

4.
Marketing economies
. Marketing costs do rise with the size of a business but not at the same rate. Both need marketing but for large firms the costs can be spread over a higher level of sales.

5.
Managerial economies.
Small firms employ general managers who have a range of management functions to perform. As a firm expands it can afford to attract specialist functional managers.
Diseconomies of scale
Many larger firms have actually experienced periods where long run unit costs actually increase. This is known as diseconomies of scale. Diseconomies of scale are factors that cause average costs of production to rise when the scale of operation is increased.

Diseconomies of scale are related to management problems of trying to control and direct an organization with many thousands of workers,in many separate divisions, often operating in several different countries.

There are three main causes of management problems.
1.
Communication problems.
Large-scale operations will often lead to poor feedback to workers, excessive use of non-personal communication media, communication overload with the volume of messages being sent and distortion of messages caused by the long chain of command. These problems may lead to poor decisions being made, due to inadequate or delayed information and management inefficiency.

2.
Alienation of the workforce.
The bigger the organization the more difficult it is to directly involve every worker and to give them a sense of purpose and achievement. They may feel insignificant in the overall business plan and become demotivated, failing to do their best.

3.
Poor coordination and slow decision-making.
Business expansion often leads to many departments, divisions and products. The number of countries a firm operates in often increases too. The problems for senior management are to coordinate these operations and make rapid decisions in such a complex organization.
What is an appropriate scale of operation?
Business owners must decide and evaluate:

owner's objectives - they may wish to keep the business small and easy to manage

capital available - if limited, growth is less likely

size of the market the firm operates in - very small markets do not need large-scale production

number of competitors - the market share of each firm may be small if there are many rivals

scope for scale economies - if these are substantial, business is likely to operate on a larger scale.
Advantages
Small business
can be managed and controlled by owners
often able to adapt quickly to changing demands
offer personal service to customers
find it easier to know each worker, and many staff prefer to work for smaller businesses
average costs may be low due to no diseconomies of scale and low overheads
easier communication with workers and customers.
Large business
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.
Disadvantages
Small business
many have limited access to sources of finance
may find the owner(s) has to carry a large burden of responsibility if unable to afford 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 business
may be difficult to manage especially if spread out geographically
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 a divorce between ownership and control that can lead to conflicting objectives.
http://www.dailymail.co.uk/news/article-1338281/24-million-customers-million-cases-half-miles-conveyor-belts-The-supermarket-warehouse-thats-gearing-Christmas-rush.html

http://www.telegraph.co.uk/technology/picture-galleries/9617047/Google-reveals-top-secret-data-centres-powering-the-worlds-largest-search-engine.html?frame=2372330


Source: http://www.anforme.co.uk/images/products/zoom/1284641303-54737000.jpg
Scale of Operations - Monsters Inc.

Amazon Is Bragging About Its Warehouse Full of PlayStations
http://www.businessinsider.com/amazon-brags-on-twitter-about-its-warehouse-full-of-playstations-2013-11
November 7 2013 article in Business Insider by Kyle Russell.
The Playstation 4 comes to North America on November 15, but online retailer Amazon is already building hype for what is sure to be one of the hottest- selling devices this holiday season.

The image of the warehouse lined with Sony's next gen-game console was released with the caption: "Greatness has arrived. Will it be coming to you?.
Amazon Warehouses
Books
Merchandise
Source: www.ai.org/up-contents/uploads/2013/03 amazon-warehouses.jpg
Source: i.huffpost.com/gen/889591/thumbs/o-AMAZON-WAREHOUSES- facebook.jpg

Images of Sainsbury's distribution center in 2010.
Economies of Scale at Google
Review:
Business Growth
The owners of many businesses do not want to remain small - although some do for reasons of remaining in control, avoiding taking too many risks and preventing workloads from becoming too heavy.

Why do businesses seek growth?
increased profits
increased market share
increased economies of scale
increased power and status of the owners and directors
reduced risk of being a takeover target
Achieving Growth
Growth can be achieved in a number of ways. The different forms of growth can be grouped into internal and external 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.

Source: http://legacy.businesscasestudies.co.uk/company_images/111/278/12150068512.jpg
Do Case Study:







"Starbucks confirms rapid growth strategy"
Mergers and Acquisitions
Merger

- an 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 another company buys over 50% of the shares of another company and becomes a controlling owner - often referred to as
acquisition
.
Merger Examples:
Disney + Pixar
Exxon + Mobil
Takeover example:
Kraft and Cadbury

Types of Integration
External growth is often referred to as integration as it involves bringing together two or more firms. Types of integration:
Horizontal





Vertical



Conglomerate
Acquiring a rival company operating in the same industry. This will allow for instant additional market share, economies of scale and (hopefully) the creation of synergy. Synergy refers to the idea that in larger mergers gains are made. 1 + 1 = 3.

The need to control the supply chain process either forward (towards the customer) or backwards (to monitor and secure raw material supplies.

Merger or takeover of a business in a different industry or market. This eliminates the need to spend on costly R&D on developing a new brand.
Do:

Complete:
Jet Airways
and Mercedes
case studies.
Joint Venture
Joint venture

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

The reasons for joint ventures are:
costs and risks of a new business venture are shared - useful for costs of developing new products
different companies might have different strengths and experiences and they, therefor fit well together.
they might have their major markets in different countries

Risks of joint ventures:
styles of management and culture might be so different that the two teams do not blend well together
errors and mistakes might lead to one blaming the other
the business failure of one of the partners would put the whole project at risk
Strategic Alliance
Strategic alliance

- agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives. There is no transfer of ownership.

These alliances can be made with a wide variety of stakeholders, for example:

with a university - finance provided by the business to allow a new specialist training course the will increase supply of staff to the firm
with a supplier - to join forces in order to design and produce components and materials that will be used in a new range of products
with a competitor - to reduce risks of entering markets that neither firm currently operates in
Read
handout with excerpts of current news articles that are real life examples of business growth. Annotate the articles and determine
WHY - w
hat are the benefits to the companies?
Franchising
Franchise
- a business that uses the name, logo and trading system of an existing successful business. (McDonald's, Dunkin' Donuts, 7 Eleven...)

A franchise contract allows the franchisee to use the name, logo and marketing methods of the franchiser. The franchisee can, separately, decide what type of legal structure to adopt. Franchises are a rapidly expanding form of business operation. They have allowed certain multinational businesses, for example, McDonald's and the Body Shop, to expand more rapidly than they could have otherwise done.
Do:

Franchise Review
and
Activity

The role and impact of globalization on
business growth and evolution
Conglomerate
- a large company that is made up of a number of different unrelated businesses. Conglomerate companies tend to be large multinational corporations with operations in multiple regions of the world.
Franchising
Benefits:
Fewer chances of new business failing as an established brand and product are being used.
Advice and training offered by the franchisor.
National advertising paid for by franchisor.
Supplied obtained from established and quality-checked suppliers.
Franchisor agrees not to open another branch in the area
Limitations:
Share of profits or sales revenue has to be paid to franchisor each year.
Initial franchise license fee can be expensive.
Local promotions may still have to be paid for by franchisee.
No choice of suppliers or supplies to be used.
Strict rules over pricing and layout of the outlet reduce owner's control over own business.
Evaluation of franchising
Franchising encourages standardization of vision, service and product development which some entrepreneurs may after time come to regret.
A poorly performing franchise in one area can impact on the reputation of others locally and globally.
The Starbucks model of clustering franchises, has actually led to competition between franchises.
Some stakeholders object to the presence of franchises as a symbol of globalization.
The steadily rising trend in franchising has occurred recently.
Some franchisors find this growth hard to control.

"After a very poor financial performance in 2008, we need to return to our core competencies and do what we do best; coffee and innovation. We have lost our edge"
- Howard Shultz, CEO of Starbucks on their first loss and drop in share price by half in November 2008.

For the sole trader, the risk associated with running a franchise (despite the initial huge fees) is smaller than for started a business of their own, but entrepreneurial innovation will be limited.
Globalization
Globalization

- The growing integration and interdependence of the world's economies causing consumers around the globe to have increasingly similar habits and tastes.
Globalization presents opportunities for growth and evolution of businesses as well as threats to their operations. Examples include:

Globalization increases the level of competition.
Meeting consumer expectations becomes more demanding.
Increased customer base for multinationals and e-commerce businesses
Economies of scale
Greater choice of location
External growth opportunities
Increased sources of finance
Multinational corporation (MNC) - A company that operates, owns and controls resources outside of its country of origin. Their headquarters are in one country but with operating branches, factories and assembly plants in other countries. A company is not considered to be a multinational if it merely sells abroad.

A typical multinational may own research and development facilities to generate new intellectual property ideas in the host country as well as advertising, marketing and strategic direction but may allow customer service operations or manufacturing overseas (offshoring). Local managers may also be transferred frequently aground the different international markets to increase knowledge and experience.
Multinational Corporations
Why become a multinational?
Closer to main markets - this will have a number of advantages:
lower transport costs for finished goods
better market information regarding consumer tastes
may be looked upon as a local company and gain customer loyalty

Lower costs of production - apart from lower transportation costs, there are likely to be other cost savings:
lower labour rates due to much lower demand for local labour compared to developed economies
cheaper rent and site costs
government grants and tax incentives designed to encourage industrialization of such countries
Avoid import restrictions - by producing in the local country there will no import duties to pay and no other import restrictions.

Access to natural resources - they might not be available in the countries main operating country

Take advantage of expanding markets in other countries which will lead to increased sales and profits.
Setting up operating plants in foreign countries is not without risks.
Communication links with headquarters may be poor.
Language, legal and cultural differences with local workers and government officials could lead to misunderstandings.
Co-ordination with other plants in the multinational group will need careful monitoring to ensure that products that might compete with each other in the world market are not produced or that conflicting policies are not adopted.
The skills level of local employees will be low and this will require substantial investment in training.
Potential problems for multinationals
The investment will bring in foreign currency and if output from the plant is exported, further foreign exchange can be earned.
Employment opportunities will be created and training programs will improve the quality and efficiency of local people.
Local firms are likely to benefit from supplying services and components to the new factory and this will generate additional jobs and income.
Local firms will be forced to bring up their quality and productivity up to international standards either to compete with the multinational or to supply it.
Tax revenues to the government will be boosted from any profits made by the multinational.
Management expertise in the community will slowly improve when and if "foreign" supervisors and managers are replaced by local staff, once they are suitably qualified.
The total output of the economy will be increased and this will raise GDP.
Potential Benefits:
The impact of MNC's on the host countries
Potential drawbacks:
Exploitation of the local workforce might take place. Due to the absence of strict labour and health and safety rules in some countries, multinationals can employ cheap labour for long hours with few of the benefits that the staff in their base country would demand.
Pollution from plants might be at higher levels than allowed in other countries.
Local competing firms might be squeezed out of business.
Some large western based businesses, such as McDonald's and Coca-Cola, have been accused of imposing western culture on other societies by the power of of advertising and promotion.
Profits may be sent back to the country where the head office is located, rather than kept for reinvestment in the host location.
There can be extensive depletion of the the limited natural resources .
The date from the image of Starbucks and McDonald's is 2003. In groups locate the current data about the companies and their global reach.


Read the Forbes article on McDonald's and Starbucks winning strategies.

Annotate why were they successful?
Global Brands
Three YouTube videos on Economies of Scale. The 2nd one includes some Economic terms not needed and the last one is longer 6.38 minutes.
Key CUEGIS Concepts - Ethics & Strategy & Globalization
TOK
Some people have the erroneous idea that a small business cannot effectively compete against larger competitors. This concept is quite far from the truth. For example, if someone were to ask you, "What is the major source of job formations in American today?" what would you answer? If you said small business you would be right. How about this question: "What is the major source of newly formed individual wealth in a given country today?" Again, the small business is the answer. Why, then is there such misinformation about the strength, versatility and wealth of small business? The answer is that usually large corporations get the lion's share of publicity.

Source: e-commerce times
In light of this article, discuss the view that in the corporate world bigger is always better.
Small firms are very important to all economies
Many jobs are created by small firms and the small business sector employs a very significant proportion of the working population in most countries.

Small businesses are often run by dynamic entrepreneurs, with new ideas for consumer goods and services that lead to wider consumer choice.

Small firms create competition for larger businesses.

Small firms often supply specialist goods and services.

All great businesses were small at one time.

Small firms may have lower than average costs than larger ones and this benefit could be passed on to the consumer too.
Mergers and Acquisitions (Takeovers) - bringing together two or more firms
What is the difference between a merger and an acquisition?
Theory of Knowledge
Facebook buys Instagram photo-sharing network for $1 billion
Instagram - the popular photo-sharing smartphone app is to be bought by Facebook who will pay $1 billion USD in cash and stock for the takeover.

October 2010 saw the launch of Instagram as a free iPhone app that allowed users to apply various filters to their photographs before they were uploaded. A version for the Android market followed later. The free app has been a great success and Instagram state that they have more than 30 million users, with 5 million pictures uploaded every day.

The chief executive of Facebook, Mark Zuckerberg, has promised that Instagram will continue to develop as a separate brand, meaning it will continue to allow users to post to rival social networking sites.
When one organization takes over another organization it is often said it is about the takeover organizations desire to have control and power over a market.
Discuss in your class the human instinct to have power and control in business situations.
Updates: In September 2012 the purchase was completed but a fall in Facebook's share value after its IPO ($38 - $19) put the purchase value at ~ $700.

In Oct 2015 Facebook shares are worth ~97 USD and Instagram is valued at ~35 billion in Fortune magazine as of December 2014.
Global 2016: BrandZ Top100 Most Valuable Global Brands 2016 | Countdown Video
DO 1.6 Questions
"
Pfizer to buy Allergan in $160 billion deal
" - Nov 23rd, 2015"
Find a recent "In The News" article about business growth and bring it to next class to share.
Full transcript