Standard Grade Business Management - Business GrowthPresentation Transcript
What makes a firm large?
Level of Sales
Number of Employees
Some businesses prefer to keep their business small - WHY?
It is easier to manage
Workers are often given greater responsibility and so work harder
How do small firms become large?
Internal Growth is when the company increases in size on its own - through increased demand, expanding range of products or selling products in a number of locations. External Growth includes MERGERS (where 2 companies combine to become one new company) and TAKEOVERS (where one company wants to buy another company and make it part of its existing business).
Now Read the case study on Business Growth – Worksheet 1 and answer the questions
When a business merges with another it is often known as . . . INTEGRATION
There are 4 main types of integration:
Horizontal Integration Horizontal Integration is when one company merges/takes over another company which produces SIMILAR GOODS and which is involved at the SAME STAGE of production. Example: A frozen food company (Birds Eye) merging with another frozen food company (Findus)
VERTICAL INTEGRATION Vertical Integration involves the joining together of firms at DIFFERENT STAGES of production. Example: A frozen food company taking over a farm (BACKWARDS VERTICAL INTEGRATION) or, a frozen food company taking over a supermarket (FORWAR VERTICAL INTEGRATION).
LATERAL INTEGRATION Lateral Integration is a merger between two business which produce SIMILAR products. Example: A book publisher might acquire a magazine/newspaper publisher, or even television and other media products.
CONGLOMERATE MERGER * A conglomerate merger takes place when one company merges with/takes over another which is in a completely different industry. Conglomerate mergers spread the risks more because the firm no longer relies upon sales of only one type of product. In other words, the business is not “putting all its eggs in one basket” - if there is a decrease in sales for one product, they are still selling other products. * (Also known as DIVERSIFICATION)
Frozen Food Company Frozen Food Company Frozen Food Company Farm Supermarket Freezer Manufacturer Backward Vertical Integration Horizontal Integration Forward Vertical Integration Lateral Integration
Now Read the case study on Business Growth – Worksheet 2 and answer the questions
Economies and Diseconomies of Scale
Economies of Scale These are the benefits a business gains as it grows. Internal economies of scale come from within the business; external economies come from or affect the world outside the business
Small firm Large firm Increasing Scale Risk-bearing Economies Labour & Managerial Economies Commercial Economies Financial Economies Technical Economies Disintegration Labour Ancillary Services Marketing Economies Infrastructure INTERNAL ECONOMIES EXTERNAL ECONOMIES
Technical Economies - Large businesses can afford automation, computerisation and technology. These often produce greater quantities of goods in a given time. As a result, the cost per unit is reduced. Small firms are often unable to do this.
Labour and Managerial Economies - In a small firm the owner or manager may have to do everything but in a large firm they can afford specialist managers, eg sales and human resources.
Commercial Economies - Large firms can often get discounts for buying in bulk. They can do this because they perhaps have more storage space.
INTERNAL ECONOMIES (cont)
Marketing Economies - Small firms find advertising very expensive, but large firms can afford effective advertising, since the cost can be spread over a much larger level of output.
Financial Economies - Large business can obtain funding in the form of loans, overdrafts and credit at lower rates than smaller companies.
Risk-bearing Economies - Large businesses are able to sell over a wider market or offer a wider range of products because if demand for one product falls they can often make up the lost sales through the sales of another
Disintegration - Other firms are attracted to areas where specialised industries already exist - eg firms producing components or offering help with maintenance and processes.
Labour - There will be many specialist workers already trained. This will mean training costs will be reduced. Also colleges may offer courses that are aimed at meeting the needs of local industry.
Ancillary services - these are supporting services. All firms benefit from local specialised businesses. Eg - shipbuilding on the Clyde, local businesses like engineering works, sail-makers etc will all benefit.
Infrastructure - a Local Authority can feel encouraged to spend money on local roads and other facilities if it knows a large company will set up in its area. This is beneficial to the company and the local community.
DISECONOMIES OF SCALE Economies of Scale mean that as a firm grows in size the cost of production per unit decreases. However it is generally accepted that this only happens in the short term. Over longer periods of time there are disadvantages of growing bigger and these tend to push the cost per unit up again. These are known as Diseconomies of Scale and can be Internal or External.
These are disadvantages that occur within a firm due to that firm itself becoming large.
Poor communication between managers and employees can result in delays and misunderstandings that lead to industrial disputes.
Loss of efficiency as it becomes more difficult to keep control of quality of work.
Loss of business as customers become frustrated with delays and communication problems.
These are disadvantages that occur when too many firms in an industry are crowded into the same area.
Congestion - all facilities including rail, air, sea and road transport become overcrowded causing delays.
Pollution caused by vehicles, factory waste, overcrowded housing etc
Damage to the environment eg, cutting down trees etc in order to build factories, roads etc