The document outlines the concept of scale of operation in business, emphasizing the benefits of economies of scale and the challenges of diseconomies of scale. It differentiates between internal and external growth strategies, detailing how businesses can achieve growth through organic methods, mergers, and acquisitions. Furthermore, it compares small and large organizations, highlighting their respective advantages and disadvantages in terms of management, flexibility, and access to resources.

1. BUSINES
S&MANA
GEMENTby: Shadi A. Razak 1
Business Growth

2. Objectives
• Apply the concept of economies & diseconomies
of scale to business decisions.
• Evaluate the merits between small and large
organisations
• Identify the appropriate scale of operation
• Explain the differences between internal and
external growth options
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3. Structure
• Scale of Operation
• Economies of Scale
• Small vs. Large
• Business Growth
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4. Scale of operation
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SCALE OF OPERATION

5. Scale of operation
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SCALE OF OPERATION
• The maximum output that can be achieved
through the use of available resources (inputs).
• It increases by employing more of all inputs on
the long term.

6. Scale of operation
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SCALE OF OPERATION
• Think of SCOPE:
– Size of the market
– Capital available
– Ownership Objectives
– ComPetitors market share
– Economy scale

7. Economies of scale
• When business grow in size they benefits from:
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SCALE OF OPERATION
– Decrease in average cost
– Cost spread over more units/customers
– Develop more specialised work force
– Low interest rate loans
– Decrease in Agency cost
– Decrease in Transaction cost
ECONOMIES OF SCALE

8. Diseconomies of scale
• When business grow in size its average cost
might rise and inefficiency begins to appear :
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– Communication breaks down
– Decision making slows down
– Motivation Falls
– Productivity drops
SCALE OF OPERATION ECONOMIES OF SCALE

9. by: Shadi A. Razak 9
SCALE OF OPERATION ECONOMIES OF SCALE

10. Small organisations
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• According to the European Union the size of an
organisation is determined by either:
–Number of employees
–Turnover or Balance Sheet Total
SCALE OF OPERATION SMALL vs. LARGEECONOMIES OF SCALE

11. Small vs. Large
• Managed & controlled
by owner
• Adapt quickly to market
changes
• Personal service
• Human business
• No diseconomies of
scale
• Easy communication
• Specialist experienced
managers
• Economies of scale
• Set market benchmark
• Access to several source
of finance
• Spread risk by
diversification
• Utilise and deploy R&D
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SCALE OF OPERATION SMALL vs. LARGEECONOMIES OF SCALE

12. Small vs. Large
• Limited access to source
of finance
• Employees bottle
necked with workload
• High risk of negative
impact of external
changes
• Unlikely to benefit from
economies of scale
• Can be difficult to
manage - globalised
• Can suffer from
diseconomies of scale
• High risk of conflicts
arise between
stakeholders
• Slow decision making
• Break down in
communications
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SCALE OF OPERATION SMALL vs. LARGEECONOMIES OF SCALE

13. Business growth
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• Examples of drivers to grow the business
include:
– Increased profit
– Increased market share
– Increased economies of scale
– Increased power & status of owners
– Reduce risk of takeover
SCALE OF OPERATION BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE

14. Business growth
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SCALE OF OPERATION
Business Grow
Internally
(Organic)
Externally
Mergers & Acquisitions
Joint Ventures
Strategic Alliances
Franchising
Increase Market Share
Improve & Increase Production
Increase agency size
BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE

15. Internal growth
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SCALE OF OPERATION
• The expansion of a business by means of
opening new branch, shops or factories
• It is also known as ‘Organic Growth’
BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE

16. Internal growth
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SCALE OF OPERATION BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE
• Business internal growth can be achieved in
number of ways:
– Increase sales
– Develop better production techniques
– Increase the organisation size:
o Hiring more employees
o Opening more shops, offices or factories

17. External growth
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SCALE OF OPERATION BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE
• The expansion of a business by means of
merging with or taking over another business
from either the same or different industry
• The different forms of external growth:
–Horizontal growth
–Vertical growth
–Conglomerate growth

18. External growth
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SCALE OF OPERATION
Vertical Growth
(Forward integration: towards customer)
Conglomerate Growth
( getting in different industry)
BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE
Vertical Growth
(Backward integration: towards supplier)
(the same industry, offering a different product)
Horizontal Growth
• Forms of external growth

19. External growth
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SCALE OF OPERATION BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALE
• Business external growth can be achieved in
number of ways :
–Merges and acquisitions
–Joint ventures
–Strategic alliances
–Franchising

20. Summary
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BUSINESS GROWTHSMALL vs. LARGEECONOMIES OF SCALESCALE OF OPERATION
• Explained what is meant by ‘Scale of
Operation’
• Differentiated between economics and
diseconomies of Scale
• Discussed business growth and its various
forms and options
• Discussed the merits between small and large
businesses