Topic 1.

5 Growth and Evolution

You will collaborate with your group for the duration of this topic. Put all your work in
here directly under the relevant task description; it will become your topic portfolio.
Your group MUST complete all base tasks satisfactorily, in class or prep. Base tasks access
to IB5. Selecting some stretch tasks is optional, completion of some can access IB7.

1. Internal economies and diseconomies of scale

Base
● Read Kognity 1.5.2. Give definitions of internal economy of scale and internal
diseconomy of scale and paste in a diagram that illustrates the concept.

● Nestle (HQ Vevey) makes a lot of chocolate/food product (almost $100bn

annually). Explain in context how Nestle might achieve these 5 types of
economies of scale; 1) purchasing, 2) technical, 3) financial, 4) marketing, 5)
managerial.

● Nestle employs over 300,000 people globally! Explain why Nestle might suffer
internal diseconomies of scale relating to communication, coordination and
motivation.

Stretch
● Produce a collage of images that illustrate the concept of internal economies of
scale.

● Review this article and identify possible benefits and problems of scale.

Internal economy of scale:

Internal economy of scale is when the company tries to reduce the cost of
production of outputs per unit and occurs in the same organisation due to a set of decisions
that the company makes in different areas, many internal areas of the business are involved
and can be affected and going to influence the production process.
internal diseconomy of scale
They are the opposite of economies of scale, where instead of reducing the cost of
production of outputs, the firm increases the cost of production, this happens because of
the inability to handle obstacles.

How Nestlé might achieve these 5 types of managerial?

● 1) purchasing, 2) technical, 3) financial, 4) marketing, 5) managerial.

Nestle is a food and beverage company that is in multiple locations around the world, and to
grow in purchasing, they could buy the raw materials that they do not produce in bulk (such
as milk, sugar, coffee beans, etc.), to negotiate with suppliers, and reduce the cost so that
their inputs do not cost as much.
In order to grow technologically, they should also use the money saved by purchasing the
inputs and invest in new, efficient machinery that reduces the cost of production of the
outputs.
For Nestle to grow financially, it could be listed on the stock market, thus gaining more
access to new finance and, hence, even greater economies of scale through the sale of
shares, and Nestle as a large entity is more likely to be able to get banks to offer lower
interest rates for a loan.
For marketing growth the company should negotiate with social media platforms for global
campaigns, since they are more used in recent times, as well as if they do it worldwide the
cost is reduced
And for managerial Specially qualified personnel should be hired who have specific
knowledge in each area, not all employees, but some, so that they know how to guide
others

Why might Nestle suffer internal diseconomies of scale relating to communication, coordination,
and motivation?

Nestle is a big company that operate in many countries, therefore If there is a poor communication
between the employees and managers the information might lose or misunderstanding, so the
employees won’t be able to do their work properly and they will have a lack of coordination
Review this article and identify possible benefits and problems of scale.

One of the benefits of scale that apple has is that it buys in mass and produces in mass, so the
production of its output is low (purchasing), likewise, most of the process is carried out electronically
(technological), as well as transportation of cell phones is made en masse and it is easy since they
are small products. One problem is that in China cell phones are sold at a higher price than in other
parts of the world, but this is due to taxes, for which Apple does not earn more

2. External economies and diseconomies of scale

Base
● Read this and explain how external EoS is different from internal EoS.

● Explain any 2 external economies and 2 diseconomies of scale.

Stretch
● Read about a trip through Sillicon Valley and find images or words that illustrate
these concepts to that location.
● Have a go at this revision quiz. Evidence your score.

Internal economies of scale quantify a company's production efficiency and are caused by
variables under the management team's control. Larger changes within the industry lead to external
economies of scale, so as the industry expands, the average cost of doing business decreases.
Because an external economy of scale is shared by competitors, internal economies of scale provide
larger competitive advantages. While external economies of scale result from more significant
developments outside the firm, internal economies of scale are firm-specific, or created within. The
overall consequence is the same, despite the fact that both lead to lower marginal costs of
production.

External economies:

Skilled labour: similar businesses setting up shop in a specific area will entice skilled labour
to look for employment there. For instance, the area outside of San Francisco known as Silicon Valley
has become a hub for IT-related businesses. This draws in talent-rich personnel. Businesses need
fewer resources to hire skilled labour.
 Cluster effect: When businesses cluster together, it is easier for suppliers to reach a wider
range of customers. For instance, if you establish a computer chip production business in Silicon
Valley, there are already suppliers and transportation connections to handle the related components
of the sector.

Diseconomies of scale

Technical diseconomies of scale - Diseconomies of scale in technology occur during the

production process. They result from production process inefficiencies. These inefficiencies are
frequently brought on by issues in overseeing a larger workforce. These inefficiencies might result
from cramming a space with employees, which would cause them to obstruct each other's work or
do it twice. Diseconomies of scale might also result from a new facility.

Organisational diseconomies of scale: Organisational diseconomies of scale may happen for

a number of reasons. However, managing a larger workforce presents its own set of difficulties.
Diseconomies of scale may result from a variety of these issues. One of these issues is the worsening
communication issues. It might be far more challenging for a larger company to communicate
effectively throughout its various divisions. Additionally, it's possible that workers are no longer fully
aware of what is expected of them.
 Skilled labor and cluster effects are just some of the external factors that affect businesses in
Silicon Valley. (The explanation of why is above.) This will further explain why businesses, especially
IT-focused, are drawn to Silicon Valley. But also, some of the factors resulting from the diseconomies
of scale can be seen here, as skilled labor is being sought. And there is a limit to the number of
people who can be skilled workers. As a result, businesses frequently have to compete for good
employees, which is extremely difficult for most businesses.

3. The merits of small versus large organisations

Base
● Review kognity 1.5.1 and 1.5.5

● Prepare your own table summarising some of the pros/cons of being a small or
a large business.
● Answer this in 100-200 words ‘is bigger always better?’

Stretch
● Eton College (UK) has 1300 students. Aiglon has 400. Is Aiglon the right size?
Justify your view.
● Choose an industry of interest to you and contrast the performance of a large
and small business within it.
● Find images that contrast small vs large

● Prepare a short kahoot

 Advantages Disadvantages

● Keeping control and avoiding risk: As a result of their inability to benefit from the
Business owners can choose not to economies of scale afforded to larger
expand because they do not want to organisations, small enterprises frequently have
take significant risks or cede higher production costs. Lower profits could
management of their company. They result from this. Additionally, obtaining
merely put effort into making the financing can be challenging because some
profits they require to live comfortably. external sources of capital may think it is
This is referred to as satisficing hazardous to invest in a small company. Finally,
occasionally. while larger companies may be able to provide
● Small market size: Although growing higher compensation, more perks, and more
market share is one of the most popular opportunities for professional growth, small
company goals, some highly specialised businesses may have problems attracting and
experts may not desire to expand their keeping qualified people.
services to other locations or
demographic groups. These
professionals may exclusively serve
customers in the local area or a niche
market.
● Limited access to financial resources: It
can be challenging for small firms to
obtain financial resources in order to
expand, which can act as a barrier and
keep them from growing.
● Sustainability: Some small firms may be
concerned about preserving the
environment and refraining from
excessive resource use.
● Strong social networks: Some firms may
choose to remain small in order to
positively engage with other
stakeholders, including clients and staff,
through strong networks, with an
emphasis on sociocultural sustainability
and obtaining

When it comes to if bigger is always better, I would say that it is not, as some businesses
decide to stay smaller as they have many advantages such as but not limited to, the ones mentioned
above. But also bigger businesses have much more sustainability and are harder to destroy
compared to smaller businesses. When it comes to customers, bigger businesses tend to have more
of them and more reliable ones, which is always good for businesses. but when it comes to the
environment, most small companies are much more sustainable and green, and therefore are much
more supported. Overall, bigger does not mean better, but i would rather say, when it comes to
businesses, it means safer.
 ● Eton College (UK) has 1300 students. Aiglon has 400. Is Aiglon the right size? Justify your
view.
As opposed to Eton College, which is a public school with 1300 pupils but is situated in a
town area, Aiglon is a small private school on a mountain with 400 students. Aiglon prioritizes
education quality because it is a small school and can adapt instruction to meet the needs of pupils.
The only way that they could do this is if they had a small number of students compared to the
number of teachers, as most classes in the IB are 7 to 1, with 7 being the pupils and 1 being the
teachers. Due to its location, Aiglon is much more perfect for a boarding school, so parents can have
more faith in leaving their children there, and its location getting bigger could disrupt the small city
by a lot. And also, the school has a huge effect on the town's economy as many students go out of
school to the stores around aiglon such as Coop, Papai Tai…

4. The difference between internal and external growth

Base
● Review Kognity 1.5.3 and produce a concise table summarising the pros/cons of
internal growth
● Watch this and answer question 3 of Activity 1.6.2 (find on classroom)

● Review Kognity 1.5.4. Define external growth and list 6 methods.

Stretch
● Write a ‘beat the teacher’ resource on internal vs external growth

● Watch this and do the Brakspear integration task (find on classroom)

Pros of Internal growth Cons of internal growth

● Internal growth is less expensive than
external growth therefore companies
generally elect to use internal sources of
funding, including retained profits, for
expansion when they grow internally
since it is less expensive. They can avoid
paying interest rates or giving up equity in
the company if they don't use external
financing sources like bank loans.
● Internal growth is less dangerous than
external growth because no outside party
is engaged when a company expands
internally. As a result, managers have
more sway over the tools the company
uses to expand and how it chooses to do
so.
● Internal growth allows for greater
business control than external expansion
● Internal growth is slower than external
growth because it can take a long time to
expand only using corporate resources, and
bigger competitors could enter the market
during that period.
● Internal expansion may result in cash flow
issues for firms: Growth can be expensive,
and if revenues do not increase straight
away, businesses may experience cash flow
issues.
● Internal growth may be constrained: If a
company serves a tiny market, it may not be
able to develop to a level that yields
respectable profitability. In addition, a
business's ability to expand is constrained by
its own financial capabilities.
● Internal growth can also cause for a
company to have lack of experience in
 because it eliminates the need for outside specific stage of productions
funding and allows the business's founder
to remain in charge of all decisions.
● More than outward growth, internal
growth can uphold the company's values:
The company's culture can be preserved
through internal expansion since there is
no danger of a third party imposing
different values or affecting the
company's culture.

● Watch this and answer question 3 of Activity 1.6.2 (find on classroom)

Analyse the possible advantages of Starbucks focusing growth in China

The advantages of Starbucks opening stores in China are huge, as they plan to open over
2,000 stores. The reason China is the key to its growth is because of its fast growing economy, which
nearly everyone can afford. Furthermore, there are not that many stores that are similar to
Starbucks in China, as they do not have that many “Western retailers," which means that there is a
lack of competition, which is always good for the brand/business. Opening stores in China will bring
huge success to the business as they can exploit their fast growing economy, and use the brand
name, which has a really big influence! Furthermore, they will expand their drink menus to more
non coffee drinks, as it could help attract people who don't drink coffee, so the number of potential
customers could increase.

● Review Kognity 1.5.4. Define external growth and list 6 methods.

External growth is the expansion of a company using outside resources, usually in
collaboration with another organization.Companies can realise their strategic
objectives more quickly and effectively by partnering with another company.
External expansion takes many distinct kinds.

The 6 methods are:

● Franchising,
● Strategic alliances,
● Joint ventures,
● Takeovers,
● Acquisitions,
● Mergers
Beat the teacher:

External growth is the expansion of a business by relying on internal resources, typically with
another organization. There are 6 methods of external growth, and they are Mergers, Franchising,
Takeover, Joint ventures,Strategic alliances and Stakeholders. Acquisitions is when two companies
decide to combine forces to form a new company, a merger occurs. Companies that are viewed as
being equally powerful may merge, in which case both companies adapt to the new structure. A
"takeover" occurs when one business buys another without the consent of the board of directors or
the business itself. A majority of the shares of the target company will often be sought after by the
buying corporation, either directly from shareholders or via stock exchanges.A joint venture is a
brand-new business initiative that two or more companies, who otherwise maintain their own
identities, undertake together. A more adaptable strategy for external growth than mergers,
takeovers, and acquisitions is joint ventures.

5. External growth methods – mergers, acquisitions, takeovers, joint ventures, strategic

alliances
Base
● Read Kognity 1.5.4. and/or Hodder text pp114-116. Compile and insert the
external growth methods table (find on classroom).
● Research and comment: Compare the Facebook acquisition of WhatsApp to the
Time Warner AOL merger. What were the outcomes?

Stretch
● Prepare a short kahoot on the growth
methods(https://create.kahoot.it/creator/2bcb66cd-cb92-408b-b7a7-
638e8864d36c)
● Record your % score on this quiz.

Explained Reasons why Risks

Acquisition A company makes an For a variety of reasons, If your company completes a
acquisition when it buys companies buy rival purchase with erroneous
the majority or all of the businesses. They can be assumptions about reaping
shares of another looking for economies of synergies, or ways in which
company in order to take scale, diversification, a the two companies combined
over that business, with bigger market share, more are more valuable than they
approval from the board synergy, price cuts, or new are independently, a number
of directors. The acquirer specialised products. of issues may arise.
can make choices on Companies frequently
newly acquired assets overestimate the imminent
without the consent of the reward when entering a deal
target company's other and underestimate how long
shareholders if they synergies take to materialise.
purchase more than 50% It takes time to combine
of the target company's operational procedures and
stock and other assets. workforces. If there are
erroneous expectations
regarding when the
integration will be finished,
additional expenditures may
also be incurred.

Merger When two companies Companies that are viewed
decide to combine forces as being equally powerful
to form a new company, a may merge, in which case
merger occurs. both companies adapt to
the new structure. However,
they can also take place
The structures of the
companies involved are
fundamentally altered as a
result of mergers,
acquisitions, and takeovers.
They are not easily reversible
if something goes wrong. As

Takeover When one business buys
another without the
consent of the board of
directors or the business
itself, it is referred to as a
takeover. A majority of the
shares of the target
company will often be
sought after by the buying
corporation, either directly
from shareholders or via
stock exchanges.
Joint Venture A joint venture is a brand-
new business initiative
that two or more
companies, who otherwise
maintain their own
identities, undertake
together. A more
adaptable strategy for
external growth than
mergers, takeovers, and
acquisitions is joint
ventures. At the
conclusion of a project,
the distinct corporate
entity may be disbanded
without harming the
parent companies'
businesses.
Strategic A strategic alliance is when
Alliance two or more companies
collaborate to accomplish
a common goal without
simultaneously founding a
new company. The most
flexible and low-risk
method of external
growth is through
strategic alliances.
between businesses that
aren't on an equal footing,
where one dominates and
necessitates a more
significant change in the
other organisation during
the merger process.
In order for a company to
get rid of its competitions,
they could buy it and
therefor own their
competition. Furthermore,
they would own their
shares.
The creation of a joint
venture may be motivated
by corporate growth, the
creation of new products, or
the entry into new markets,
particularly those abroad. It
may have cutting-edge
concepts and goods, and the
company may have
significant growth potential.
Strategic partnerships are
created in order to expand a
company's market share,
compete with rival
businesses, pool resources
for expensive capital
projects, create economies
of scale, or get access to
complementary resources.
a result, they are riskier than
the joint ventures and
strategic alliances that will be
covered later in this section.
Between 70% and 90% of
mergers and acquisitions fail,
according to many
commentators. Companies
that want external growth
with a sizable partner must
therefore act with care.
with the purchase price
frequently proving to be too
high. Issues with value (see
the price too high, above)
consumers and suppliers that
are dissatisfied, typically as a
result of the interruption.
Integration issues (change
management), including staff
opposition.
Joint ventures can come with
a lot of obligations and the
chance of partner conflicts
and disagreements. If the
venture's goals are unclear,
issues are likely to occur.
There is poor communication
between partners.
Utilizing and managing
strategic alliances offers
more than just opportunities
and advantages. Additionally,
there are dangers and
restrictions that must be
taken into account.
Unrealistic expectations, a
lack of dedication, cultural
incompatibilities, divergent
strategic goals, and a lack of
trust are frequently cited as
causes of failure.
 Acquisitions can involve both big and small operations. In order to gain access to technology
and expertise that it did not already have it, Meta (previously Facebook) has acquired a number of
smaller businesses, including Instagram and WhatsApp. At the time, Facebook made significant
expenditures in these projects; for example, it spent over $19 billion on WhatsApp. Even so, this
amount was still negligible in comparison to Facebook's market capitalization. Therefore, even if the
acquisition had failed, Facebook's future would not have been substantially compromised. The Time
Warner/AOL merger was unsuccessful, whereas this transaction was a success. AOL paid $182 billion
for Time Warner in 2000, but due to a number of issues, the transaction was a failure. These were
brought on by inadequate research into business culture, a lack of familiarity with the media scene,
and an inability to foresee where the internet would go.

6. Franchising
Base
● Review these notes and watch this clip.

● Write a

● paragraph that explains the relationship between the terms franchise,

franchisee and franchisor.
● Compile a table detailing the key pros and cons of the arrangement for both
franchisor and franchisee.

Stretch
● Scaffold your answers to any 2 of the Pizza Delight franchise questions (find on
classroom?)
● Subway or McDonalds - which franchise would you buy? Be prepared to make
your case to the class.
● Prepare a short kahoot (

Relationship between the terms franchise, franchisee and franchisor

A franchise is a method of distributing products, and it consists of franchisor and franchisee. A

franchise is an individual or a parent company that owns and has the rights to the logo, name, and
business model, and allows external entities to run a business using their trademarks in exchange
for a fee. These external entities are the franchisees, who, under a contract, are allowed to use the
business model of the brand.

franchisor

Pros Cons

● The business grows faster. ● May expending time in supervising

● Franchisor don’t expend much money
as the franchisees are the one who
invest
● They still have control over the brand.
● Franchisor will be able to have more
opportunities to negotiate also as well
as economies of scale
● Franchisors can count on the help of
franchisees in developing new ideas, or
in marketing.
franchisees, and checking that they
follow the rules of the business
● In addition to expending time in
developing models that can assist in
training and support for the franchisees
● There is a risk that franchisees can ruin
the reputation of the brand, so you
have to choose them carefully, so that
you are sure that the franchisees are
suitable for the business, which takes
even more time to the franchisors

franchisee

Pros Cons

● The franchisor helps them, as he has to ● Sometimes franchise fees can be

supervise that everything runs
smoothly.
● The business model has been already
tested , so the franchisees are sure that
the business it’s successful
● Many consumers already recognise the
brand, which creates confidence in
buying the product or service.
● Some banks offer better rates for
lending to franchisee
● Franchisees don’t have to build a brand
or business model from cero, they have
all the tools given by the franchisors
that make it easier and cheaper.
expensive, so it can be difficult to make
a profit in the short term.
● Nothing about the brand can be
changed to suit them or other markets.
● When the contract ends, all the good
goes to the franchisor.
● Relationships with outside companies
may be limited by agreements signed
with the franchisee.
● They do not have the same freedom of
creativity as other non-franchised
businesses, as they have rules set by
the franchisor.

Scaffold your answers to any 2 of the Pizza Delight franchise questions (find on classroom?)

● Explain what is meant by a ‘franchise agreement’.

It is a commercial legal contract that unites the franchisor with the franchisee, in this are the
terms and conditions that the franchisee must follow, likewise the contract grants a licence
for the franchisee to use the brand, it also states that the franchisor must receive full
payments and that the franchisee must receive all the necessary materials to operate (such
as recipes, knowledge, etc.)
 ● Explain why the risks of failure might be greater if Sally decided to open her own
restaurant,under her own name, rather than use the franchise option open to her.

If Sally decided to start her own business, the risks of failure would be greater because she
does not have the experience that is required to start a business from scratch, She has only
attended one business conference, but that is not enough, She would also be experimenting
with a new product that is not known to the market and has no new product recognition, so
she does not know if it will be accepted.

Subway or McDonalds - which franchise would you buy? Be prepared to make your case to the class.
I would buy Subway, because, unlike McDonalds, this brand operates 100% through
franchises, so they have absolutely all the necessary tools to help their franchisees since they are
dedicated to this, and the initial capital that is needed to invest is smaller than McDonald's, as well
as having a better reputation than McDonald's, since it is focused on healthy food. Furthermore, as
there aren't that many countries that actually have Subway, opening it in areas where there are no
Subways could actually increase the profit I could make by investing in it.

Unit 1.5 Growth & Evolution

Acquisition When a business purchases another business outright

Average cost The production cost per unit of output

Backward vertical A business merges or acquires a business in its supply chain to

integration take more control of the production of what it sells

Barriers to entry Factors that make it hard for a firm to enter an industry such as
brand loyalty, economies of scale, intellectual property

Bulk buying When businesses purchase large quantities of materials and

negotiate a low price to reduce costs

Bureaucracy Rules and procedures that slow decisions and add costs for
large businesses, especially the public sector

Brand recognition The extent to which consumers are aware of a brand

Diseconomy of scale An increase in average costs experienced with high output

suffered by very large businesses

Economy of scale A fall in average costs as output rises

External diseconomies Diseconomies of scale suffered by all firms in an industry

External growth Growth achieved by acquiring or merging with another business

Financial economies Cost savings achieved by large businesses that can negotiate
lower interest rates on borrowing
Forward vertical A business merges with or acquires another business that is
integration involved in distributing or selling their product to the customer

Franchise A business that has the right to trade using an established

business format or brand

Franchisee An entrepreneur that pays for the right to trade using an

established business format or brand and pays royalties to the
franchisor

Franchisor An established business that sells franchise rights to

franchisees, an external growth strategy

Hostile takeover An acquisition that is not supported by the target company’s

directors

Horizontal integration Integration with another business in the same industry at the
same stage of production

Internal growth Expansion of a business by opening new branches or factories

(organic growth)

Internal economies Economies of scale enjoyed by one business through its

increased output

Joint venture Two or more businesses agree to work together on a project

and create a new business to do so.

Managerial economies Savings achieved by large businesses who employ highly

skilled and specialist managers

Marketing economies Savings achieved by large businesses who spread marketing

costs over many products, having lower marketing cost per unit

Merger An agreement to bring 2 businesses together to form a single

new business with common directors and shareholders

Royalty payments Payments made by franchisee to franchisor, usually a

percentage of revenue or profits

Strategic alliance Agreement between 2 or more businesses to work together on a

project without forming a new business.

Synergy The gains that may be achieved by integrating with another

business where the total is worth more than the constituent
parts

Takeover When a company buys over 50% of the shares of another

company and becomes the controlling owner. Same as
acquisition.

Technical economies Savings achieved by large businesses with access to advanced

machinery and technology

Vertical integration Integration with a business in the same industry, either a

supplier or a customer
Unit costs Cost per unit of output, same as average costs