1.5 Growth and Evolution

Growth and Evolution
Unit 1.5
Do you think having a large
organisation is better than a
small one?
Why, why not?
Learning Objectives
Evaluate why businesses grow, or stay small

Analyse and apply:
- Internal economies of scale
- External economies of scale
- Internal diseconomies of scale
- External diseconomies of scale
BMT: Ansoff’s Matrix
First off… How can we even measure the size of a business?!
Market share - a firm’s sales revenue as a percentage of the industry’s total sales revenue.
Total sales revenue - the value of a firm’s annual sales revenue for a given time period, usually
per year. This measure gives an indication of the size of the firm’s customer base.
Size of workforce - the total number of employees hired by the business per time period.
Profit - the value of a firm’s profits per time period.
Capital employed - the value of the firm’s capital investment as recorded on its balance sheet
(see Chapter 17).
Any increase in one of the above factors suggests that the business is growing!
#Inquirers #Communicators #Knowledgeable
Advantages and Disadvantages of Large/Small Organisations
#ExpertSystem
Split yourselves into four groups. I will be providing you with a topic to research with your
group.
In each table, I will assign an “Expert”.
After 10 minutes are over, each table’s expert will move to a new table.
The expert will begin to explain their assigned topic, and afterwards, the table’s members
will explain to the expert their assigned topic.
*Complimentary slide
Large Organisations - Adv & Disadv
Advantages Disadvantages
- Can afford to employ specialist managers - May be difficult to manage especially

- Benefit from cost-reduction associated if geographically spread
with large-scale production - May have potential cost increases
- Several different sources of finance associated with large-scale production
- Brand reputation - May suffer from slow decision making
- Customer loyalty and poor communication due to the
- Offer lower prices structure of a large organisation
Small Organisations - Adv & Disadv
- Can be managed and controlled by the - May have limited access to sources of
owner finance
- Often able to adapt quickly to meet - Owner may have to carry a large
customers’ changing needs burden of responsibility if unable to
- Easier communication with employees hire specialists
and customers - Unlikely to benefit from economies of
scale
- Average costs may be high due to no
economies of scale
So… how does an
organisation realise its
optimal (most appropriate)
size?
It really depends on the internal structure of the business, its finances, and
objectives!
If asked whether a firm should expand/reduce in size, you need to consider
the above factors before making a decision (this is usually a 10 mark q!)
Learning Objectives
Analyse and apply:


Did Lulu Hypermarket make
a typo with the 24 pieces of
water bottle price?
Shouldn’t it be BHD 1.8?

(0.075 x 24)
How can they afford to

reduce the price of the
24 unit pack?
Economies and Diseconomies of Scale
Internal Economies of Scale
Economies of scale occur when the
average costs of running a business fall
as a firm increases its output and size. External Economies of Scale
Diseconomies of scale occur when an Internal Diseconomies of Scale

organization becomes inefficient due to
the scale of its operations being too
External Diseconomies of Scale
large to manage effectively. This results
in higher average costs of production.
Split the class into two groups.
You will compete to arrange the correct internal + external

economies/diseconomies of scales types.
You will have a time limit of 3 minutes to use the internet

before we begin the game - use your time wisely 😈
The first to get them all correct, wins!

**not in old textbook
Economies of scale that occur inside the firm and are within its control
Technical economies - Large firms can afford sophisticated capital and machinery to mass
produce their products. The high costs of their equipment and machinery are spread over
the huge scale of output, thereby reducing the average cost of production. Small businesses
do not find it feasible or cost-efficient to buy and use such technologies.
Financial economies - Large firms can borrow large sums of money at lower rates of
interest compared to smaller competitors because the larger organizations are seen as less
risky to financial lenders. In addition, a large business looking to borrow money can choose
a lender that offers the most attractive interest rate, i.e. there is rivalry amongst the
financiers to lend to large and reputable businesses. By contrast, smaller firms oﬅen
struggle to raise external finance and are charged higher interest rates on their borrowing
due to the higher degree of risk involved.
Managerial economies - Large firms divide managerial roles by employing specialist

managers. By contrast, a sole trader oﬅen has to fulfil the functions of marketer, accountant
and production manager. As people cannot be equally good at everything, specialisation
leads to higher productivity. Higher productivity = decreased average costs.
Specialization economies - This is similar to managerial economies of scale but results from
division of labour of the workforce, rather than the management. Motor vehicle
manufacturers that use mass production techniques benefit from having specialist labour
including designers, production staff, engineers and marketers. These specialists are
responsible for a single part of the production process and their skills and expertise mean
that there is greater productivity thereby helping to reduce the average cost of output.
Marketing economies - Global firms such as McDonald’s and Nike can spread the high costs of their
advertising by using the same marketing campaign across the world (language translation is a minor part of
the costs of a global marketing budget).
Purchasing economies - Large firms can also lower their average costs by buying resources in bulk. Note,
however, that even relatively small firms can gain from purchasing economies of scale because they also gain
discounts for bulk purchases. Of course, the larger the order the greater the bulk discount might be, so there
is still an advantage to being big in the corporate world. For example, a small retail outlet might sell 1,000
cans of Coca-Cola in a month to hundreds of different customers. This will cost a lot more than the Coca-Cola
Company that can sell 1,000 cans in just one transaction to a single customer (such as a supermarket).
Risk-bearing economies - These savings can be enjoyed by conglomerates (firms with a diversified portfolio
of products in different markets). Conglomerates can spread their costs, such as advertising or research and
development, across a wide range of their operations. Hence, a loss in one area of their business does not
jeopardise the business overall.
External Economies of Scale **not in old textbook
Cost-saving benefits of large- scale operations arising from outside the business due to
its favourable location or general growth in the industry.
Technological progress increases the productivity level within the industry. For example, the Internet has created
huge cost savings for businesses engaged in e-commerce. Online retailers, for example, do not have to be located
in central business districts thereby avoiding highly expensive rent.
Improved transportation networks help to ensure prompt deliveries. Furthermore, employees who are late to
work due to poor transportation links cost the business money. Customers and suppliers also want convenience
(ease of access).
An abundance of skilled labour might exist in the local area, perhaps through government aided training
programmes or reputable education and training facilities in a certain location. This provides local businesses with
a suitable choice of educated and trained labour, thereby helping to cut recruitment and training costs without
compromising productivity levels.
Regional specialisation means that a particular location or country has a highly regarded and trustworthy
reputation for producing a certain good or service. This allows the industry to benefit from having access to
specialist labour, sub-contractors and suppliers, thus helping to reduce the average cost of production for the
Internal Diseconomies of Scale
Usually occur due to problems of mismanagement.
As a firm becomes larger, managers may lack control and coordination and is likely to increase and cause
communication problems. Ultimately, these difficulties slow down decision-making. Coordination and control
problems also occur for organizations with business operations in different locations throughout the world.
Tere is likely to be poorer working relationships in an oversized business. With a larger workforce, senior managers
are more likely to become detached from those lower down in the organizational hierarchy, thereby making them
feel distanced or out of touch. This can damage communication flows and the motivation of staff, thereby reducing
their productivity and leading to higher average costs.
Outsized organizations are likely to suffer from the disadvantages of specialization and division of labour. Workers
become bored with performing repetitive tasks. With a larger workforce, there may also be scope for slack
(inefficiencies and procrastination). This leads to lower productive efficiency and hence an increase in the average
costs of production.
Complacency with being a large and dominant firm with market power or even being the market leader can also
cause many problems. Complacency (a lack of awareness of genuine risks or deficiencies) is most likely to reduce
External Diseconomies of Scale
Occur once there is an increase in the average cost of production when a firm grows due to factors
beyond its control. Usually caused when there are too many businesses competing in the market.
Too many businesses locating in a certain area causes land to become even more scarce
thereby causing higher rents. This adds to the fixed costs (rent) of all businesses in the area
without any corresponding increase in output. Hence, unit costs will rise.
Since workers have greater choice from a large number of employers in the local area,
businesses might have to offer higher pay and financial rewards to retain workers or attract
new staff. This will increase costs without necessarily increasing output, thereby raising
average costs of production for all firms in the industry.
Traffic congestion results from too many businesses being located in an area. Deliveries are
likely to be delayed due to the overcrowding. This increases transportation costs for
businesses, thereby contributing to an increase in unit costs of production.
Learning Objectives
Analyse and apply:


#ThinkPairShare
Think about a company that have “grown” by releasing a new

product.
What was the strategy they took with the release of the product?
Ansoff's Matrix is a model used to show the degree of risk associated with
different options when considering new opportunities for sales growth.
There are four strategies of market penetration, market

development, product development and diversification.
Ansoff’s Matrix
Market Penetration: Sell more in existing markets;

- Market visibility will be increased,
- Market share will increase.
The risk is that if you dont sell new products or explore new markets, your
business can be outdated.
Usually market penetration is safe because there is no risk of trying a new product
or exploring a new market.
Example: Reducing prices of products in order to achieve more sales = increased
market share.
Ansoff’s Matrix
Product development: Sell new products in existing markets, the risk is

introducing new products & the uncertainty of its success or failure.
Example: Coca-Cola Cherry! New product (at the time) selling in the
same market as regular Coke.
Market development: Sell existing products in new markets.
The risk is that you have to explore the new markets and operate in a new
environment.
Example: Lucozade used to be promoted as a health tonic - they then
repositioned it as a sports-drink!
Ansoff’s Matrix
Diversification: Sell new products in new markets, the most risky

strategy, because both product and the market are new and unknown.
Example: The Virgin Group went from media, to airline, to train operator,
to finance!
A marketing manager has to analyse these four possibilities and the

risks associated with each one, then choose one strategy.
Complimentary Slide
Coca Cola’s Ansoff’s Matrix Example
With an international company of your choice,
apply the Ansoff’s Matrix in your notebook!
Once you are done, suggest a new growth strategy for

them and explain why it is appropriate for this company.
Learning Objectives
Analyse and apply:


Plenary
In your notebooks, create a mindmap of the different types of economies and

diseconomies of scale!
Unit 1.5
Starter
Let’s explore how brands have evolved and grown!
On the whiteboard, rearrange the household-name brands with the original purpose of
their products (I got a new list😁😁).
Why do you think these brands have ‘rebranded’ the use of their
products?
Learning Objectives
Explain the difference between internal and external growth
External growth methods:
• Mergers and acquisitions (M&As)
• Takeovers
Internal Growth
Internal growth occurs when a business grows organically, using its own capabilities and
resources to increase the scale of its operations and sales revenue.
It is usually financed through:

- Retained profits (Profits after paying all costs, taxes, and shareholder dividends)
- Issuing and selling new shares
How can a business can grow internally?

Internal Growth Methods
Changing price of product Greater product

placement
(increase or reduce price to increase sales) (Making product more widely
available)
Improved training and development Offering credit options

( quality of customer service = sales) (Buy now - pay later options)
Producing better products Improved promotion
Increased capital expenditure Providing value for mone

(investment spending) (brand image,
after-sales care, etc.)
Advantages and Disadvantages of Internal Growth
Better control and coordination Diseconomies of scale
Relatively inexpensive (main source of A need to restructure (in the event of

internal growth is retained profits!) becoming a multinational
company/opening several locations)
Maintains the corporate culture (no
conflicting management style involved Dilution of control and ownership (in the
with merging/acquiring firms) event of changing legal status of firm i.e.
sole trader → privately held company)
Less risky!
Slower growth.
External Growth
External growth (or inorganic growth) occurs through dealings with outside organizations
rather than from an increase in the organization’s own business operations.
Methods of external growth:

Mergers and acquisitions (M&As)
Takeovers
Joint ventures
Strategic Alliances
Franchises
These methods are usually referred to as amalgamation or integration of firms.
Can you think of any company who has recently experienced a type of external growth?
Advantages and Disadvantages of External Growth
More expensive than internal growth
Quicker than internal growth
Greater risks (from inadequate
Synergies (Businesses can benefit from knowledge of new markets)
larger selection of skills, knowledge
and expertise of external parties). Regulatory barriers (acquisitions and
takeovers can be blocked my govt. If the
Reduced competition move is anti-competitive)
Economies of scale Potential diseconomies of scale
Spreading of risks (diversification) Organisational culture clash

Learning Objectives
• Takeovers
Take 7 minutes to self-study Mergers & Acquisitions, and takeovers.
Then, complete the linked crossword puzzle using your devices!
https://wordwall.net/resource/36504499
What are the benefits and
limitations of M&As?
Use the internet, in each group, and research 3
different instances of mergers and acquisitions.
Learning Objectives
• Takeovers
Takeovers
Takeovers occur when a company purchases a controlling stake (majority of the stocks) in
another company without the permission and agreement of the company or its Board of
Directors.
Hence, takeovers are also referred to as hostile takeovers.
To get the shareholders to sell their shares, they are usually offered a price well above the
stock market value for the share.
#RiskTaker
In April 2010, Hewlett-Packard purchased the company synonymous with mobile devices: Palm.
Unfortunately, Palm had last been synonymous with mobile devices about a decade earlier.
Palm particularly struggled against Blackberry who, in turn, suffered at the hands of the iPhone
and Android. After a US$1.2 billion purchase, Palm became part of Hewlett-Packard.
The speed with which Hewlett-Packard realised its mistake was remarkable. By the summer of
2011, HP had moved well past the point of looking to find a buyer for its Palm subsidiary and
instead decided to discontinue the entire thing. Even a revamped operating system, Palm’s
critically acclaimed WebOS, was not enough to salvage the erstwhile bright star. The mobile
operating system exists today as a small open-source project.
Major business decisions often involve failure. As ‘risk-takers’, how can business people
effectively manage the risks they take when making major decisions like takeovers?
How do you think a business becomes a takeover target?
Learning Objectives
• Takeovers
True or False #EyesClosed
Horizontal integration is when one firm merges or

takes over another from the same industry at the
same stage of production.
TRUE
An example of vertical integration is:

When a truck manufacturing business merges with
another truck manufacturer.
FALSE
Vertical integration can be backwards and sideway

integration.
FALSE
Forward vertical integration is when a firm

integrated with another firm which is at a later stage
of production. (i.e. closer to the consumer)
TRUE
Conglomerate integration (diversification) is when a

firm takes over or merges with another firm that is in
a completely different industry.
TRUE
Unit 1.5
Recap on previous lesson!
Learning Objectives
Evaluate External growth methods:
• Joint Ventures
• Strategic Alliances
• Franchises
#ExpertSystem
In your groups, research and self-study the given

external growth method (definition, example,
adv+disadv).
Once you are done, one expert will move on to the

next group to explain the concept to them and vice-
versa.
Prepare 2 questions about your given method to ask

Joint Ventures
A joint venture (JV) is an external growth method that involves two or more organizations
agreeing to create a new business entity, usually for a finite period of time. The newly
created business is funded by its parent companies.
At the end of the predetermined time period for the JV, there are three possible options:
- The joint venture is dissolved (discontinued)
- One of the parent companies buys out the JV
- The JV project is extended for an additional period of time.
Watch this video & identify the key reasons why VW and Ford
would want to form a joint venture despite being rivals in the same
industry.
Pool resources to develop electric cars

and self-driving cars (the pooling of
resources will help them gain
economies of scale which will allow for
cost savings in the R&D and
production process)
To gain a first-mover advantage in the

market for electric cars and self-driving
cars (especially in response to
competition from the likes of Google
and Uber in the market for self-driving
cars).
Advantages and Disadvantages of Joint Ventures
Possible conflicts and disagreements between the
It can be dissolved at the end the project if parent companies due to different organizational
needed cultures and management styles. This can create
communication and productivity problems, thus
jeopardising the joint venture.
Combination of expertise, technologies and
financial resources, to create the new business = In the case of poor performance, a joint venture is
increasing chances of success. (Synergies) more difficult to terminate than a strategic alliance.
Joint ventures are generally cheaper than M&A. Many joint ventures are short-lived as they do not
succeed or are purchased outright by one of the
For international joint ventures, the partner parent companies.
company can provide local knowledge to cope
For joint ventures that do succeed, the parent
with any problems related to cultural differences companies have to share the profits.
Joint Ventures: Examples
• Example 1
Google parent company and the pharma company Glaxo and Smith decided to enter into a joint
venture agreement to produce bioelectric medicines the ratio of the ownership was 45%-55%. The
joint venture lasted and was committed for 7 years with a capital of Euro 540 million.
• Example 2
Another example of a joint venture is the joint venture between the taxi giant UBER and the heavy
vehicle manufacturer Volvo. The joint venture goal was to produce driverless cars The ratio of the
ownership is 50%-50%. The business worth was $350 million as per the agreement in the joint
venture.
Learning Objectives
• Joint Ventures
• Franchises
Strategic Alliances
Strategic Alliances: An agreement between firms in which each agrees to

commit resources to achieve an agreed set of objectives.
- Each business stays independent, while pooling resources together to reach new
audiences, strengthen both of their brands, and achieve mutual goal that they
might not be able to achieve on their own.
- This can be done with a variety of stakeholders such as a supplier, a university, a
competitor etc.
Advantages and Disadvantages of Strategic Alliances
Possible conflicts and disagreements between the
Combination of expertise, technologies and financial parent companies due to different organizational
resources, to create the new business = increasing cultures and management styles.
chances of success. (Synergies)
As it is much easier for members to pull out of a
Businesses retain their individual corporate identities. strategic alliance, they may be less committed.
Quicker than setting up a JV. Many strategic alliances are only short-term
agreements. This can limit the options for an
Fosters cooperation rather than competition. organization’s external growth strategies.
There is greater flexibility with a strategic alliance than a As there can be numerous members in a SA, the
joint venture because membership (of the alliance) can business organization in question is exposed to the
change without having to terminate the coalition. potential mistakes or misconduct of member firms
in the alliance.
Strategic Alliances: Examples
Example 1: Uber and Spotify

Uber’s partnership with Spotify lets Uber riders easily stream their Spotify music library
whenever they take a ride. This helps the Uber experience feel more personalized and
encourages Uber customers to subscribe to Spotify Premium (for more control of their tunes both
inside and outside the Uber).
Example 2: Starbucks and Target

As soon as you walk into Target, there’s a Starbucks waiting to blend your favorite drink. Target
and Starbucks knew both their brands had similar audiences (busy shoppers looking for
affordable “luxuries” and a quick escape from the everyday).
Learning Objectives
• Joint Ventures
• Franchises
Franchising
Franchise: A business that uses name, logo and trading systems of an existing successful
business. Examples: McDonald's, KFC, Baskin Robbins etc
Franchisee: A small business owner who operates a franchise. The franchisee has purchased
the right to use an existing business' trademarks, associated brands, and other proprietary
knowledge to market and sell the same brand and uphold the same standards as the first
business.
• Franchisor: Sells the right to open stores and sell products or services using its brand,
expertise, and intellectual property
Advantages and Disadvantages of Franchising for the Franchisor
The franchisor’s corporate image and brand
Franchising is a faster method of growth than using reputation is at risk if a franchisee is negligent
internal growth. and/or incompetent.
Franchisees fund the growth of the franchise as they pay The franchisor still needs to ensure quality
an upfront fee to purchase the franchise license. + the standards are met.
franchisor receives royalties, usually calculated as a % of
The franchisee, as the owner of the franchised unit,
the franchisee’s sales revenues. gets to keep the profits they generate. This would
not be the case if the franchise chose to grow
The franchisor sells the agreement to someone who has organically.
been vetted and is more motivated to succeed.
The franchise method of growth is not applicable to
The franchisor, in its pursuit of growth in other all businesses as they lack the expertise, resource
geographical locations, can also again from the and brand awareness to attract buyers
franchisee’s local knowledge. (franchisees).
Advantages and Disadvantages of Franchising for the Franchisee
The success rate of franchising is usually very high. Buying a franchise is usually very expensive. Even
so, the process of applying for a franchise license
Benefits from the brand recognition and brand loyalty is typically complex and time consuming. Even
established by the franchisor. Hence, there are after paying for the start-up costs and running
opportunities for the franchisee to earn large profits. costs of the business, the franchisee must also pay
a percentage of its sales revenues to the franchisor
as royalty payments. This can cut a franchisee’s
Franchisees receive ongoing support and expert advice
profit margins quite substantially.
from the franchisor, such as upskilling training, market
research findings, and legal advice. This improves the The franchisee is constrained by the standards and
chances of success for the franchisees. practices set by the franchisor.
They gain from the purchasing economies of scale of the Like the franchisor, each individual franchisee is at
franchisor, rather than facing much higher costs (of risk of a damaged reputation if another franchisee
inventory, for example) if operating as a sole trader of a of the business makes a serious blunder.
much smaller, independent organization.
Learning Objectives
• Joint Ventures
• Franchises
Kahoooooooot!

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Growth and Evolution

Evaluate why businesses grow, or stay small

Profit - the value of a firm’s profits per time period.

Advantages and Disadvantages of Large/Small Organisations

In each table, I will assign an “Expert”.

Large Organisations - Adv & Disadv

- Can afford to employ specialist managers - May be difficult to manage especially

Small Organisations - Adv & Disadv

Evaluate why businesses grow, or stay small

Analyse and apply:

BMT: Ansoff’s Matrix

Shouldn’t it be BHD 1.8?

How can they afford to

Diseconomies of scale occur when an Internal Diseconomies of Scale

You will compete to arrange the correct internal + external

You will have a time limit of 3 minutes to use the internet

The first to get them all correct, wins!

Managerial economies - Large ﬁrms divide managerial roles by employing specialist

Evaluate why businesses grow, or stay small

Analyse and apply:

BMT: Ansoff’s Matrix

Think about a company that have “grown” by releasing a new

There are four strategies of market penetration, market

Market Penetration: Sell more in existing markets;

Product development: Sell new products in existing markets, the risk is

Diversification: Sell new products in new markets, the most risky

A marketing manager has to analyse these four possibilities and the

Once you are done, suggest a new growth strategy for

Evaluate why businesses grow, or stay small

Analyse and apply:

BMT: Ansoff’s Matrix

In your notebooks, create a mindmap of the different types of economies and

Let’s explore how brands have evolved and grown!

Explain the difference between internal and external growth

External growth methods:

• Mergers and acquisitions (M&As)

It is usually financed through:

How can a business can grow internally?

Changing price of product Greater product

Improved training and development Offering credit options

Producing better products Improved promotion

Increased capital expenditure Providing value for mone

Relatively inexpensive (main source of A need to restructure (in the event of

Methods of external growth:

These methods are usually referred to as amalgamation or integration of firms.

Economies of scale Potential diseconomies of scale

Spreading of risks (diversification) Organisational culture clash

Explain the difference between internal and external growth

External growth methods:

• Mergers and acquisitions (M&As)

Explain the difference between internal and external growth

External growth methods:

• Mergers and acquisitions (M&As)

Hence, takeovers are also referred to as hostile takeovers.

Explain the difference between internal and external growth

External growth methods:

• Mergers and acquisitions (M&As)

Horizontal integration is when one firm merges or

An example of vertical integration is: