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1 7 Growth And Evolution Outline

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1.1 Nature of business activity

Key words

Notes

1. Apply the concepts of economies and diseconomies of scale to business decisions.

Economies of scale
 Economies of scale refer to the lower average costs of production as a firm operates on a larger scale. o Can help businesses gain a cost advantage over their competitors. Lower average costs mean charging lower prices an earning a higher product margin o Benefits:
 Easier and cheaper access to finance
 Marketing economies
 Division of labour and technological economies Internal economies of scale o Internal economies of scale refers to economies of scale that are within the organization's control and occur within the firm. o Technical economies
 Use sophisticated machinery in an intensive way mass produce their products
 The high fixed costs of their equipment and machinery are spread over the huge scale of output, thereby reducing the average costs of production
 Large market demand-benefit from having a large and efficient distribution and transportation arrangement.
 Small businesses:
 Not feasible because of the excess supply produced
 Not cost-efficient o Financial economies
 As a firm grows in size, it is much easier for that firm to access loan because banks see them as 'low risk'
 Small businesses:
 Struggle to raise external finance
 Have to pay higher rates of interest on overdrafts and loans o Managerial economies
 Employ specialist to split up manager roles
 Increasing specialization can also create benefits of synergy for the business o Specialization economies
 Employ more employees to creates division of labour of the workforce o Marketing economies
 Large businesses
 Benefit form lower average cots by selling in bulk
 Benefit from reduced time and transaction costs
 Administration
 Cost of invoicing customers
 Global marketing economies
 Spread the high cost of advertising across the world
 Using same marketing campaign o Monopsony economies
 Buying resources in bulks
 Lower average cost
 Only for businesses with strong buying power o Commercial economies
 Buying resources in bulks
 Even small companies can do it o Risk-bearing economies
 Conglomerates-firms that have a diversified portfolio of products in different markets External economies of scale o External economies of scale refers to economies of scale that are within the industry that the business operates and are largely beyond the control of the business. o Technological progress o Improved transportation and communication networks o More and better trained labour o Regional specialization Diseconomies of scale
 Diseconomies of scale are the cost disadvantages of growth o Unit costs are likely to eventually rise as a firm grows in size due to internal factors and external factors Internal diseconomies of scale o Lack control and coordination o Poorer working relationship

1.1 Nature of business activity

Key words

Notes
Slack amongst the workforce Bureaucracy (polices) increases Complacency External diseconomies of scale o External diseconomies of scale refers to an increase in the average costs of production as a firm grows due to factors beyond its control. o This is often caused by problem associated with too many firms being in the industry o Too many businesses locating in a certain area will result in land becoming more scarce thereby increasing market rents o Traffic congestion o The supply of local labour may also increase dye to the opportunities being offered by rivals located in the same area o Higher wages and financial rewards needed Dealing with diseconomies of scale o Reduce level of output o Introduce measures to remove productive inefficiencies

o o o

2. Evaluate the relative merits of small versus large organizations.

Growth of a business = expansion in size of its operations o Market share o Total revenue o Size of workforce o Profit o Capital employed o Market Value Reason of growth/remain small

Be large Be small
 To reap the benefit of economies of scale
 Cost control
 Economies of scope
 Financial risk
 In addition to large organization achieving
 Government aid economies of scale they may also benefit from
 Local monopoly power economies of scope
 Personalised services
 Larger market share
 Flexibility
 Survival
 Small market size
 Spread risk
 Brand recognition
 Image convenience discounts
 Customer loyalty
 More chose
 Barriers to entry
 The optimum size for a business will depend on its internal structure, its costs and the size of the market.
 The most appropriate size for a business also depends on its aims and objectives.

3. Recommend an appropriate scale of operation for a given situation.

4. Explain the difference between internal and external growth.

Internal Growth
 grows internally, using its own resources to increase the scale of its operation and sale revenues.
 Ways of changing o Change of Price o Advertising and Promotion o Improving production and production o Selling products in different locations o Offering customers preferential credit payment terms o Investing in capital expenditure o Training and Development External Growth grows by collaborating with, buying up or merging with another firm

5. Evaluate joint ventures, strategic alliances, mergers and takeovers as methods of achieving a firm's growth objectives.

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