Unit OneBusiness organization and environment

1-6 Growth and evolution

Dr. Fereshteh Mohammadian

Economies and Diseconomies of scale

• Economies of scale: Increasing the scale of business operations (with greater volume of production) and becoming more efficient by lower average costs.

• Diseconomies of scale: increasing the average unit cost of business by increasing its size.

Efficiency

• Efficiency is measured in terms of costs of production per unit.

• Fixed costs: the costs are not changed during production changes (such as monthly rent payment which is the same regardless of the quantity of business production).

• Variable costs: the costs that vary as production changes.

Total costs = fixed cost + variable cost

TC = FC + VC

Average costs

• Average costs or unit costs or average unit costs = total cost per unit

Average cost =𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

𝑞𝑢𝑎𝑡𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

AC =𝑇𝐶

𝑄AC =

𝐹𝐶+𝑉𝐶

𝑄

i

Optimum

production

100% capacity utilization

Advantages of being a big business Advantages of being a small business

Grater chance to survive Greater focus to invest for more profitability and larger returns

Echonomies of scale (greater profit, higher return & healthier balance sheet

Greater cachet to be able to charge more for their good and services for higher profit margins

Higher status (to motivate employee and managers

Greater power to motivate managers and employees

Market leader status (can shape market habits)

Competitive advantage by providing personalized products or services

Increased market share (can control market by determining prices and deciding about standard services

Being too small make less competition with big businesses

Mergers Acquisitions Joint ventures Strategic alliances

Mergers: 2 business joint

together

Acquisitions

One business

take over the

other

Two businesses combine

resources, skills, knowledge &

expertise

More than two businesses

Business integrations such as Horizontal,

Vertical (forward or backward) of related

businesses or Conglomeration

(diversification) with unrelated business

lines

Pooling of resources for big

projects for a finite of time

No new business (agreement

for mutual benefits),

independent individual

businesses

Adv: -complementary activities,

economies of scale, control down or up

of production chain.

Adv: grater sales, keep legal

existence or identity, different

area of expertise make powerful

combination

Adv: more fluid than joint

venture, changing

membership wo destroying

alliances

Disadv: costly, high legal & consulting

fees, employees’ cultrul clash

Disadv: risk of disagreement Disdv: less capital strength

of legal merger, no

economies of scales, lack

ofstability for more fluidity

Horizontal integration: same industry, same line of production, or competitors

Backward integration (vertical): with earlier stage in the production (to protect

supply chain)

Forward integration (vertical): with later stage(to secure products outlet)

Conglomeration (diversification): with unrelated business line

Franchisors Franchisees

Developed business concept & product and sells the

right to offer it by the others

Buy the right to offer franchisor business concept &

product

In host or home country Other countries

Not have to provide the product Produce and sell the product

Knowledge of local markets, conditions and cultures Know local language

Gain sign-up fee and profit Pay for right of business Concept &

royalty (a %of sale or a flat fee)

Provide the stock, the fitting and the uniforms Set prices and wages

Staff training Employ staff

Legal and financial help Pay an agreed royalty on sales

Global advertising Advertise locally

Global promotions Local promotions

Acquire a franchise or develop an own business model by franchisee

Advantages Disadvantages

The product exists and is usually well

known

Has no control what to sell

The format of product sales is

stablished.

has unlimited liability for the franchise.

The set-up costs are reduced. Has to pay royalties to the franchisor

Existing of a secure supply of stock Has no control over supplies

Providing legal, financial, managerial

and technical help by franchisors

Makes all the global decisions.

Advantages of franchisors Disadvantages of franchisors

Gains quick access to wider

markets

Loses some cotrol in the day to

day running of the business

Makes use of local knowledge

and expertise

Can see its image suffer if a

franchise fails or does not

perform properly.

Does not assume the risks and

liability o running the franchise

Gains more profits and the sign-

up fees.

Globalization

• Globalization is the process by which the world’s regional economies are becoming one integrated global unit.

• Post-national businesses: although some companies have a home(registered in a country) but they are transnational which means no place their home or every place can be their home. In other words, they can extend or operate across national boundaries.

http://gaileacertta.jimdo.com/2016/07/26/download-torrent-a-dictionary-of-international-trade-organizations-and-agreements/

• Significant impact of globalization on the growth of domestic businesses:

• Increased competition= became more efficient by offering lower cost goods and services to the consumers

• Greater brand awareness= have to create their own USP by emphasizing the local or national origins of their products compared to the foreign products of multinational or global firms.

• Skill transfer: two-way transfer of knowledge and skills between foreign and local businesses.

• Closer collaboration: through joint venture, franchises or strategic alliances, domestic producers can create new business opportunities.

Rank Company Country Industry Revenue in USD

1 Walmart United States Retail $485.7 billion

2 Sinopec China Petroleum $446.8 billion

3 Royal Dutch ShellNetherlandsUnited Kingdom† Petroleum $431.3 billion

4China National Petroleum Corporation

China Petroleum $428.6 billion

5 ExxonMobil United States Petroleum $382.6 billion

6 BP United Kingdom Petroleum $358.7 billion

7State Grid Corporation of China

China Power $339.4 billion

8 Volkswagen Germany Automobiles $268.6 billion

9 Toyota Japan Automobiles $247.7 billion

10 GlencoreSwitzerland

United KingdomCommodities $221.0 billion

July 22, 2015