1.7 Growth and
Evolution

Economies of Scale
◦ Purchasing economies
“bulk buying” – discounts for large orders
◦ Technical economies
Production lines – produce products at a reduced cost
because of efficiency
Computer systems – afforded by large firms
that can absorb greater fixed costs
◦ Financial economies
Banks show preference to large corporations
Large firms can “go public” with their stock
◦ Marketing economies
Advertising costs for large companies can be spread over
a large product line
◦ Managerial Economies
Large firms can higher specialists
 Diseconomies
of Scale
◦ Communication Problems
◦ Alienation of Workforce
◦ Poor Coordination and slow decision
making
◦ Large Scale production costs
 Growth
Internal Growth
Companies expand by creating new
offices, opening new stores, growing
existing business
External Growth
Merging with other firms, or acquiring
other firms through purchase
Types of External Growth
Merger
 When companies agree to combine and
operate under one board of directors with
shareholders in both businesses owning
the newly merged company.
Takeover
 When a company buys over 50% of the
shares of stock to gain controlling interest
Integration Options

Horizontal –

Forward Vertical –

Backward Vertical –

Conglomerate –
same industry and same stage of
production
United Airlines & Continental Airlines
same industry but a customer of the
existing business. Manufacturer owns distribution company and
retailers.
Comcast Cable owns NBC Television
same industry but a supplier of the
existing business. Manufacturer owns suppliers; helps control and
stabilize the supply chain.
Car manufacturer owns tire, glass, and metal
fabricator.
merger or takeover of a business in a
different industry
GE owns finance, energy, technology, and consumer
companies
Small Business
VS
Large Business
Can be managed and controlled Can afford to employ
by owners
professional managers
Can adapt quickly to customer
needs
Cost reductions due to largescale production
Personal service
Can set prices that other firms
follow
Can know your staff
Access to financing
Average lower costs due to low
overhead and diseconomies of
scale
Risks can be spread over
diversification of markets
and/or products
Easy to communicate with
workers and customers
Likely to afford research to
develop new
products/processes
Recommending Size of Business
1.
2.
3.
4.
5.
Owners Objectives
Capital Available
Size of Market
Number of Competitors
Scope for scale economies
Either Diseconomies or Economies
Types of Businesses
Franchise
A business that uses the name, logo, and
marketing methods of the franchiser.
Example: McDonald’s, Dairy Queen,
Wendy’s, Subway
NOT: Walmart, Target, Harris Teeter
Joint Venture
Two or more businesses agree to work
closely together to further a common
interest.
Costs are shared
Different companies have different
strengths
 Different market shares that could be
combined


Examples of Joint Ventures

DowCorning
Dow Chemical with Corning Glass Works
Dow Chemical combined their chemical technology with Corning Glass
Works glass products.
Products: Solar Panels, “teflon” coatings

Sony Ericisson
Sony – A Japanese electronics firm partnered with Ericsson a Swiss
telecommunication company.
Products: mobile phones

MillerCoors
SabMiller and Molson Coors Brewing Co. partnered to better compete with
Anheuser-Busch InBev – a Dutch company- 7/2008

Ice Cream Partners USA
Nestle – experience in specialty foods partnered with Haagen-Dazs an ice
cream company to expand their markets and growth opportunity
Strategic Alliance
Agreements between firms to commit resources to
achieve an agreed set of objectives


University research – NC State has
Engineering campus with many companies
represented.
Supplier – design new materials for the
manufacturer. Soho Natural Soda worked with
Anheuser-Busch for distribution.

Competitor – reduce risks entering a market
that neither currently operate. Motorola And InFocus created high performance video displays.
Ansoff’s Matrix
A model used to show risk with the four growth
strategies
Market Penetration – higher market shares in
existing market with existing products
 Market Development – selling existing
products in new markets
 Product Development – sales of new or
improved products in existing markets
 Diversification – selling different or unrelated
products in new markets


Southwest Airlines expands their service
from the Texas.

Southwest Airlines now operates in 37
states…mainly in the northeast, midwest,
and southwest regions of the country.
Market Penetration

Developing new products for a market you
already serve.

Coke created new products:
Diet Coke
Coke Zero
Coke
Cherry Coke
Product Development

Selling existing products into NEW
markets
Burger King expanding into foreign
markets. Expecting 80% of new growth
to be overseas. High expectations for the
Asian market
Market Development

Selling different and unrelated goods or services
in new markets.

GE (General Electric)
Generation, transmission and distribution of
electricity (e.g. nuclear, gas and solar), industrial
automation, medical imaging equipment, motors,
railway locomotives, aircraft jet engines, and
aviation services. It co-owns NBCUniversal.
Through GE Commercial Finance, GE Consumer
Finance, GE Equipment Services, and GE
Insurance it offers a range of financial services
as well.
Diversification