1.6.1 Growth and Evolution
Internal and External Growth
• Economies and diseconomies of scale:
• Internal - everything an organisation undertakes based on its
• businesses that are able to produce goods and services own to expand and develop
at a lower cost than their competitors have a competitive • External - development that involves the participation of
advantage another organisation. The company works with another
• business producing a higher level of output will be able to company in order to expand. For examples, M&A, joint
produce a given good or service at a lower cost ventures and strategic alliances, and franchising.
• economies of scale are factors that decrease the average • merger - form of external growth that usually results in two
unit cost of production as the level of output increases, firms combining to form a third entity. This new company
usually resulting from bulk purchasing, technological, then replaces the two that existed before
marketing, managerial or financial economies of scale • acquisition - form of external growth whereby one firm
• diseconomies of scale are factors that increase the purchases another firm
average unit cost of production as the level of output • takeover - the term used to describe the process that results
increases usually by the difficulty of managing very large in either a merger or an acquisition. A takeover involves one
operations firm offering to buy the shares from the shareholders of
another firm, usually at a price that exceeds their value in the
• Economies of scale stock market. A hostile takeover is when this is opposed by
• bulk purchasing the senior managers
• acquiring inputs at a lower cost when larger amounts • Joint ventures - involve the creation of a new company by
are purchased two or more ‘parent’ companies. The joint venture is formed
• technological in order to carry out an aim or objective that might be difficult
• investing in newer machinery or computers as it for each of the parent companies to achieve on its own
allows production to become more automated and • Strategic alliances - involves two or more organisations
efficient working together to realise a set of common objectives. The
• production may have to reach a certain level before relationship between the companies may be contractual,
the investment begins to be profitable however, no new entity is created and the original
• marketing organisations remain intact
• when the marketing costs are spread over a larger • advantages of external growth
volume of sales, the marketing cost per volume of • often faster
output decrease • in the case of M&A, elimination of a competitor
• larger corporations may be able to negotiate better • Potential for economies of scale
rates for airtime is they buy more • synergy
• managerial • improve access to capital
• as organisations grow it is likely they will require more • disadvantages of external growth
personnel, when this is the case, more managers can • potential for reduced risk in the event of success, but
be recruited for their specialist areas failure can increase risk
• Financial • competitors may gain know-how or proprietary information
• cost of capital usually decreased as financing through JV or SA
requirements grow • need more control and knowledge of employees and
• Large corporations can negotiate lower interest rates assets
due to the perception that they represent a lower risk • possibility of a culture clash between organisations
• if the external growth is finances through borrowing,
• Diseconomies of scale gearing will be increased
• Co-ordination • advantages of internal growth
• strong vision and mission are required to set aims and • often less risky
objectives • existing owners and shareholders maintain control
• it is challenging to have one CEO to be followed by • if internally finances, will not increase gearing, interest
hundreds of thousands of employees expense and the risk of insolvency or bankruptcy
• there may be rivalries between different divisions of a • internal management may be strong, know the business
large firm better, and be better positioned to react to changes in the
• Communication external environment
• as organisations grow, their structures become more • disadvantages of internal growth
hierarchical, with several layers of management • can be slow and strong competitors may enter the market
between CEO and employees, communication can • limited resources
become complicated • more employees means more salaries to pay, may not be
• Communication issues get worse if offices spread able to retain good cash flow position
across the globe • the market may not allow the business to grow above a
• Control certain size
• as companies grow there is an increased number of • factors to take into account when deciding on growth
layers between employees and CEO, the large strategy
number of managers can increase expenses such as • timing
salaries and wages • competitive environment
• jobs may become so specialised that employees no • regulatory environment - mergers to big so CMA intervene
longer see how their role fits into the company’s • risk - internal less risky
operation as a whole, thus making them feel alienated • proprietary information and tech - external more risk of
in decision making leaks
• culture clashes
Internal and External Growth
• Economies and diseconomies of scale:
• Internal - everything an organisation undertakes based on its
• businesses that are able to produce goods and services own to expand and develop
at a lower cost than their competitors have a competitive • External - development that involves the participation of
advantage another organisation. The company works with another
• business producing a higher level of output will be able to company in order to expand. For examples, M&A, joint
produce a given good or service at a lower cost ventures and strategic alliances, and franchising.
• economies of scale are factors that decrease the average • merger - form of external growth that usually results in two
unit cost of production as the level of output increases, firms combining to form a third entity. This new company
usually resulting from bulk purchasing, technological, then replaces the two that existed before
marketing, managerial or financial economies of scale • acquisition - form of external growth whereby one firm
• diseconomies of scale are factors that increase the purchases another firm
average unit cost of production as the level of output • takeover - the term used to describe the process that results
increases usually by the difficulty of managing very large in either a merger or an acquisition. A takeover involves one
operations firm offering to buy the shares from the shareholders of
another firm, usually at a price that exceeds their value in the
• Economies of scale stock market. A hostile takeover is when this is opposed by
• bulk purchasing the senior managers
• acquiring inputs at a lower cost when larger amounts • Joint ventures - involve the creation of a new company by
are purchased two or more ‘parent’ companies. The joint venture is formed
• technological in order to carry out an aim or objective that might be difficult
• investing in newer machinery or computers as it for each of the parent companies to achieve on its own
allows production to become more automated and • Strategic alliances - involves two or more organisations
efficient working together to realise a set of common objectives. The
• production may have to reach a certain level before relationship between the companies may be contractual,
the investment begins to be profitable however, no new entity is created and the original
• marketing organisations remain intact
• when the marketing costs are spread over a larger • advantages of external growth
volume of sales, the marketing cost per volume of • often faster
output decrease • in the case of M&A, elimination of a competitor
• larger corporations may be able to negotiate better • Potential for economies of scale
rates for airtime is they buy more • synergy
• managerial • improve access to capital
• as organisations grow it is likely they will require more • disadvantages of external growth
personnel, when this is the case, more managers can • potential for reduced risk in the event of success, but
be recruited for their specialist areas failure can increase risk
• Financial • competitors may gain know-how or proprietary information
• cost of capital usually decreased as financing through JV or SA
requirements grow • need more control and knowledge of employees and
• Large corporations can negotiate lower interest rates assets
due to the perception that they represent a lower risk • possibility of a culture clash between organisations
• if the external growth is finances through borrowing,
• Diseconomies of scale gearing will be increased
• Co-ordination • advantages of internal growth
• strong vision and mission are required to set aims and • often less risky
objectives • existing owners and shareholders maintain control
• it is challenging to have one CEO to be followed by • if internally finances, will not increase gearing, interest
hundreds of thousands of employees expense and the risk of insolvency or bankruptcy
• there may be rivalries between different divisions of a • internal management may be strong, know the business
large firm better, and be better positioned to react to changes in the
• Communication external environment
• as organisations grow, their structures become more • disadvantages of internal growth
hierarchical, with several layers of management • can be slow and strong competitors may enter the market
between CEO and employees, communication can • limited resources
become complicated • more employees means more salaries to pay, may not be
• Communication issues get worse if offices spread able to retain good cash flow position
across the globe • the market may not allow the business to grow above a
• Control certain size
• as companies grow there is an increased number of • factors to take into account when deciding on growth
layers between employees and CEO, the large strategy
number of managers can increase expenses such as • timing
salaries and wages • competitive environment
• jobs may become so specialised that employees no • regulatory environment - mergers to big so CMA intervene
longer see how their role fits into the company’s • risk - internal less risky
operation as a whole, thus making them feel alienated • proprietary information and tech - external more risk of
in decision making leaks
• culture clashes
