Business Management 1.6 – GROWTH AND EVOLUTION
Scale of operations: maximum output that can be achieved using the available inputs
(resources). It increases by employing more inputs
ECONOMIES OF SCALE: reduction in unit cost of production, due to an increase in scale of
operations
Purchasing economies (bulk-buying)
Suppliers offer discounts for large orders (cheaper to process and deliver one large order)
Technical economies
Justify the cost of flow production lines. So, working at a high-capacity level, they offer
lower unit costs.
Latest and most advanced technical equipment are bought by businesses with high output
levels, so average fixed costs are reduced
Financial economies
Banks will lend money to big businesses, with proven track record and diversified range of
products, with lower interest rates than smaller businesses
By “going public”, the average cost of raising the finance will be lower for larger firms
selling millions of dollars´ worth of shares.
Marketing economies
Increase together with the size of the business, but not at the same rate. Costs spread
over a higher level of sales
Managerial economies
Attract specialist functional managers, who operate more efficiently than a general
manager, reducing average costs
DISECONOMIES OF SCALE: factors that cause average costs of production to rise when the
scale of operation is increased (increase beyond a certain size). These, prevent big businesses
to dominate smaller ones
Communication problems
Poor feedback to workers, use of non-personal communication media, communication
overload, and distortion of messages (long chain)
Workers initiatives may vanish, poor decisions are made and management inefficiency.
Alienation of the workforce (confusion)
Workers, by not having a sense of purpose and achievement, feel insignificant and
demotivate (do not do their best). In flow-line productions, workers do repetitive and
boring tasks.
Poor coordination and slow decision-making
Many departments, divisions and products in many countries, so cost might increase if
they aren’t well coordinated.
1
, Business Management 1.6 – GROWTH AND EVOLUTION
MERITS OF SMALL AND LARGE ORGANISATIONS
Small firms: few employees and low turnover. Importance of small firms:
Jobs are created
Run by dynamic entrepreneurs with new ideas leading to a wider consumer choice
Compete with large businesses, by not letting them to exploit consumers with high
prices and poor service
Supply specialist goods and services to important industries
Small businesses are encouraged to become established and expand, so, there are
more chances that an economy will benefit from large-scale organizations in the future
Lower average costs than big businesses, benefit for the consumer. Lower wage rates
paid, lower cost of management.
SMALL LARGE
AGESDISADVANTESADVANTAG
Managed and controlled by owners Afford hiring specialist professional
Adapt quickly to meet the needs managers
Offer personal service Cost reduction due to large-scale
Know each worker, “human” production
businessaccess to finance
Limited Able to set
Difficult
prices that other firms have
to manage
Owner has lots of responsibilities if Cost increases due to large-scale
he can´t employ specialist managers production
Higher risks (no diversification) Slow decision-making and poor
Do not benefit from economies of communication
WHAT IS AN APPROPIATE SCALE OF OPERATION – 5 factors
1. Owners´ objectives
2. Capital available
3. Size of the market the firm operates in (small markets do not need large scales of
production)
4. Number of competitors
5. Scope for economies of scale.
BUSINESS GROWTH
NO YES
Control, avoiding risks and preventing too Increased profits, market share, economies
heavy workloads of scale, power and status of owners and
directors. Reduced risk of takeover
2
Scale of operations: maximum output that can be achieved using the available inputs
(resources). It increases by employing more inputs
ECONOMIES OF SCALE: reduction in unit cost of production, due to an increase in scale of
operations
Purchasing economies (bulk-buying)
Suppliers offer discounts for large orders (cheaper to process and deliver one large order)
Technical economies
Justify the cost of flow production lines. So, working at a high-capacity level, they offer
lower unit costs.
Latest and most advanced technical equipment are bought by businesses with high output
levels, so average fixed costs are reduced
Financial economies
Banks will lend money to big businesses, with proven track record and diversified range of
products, with lower interest rates than smaller businesses
By “going public”, the average cost of raising the finance will be lower for larger firms
selling millions of dollars´ worth of shares.
Marketing economies
Increase together with the size of the business, but not at the same rate. Costs spread
over a higher level of sales
Managerial economies
Attract specialist functional managers, who operate more efficiently than a general
manager, reducing average costs
DISECONOMIES OF SCALE: factors that cause average costs of production to rise when the
scale of operation is increased (increase beyond a certain size). These, prevent big businesses
to dominate smaller ones
Communication problems
Poor feedback to workers, use of non-personal communication media, communication
overload, and distortion of messages (long chain)
Workers initiatives may vanish, poor decisions are made and management inefficiency.
Alienation of the workforce (confusion)
Workers, by not having a sense of purpose and achievement, feel insignificant and
demotivate (do not do their best). In flow-line productions, workers do repetitive and
boring tasks.
Poor coordination and slow decision-making
Many departments, divisions and products in many countries, so cost might increase if
they aren’t well coordinated.
1
, Business Management 1.6 – GROWTH AND EVOLUTION
MERITS OF SMALL AND LARGE ORGANISATIONS
Small firms: few employees and low turnover. Importance of small firms:
Jobs are created
Run by dynamic entrepreneurs with new ideas leading to a wider consumer choice
Compete with large businesses, by not letting them to exploit consumers with high
prices and poor service
Supply specialist goods and services to important industries
Small businesses are encouraged to become established and expand, so, there are
more chances that an economy will benefit from large-scale organizations in the future
Lower average costs than big businesses, benefit for the consumer. Lower wage rates
paid, lower cost of management.
SMALL LARGE
AGESDISADVANTESADVANTAG
Managed and controlled by owners Afford hiring specialist professional
Adapt quickly to meet the needs managers
Offer personal service Cost reduction due to large-scale
Know each worker, “human” production
businessaccess to finance
Limited Able to set
Difficult
prices that other firms have
to manage
Owner has lots of responsibilities if Cost increases due to large-scale
he can´t employ specialist managers production
Higher risks (no diversification) Slow decision-making and poor
Do not benefit from economies of communication
WHAT IS AN APPROPIATE SCALE OF OPERATION – 5 factors
1. Owners´ objectives
2. Capital available
3. Size of the market the firm operates in (small markets do not need large scales of
production)
4. Number of competitors
5. Scope for economies of scale.
BUSINESS GROWTH
NO YES
Control, avoiding risks and preventing too Increased profits, market share, economies
heavy workloads of scale, power and status of owners and
directors. Reduced risk of takeover
2
