GROWTH & THE IMPACT OF GLOBALIZATION

IB DIPLOMA – BUSINESS & MANAGEMENT –

Course Companion p70-79

GROWTH & EVOLUTIONEconomies of Scale

• As businesses grow in size that begin to benefit in a number of ways from falling average costs (unit costs)

• They can spread their costs, such as rent, a over a wider range of units and therefore the average costs begin to fall.

• This is known as the gaining benefits from economies of scale.

Economies of Scale (Examples)

• If a business orders a lot from suppliers it may be able to get bulk purchase discounts

• If more units are ordered from suppliers transport costs will be lower on average.

• As a business grows, its managers are able to specialize in certain roles, so they become experts and therefore more efficient. When the business was smaller the managers probably had to take on lots of different roles. They may not have been very fast or skilled at doing some of these and so they were less productive.

• Banks may well give a large business lower interest rates on loans than they offer small businesses

Diseconomies of Scale• As businesses grow in size

there is a point where average costs begin to rise – inefficiency begins to appear – because of diseconomies of scale.

What could cause diseconomies of scale?

• Communication breakdowns can arise in larger organizations.

• Decision making slows down as more people become involved, causing inefficiency and lost market opportunities.

• Motivation of workers falls and productivity drops causing costs to rise – often workers in larger organizations feel they have no influence or importance and lose interest in working effectively.

Arguments for keeping a business small scale

• Many small businesses decides not to expand but instead to stay small because they prefer the friendly atmosphere of a work environment where everyone knows the boss and respects each other.

• There may be more manageable levels of debt if the business is kept small. Large businesses need more funds to debt levels and personal investment may be much greater and more worrying for the owner.

Arguments for keeping a business small scale

• Small business people often make poor directors of large organizations.

• Different skills are needed to lead a large organization.

• To take one example, can the person talk effectively in public, perhaps to a large group of investors.

Arguments for expanding and growing the business

• The business may become less dependent on one product or one market, eg: the business might start to expand.

• Career opportunities for the workforce grow and new managers appear who can help run the organization.

• If business conditions become tougher, there is less worry in a large business about sacking people (whereas in a small business the colleagues may be old friends)

Arguments for expanding and growing the business

• Owners of a business that expands can increase their wealth in the future. A larger and more successful company will sell for a lot of money when they want to retire.

• If a business does not expand, it may be squeezed out of the market completely. The argument is “You can’t stay still” – all businesses need to grow to survive.

Internal Growth Vs External Growth

Businesses can expand in three ways.• Internal (organic growth) or• External (growth through

external solutions)• Franchises

Internal (Organic Growth)

• Increasing sales by recruiting more agents, advertising more or cutting prices – even if profits fall in the short run.

• Developing better production techniques so that business can produce its products at lower costs and therefore it can cut prices (but not profits) and win more market share.

Growth through external solutions

External solutions include:

• Joint Ventures•Strategic Alliances•Mergers & Acquisitions

EXTERNAL GROWTH SOLUTIONSJoint Ventures

• A business can work with a partner to pool resources and develop business opportunities.

• One business may have a skill in producing one product and the other business in a complementary product.

• If they both sell products together they will win most of the market from competitors who can’t offer both.

EXTERNAL GROWTH SOLUTIONSStrategic Alliances

• Sometimes two or more organizations will benefit from an alliance of convenience.

Example – Oneworld Alliance• In the airline industry, the Oneworld Alliance (American

Airlines, British Airways, Cathy, Qantas + 6 other carriers) is great example of a strategic alliance.

• The purpose of Oneworld is for the airlines to share ticketing and make transfers at each others main airports speedier.

• This reduces costs and more efficient for consumers.

EXTERNAL GROWTH SOLUTIONSMergers & Acquisitions

• Buying a competitor, supplier or customer can help increase the pace of growth.

Vertical Integration• If the business buys a customer or supplier we

can this call this `vertical integration.`Horizontal Integration• If a business buys a competitor we call this

horizontal integration.

EXTERNAL GROWTH SOLUTIONSMergers & Acquisitions

Merger• If two companies of equal size join forces we call it

a merger. • Eg: Time Warner & AOL merger in 2002Acquisition • If two companies are very different in terms of

size and profits, we would generally say that this was an acquisition by one business of another.

• Eg: Volkswagen acquired Skoda cars in 2000

EXTERNAL GROWTH SOLUTIONSWhat are the risks with acquisitions?

• Organizations often pay too much to buy another business.

• Problems can emerge in the organization being acquired.

• The different culture of the two organizations can mean that the workforces are never happy working with each other and productivity falls.

EXTERNAL GROWTH SOLUTIONSWhat are the benefits of acquisitions?

• There may be cost savings, for example, from closing one factory down and moving the business to the other site.

• The business can share R&D knowledge and skills.

• The businesses might also cross-sell to each other’s customer list.

FRANCHISES

• Sometimes a business can expand more quickly by offering franchises to others. • A franchise is a legal right for a

second business to manufacture, sell and or market products from a company in a certain place or though a certain medium.

FRANCHISESThe Franchisee vs Franchisor

• The entrepreneur buying the Franchise is called a Franchisee• The business selling the

rights is the Franchisor.

FRANCHISESHow many Franchises are there in the world?

• Globally it estimated there are about 3000 companies in over 150 different industries, where franchises are available.

THE ANSOFF MATRIX

• The Ansoff Matrix is a marketing tool created by Igor Ansoff and it used to help businesses explore possible growth strategies.

• The Ansoff matrix has four quadrants and four approaches:

1. Market Penetration Approach2. Market Development Approach3. Product Development Approach4. Diversification Approach

THE ANSOFF MATRIX1. Market Penetration Approach

• This is growth with existing products in existing markets.• This is the market penetration

approach, where the business is growing its current goods or services in the current markets.

THE ANSOFF MATRIX2. Market Development Approach

• Growth with existing products in new markets.• This is the market development

approach, where the business is growing with its current goods or services into new markets

THE ANSOFF MATRIX3. Product Development Approach

• Growth with new products in existing markets.• This is the product development

approach, where the business is growing with new goods or services in its current markets.

THE ANSOFF MATRIX4. Diversification Approach

• Growth with new products in new markets.• This is the diversification

approach, where the business is growing with new goods and services in new markets.

What is Globalization?

• Globalization (or globalisation) describes an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and trade

GLOBALIZATION

Multinational companies (MNCs)• Multinational companies are companies that

have factories in the more than one country.• An organization that only has sales offices

abroad would not be considered a multinational business.

• Walmart (US) / Tata Group (India), Exxon (US) and Volkswagen (Germany) are examples of multinational companies.

Why have MNCs developed?

• Saturation of domestic markets – this meant growth had to be other countries.

• Wanting to move closer to their global customers.• Wanting to benefit from lower labour costs.• The lower tax rates in other countries allowing for greater

retained profits.• Incentives from governments monetary and non-monetary.• Exploiting colonial power to grab markets abroad.• The opportunity to be near raw materials and energy

sources.

PROBLEMS WITH MNCSExample: Bhopal Disaster 1985

• In Bhopal India in 1985, Union Carbide operated a chemical plant that leaked toxic gases and killed thousands of local residents.

• Safety standards were not rigorous enough as the businesses had minimized costs.

PROBLEMS WITH MNCsExample: MacDonalization

• MacDonalization is the term given to the impact of fast food outlets in countries where obesity was previously almost unheard of.• This has an effect on health costs

and also on cultural values.

PROBLEMS WITH MNCsNo long term loyalty to the country

• Some people think that multinationals are `footloose` - that they have no long term loyalty to the country and will put out if there are negative changes in the external environment.

• Eg: The government increases tax rates, or if better locations emerge.

PROBLEMS WITH MNCsLow Wage Employment

• There are arguments that while MNCs create employment, the type of work they provide is low level and wages are low.

• If the work is only very low skilled and is also poorly paid then that would be of concern.

• In many cases though, the wages paid are at least equal if not better than the local rates and there is also some local management created.

MNCS – PROBLEMATIC OR BENEFICIAL FOR HOST COUNTRIES

•If multinationals are all bad why are they warmly welcomed by so many countries?

MNCs & FOREIGN DIRECT INVESTMENT (FDI)

• MNCs are the key mover of FDI in countries around the world.• They are an important driver for

globalization – which is the growing interconnectedness of the world we now live in.

REGIONAL TRADING BLOCS

A regional trading block is a collection of a countries that agree to certain rules regarding trade. There are various types of trading bloc:• Free Trade Areas• Customs Unions• Common Markets• Economic & Monetary Unions

REGIONAL TRADING BLOCSFree Trade Areas (FTAs)

• An FTA is where member countries trade with each other without imposing any taxes or restrictions on each other.

• However, each member is independent when it comes to determining restrictions or taxes on other countries outside of the bloc.

• NAFTA (North American Free Trade Agreement) which involves US, Canada and Mexico is an example.

REGIONAL TRADING BLOCSCustoms Unions

• In addition to the free trade area elements, a customs union has a common external barrier for imports.

• For example, it might impose a quota on the number of units of a product allowed in, or all countries in the union agree to a 10% tax on imports of certain goods or services.

• An example of a customs union is Mercosur (which includes Argentina, Brazil, Paraguay, Uruguay)

REGIONAL TRADING BLOCSCommon Markets

• As well as having the features of a customs unions, a common market not only allows free movement of goods and services, but also of labour and capital between its members.

• In theory, labour can move across borders without restrictions.

• The countries involved may also introduce agreements on products. Eg: They might standardize what the ingredient proportions must be for chocolate for it be called chocolate.

• The EU (European Union) is an example of a common market.

REGIONAL TRADING BLOCSEconomic & Monetary Unions

• In addition to the features of a common market, an economic and monetary union requires a single currency for its members.

• It will also requires a single interest rates across the zone.

• The EUROZONE group in the EU is the best example.

The Impact on Businesses Joining a Trading Block

This will depend on a variety of factors such as:• The type of trading block• The proportion of business that the

organization has outside the bloc and how this may be affected. Eg: If there is a common tariff or tax on imports to the block from a country that is not a member, that country might impose limits or taxes on exports in retaliation.

The Impact on Businesses Joining a Trading Block

• The number of competitors in the block that may now have free access to the organization’s domestic market and customers.

• The new opportunities for free entry into other member states and markets

• The likelihood of the country and bloc developing into the next phase. Eg. From common market to economic and monetary union.

• The level of imported raw materials or components that the business buys from outside the block and the level and cost of any restrictions, quotas or taxes they may now appear.