The Size of Business and Economies of Scale

-Miss.Kinnari Kotecha

Organizing is the managerial function of arranging people and

resources to work toward a goal.

• The size of a business can be measured in a variety of ways; value of turnover or assets, capital employed, level of profits, market share, or by the number of employees and size of firm.

Layout and infrastructure of small business Unit

Layout and infrastructure of large business unit

WHY DO FIRMS WANT TO GROW?

• There may be several reasons why firms may wish to grow. To aid analysis it is worth considering three general reasons:

 • To achieve greater market share or prestige.

• To achieve greater security from diversification and/or product differentiation.

• To achieve cost reductions by taking advantage of economies of scale.

ORGANIZING

• DIVISION OF LABOR OR SPECIALIZATION. • DEPARTMENTALIZATION. • CHAIN OF COMMAND. • SPAN OF MANAGEMENT. • DEGREE OF CENTRALIZATION. • FORMALIZATION. • ORGANIZING DECISIONS • SIZE. • ENVIRONMENTAL CONDITIONS. • TECHNOLOGY.

HOW CAN FIRMS GROW?

• Through internal expansion e.g. by reinvesting past profits or savings.

• Through external expansion; e.g. by integrating or merging with other firms.  

INTEGRATION

• There are two general methods of integrating

• Horizontal Integration: This type of merger takes place between firms in the same industrial sector (i.e. primary, secondary, or tertiary) and at the same stage of the production process.

• For example, the Rowntree-Nestle merger involved two firms in the secondary sector, both at the manufacturing stage.

• Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. megamerger The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. The merger created a company valued at $182.4 billion and with a 7.3 per cent share of the global pharmaceutical market. The merged company expected $1.6 billion in pretax cost savings after three years. The two companies have complementary drug portfolios, and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force.

Vertical Integration

• This type of merger takes place between firms either in the same industrial sector or in different industrial sectors, both of whom are engaged at producing products at different stages in the production process. A business can integrate vertically through;

• Example: Merger of Usha Martin and Usha BeltronUsha Martin and Usha Beltron merged their businesses to enhance shareholder value, through business synergies. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies.

• Backward vertical integration. This involves the merging of a firm with another engaged at an earlier stage of the production process.

• For example, a clothing manufacturer taking over a textile firm.

• For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts.

• Forward vertical integration. This involves the merging of a firm with another engage at a later stage of the production process.

• For example, a manufacturing firm taking over a retail outlet.

• The Indian petrochemical giant Reliance Industries is a great example of vertical integration in modern business. Reliance's backward integration into polyester fibres from textiles and further into petrochemicals was started by Dhirubhai Ambani. Reliance has entered the oil and natural gas sector, along with retail sector. Reliance now has a complete vertical product portfolio from oil and gas production, refining, petrochemicals, synthetic garments and retail outlets.

• en.wikipedia.org/wiki/Vertical_integr• www.quickmba.com/strategy/vertical-in...• www.wikinvest.com/wiki/Vertical_integ• www.investopedia.com/terms/f/forwardi• www.allbusiness.com/glossaries/forwar