Growth and evolution

External growth
1. Mergers and acquisitions
  1. When two businesses become integrated. Merger is for companies that join forces and forma a bigger combined business, while acquisition (or takeover) happens when one of the businesses takes over the other.
    1. Horizontal Integration
      1. Two businesses in the same industry are integrated. E.g. Quimica Suiza and Mifarma
    2. Backward Vertical Integration
      1. A business integrated with another business back in the chain of production
    3. Forward Vertical Integration
      1. A business integrated with another business forward in the chain of production
    4. Conglomeration
      1. Owhen two businesses in unrelated lines integrate. E.g. Intercorp and InkaFarma
2. Joint Venture
  1. When two or more businesses join forces to finance a new business venture or product.They agree to combine resources for a specific period of time.
    1. Advantages
      1. Reduce the amount of finance needed to raise
      2. New insights and expertise, having acces to better resources
    2. Disadvantages
      1. There's no equal involvement and there's lack of communication
      2. Great imbalance and clash of cultures (beliefs, tastes and preferences)
3. Strategic alliances
  1. When two or more parties relate to pursue a set of goals or to meet a critical business need while remaining independent organizations. E.g. Starbucks and Barnes & Noble
    1. Limitations
      1. No new business is created
      2. Individuals in the alliance remain independent
      3. Lack of control and unequal benefits
4. Franchising
  1. When a business pays for the right to sell its products on another company. It’s popular for businesses that want to expand globally. E.g. KFC, Subway, Tambo, Montalvo, etc.
    1. Franchisee
      1. It’s the person or business buying the rights. It’s a way of reducing the risk of business failures by using the tried and tested ideas and products of an already successful business.
    2. Franchisor
      1. It’s the person or business selling the rights, providing a package of services in return for an initial fee and a regular royalty payment (usually based on a proportion of sales revenue).
5. Impact of the globalization
  1. Globalization is the process by which the world’s regional economies are becoming one integrated global unit, having a significant impact on businesses’ growth and evolution.
    1. Increased competition
      1. Large foreign businesses can force domestic producers to become more efficient as the domestic consumer has more choice.
    2. Greater brand awareness
      1. Domestic producers have to compete with big brand names and so need to create their own unique selling point (USP).
    3. Skills transfer
      1. Foreign businesses must use some local knowledge which will lead to a two-way transfer of knowledge and skills.
    4. Closer collaboration
      1. Domestic businesses can create new business opportunities.
6. Multinational companies
  1. Businesses that operate, own, and control resources outside their country of origin, generating more revenues than the country they operate in. They do also have factories in more than one country. E.g. Coca-Cola, Sony, P&G, etc.
    1. Advantages
      1. Improved communication
      2. Dismantling of trade barriers
      3. Deregulations of the world’s financial markets
      4. Increasing economic and political power
    2. Disadvantages
      1. Remove of raw materials from the local economy
      2. It creates a dependency on the business (economically unhealthy)
      3. Profits often go back to the business instead of staying in the local market
      4. SMEs are put out of business because of the multinational business’ size
Internal growth
1. It’s the increase of sales forced by recruiting more sellers and/or opening more establishments. It includes investing in more advertising, cutting prices (even if profits fall in the short run), and developing better production techniques so that the business can produce its products at lower costs and therefore it can cut prices (but not profits) and win more market share.
Diseconomies of scale
1. Leads with the point where businesses, growing in size, start to experience inefficiencies that increase average unit costs. It’s the increase in long-term average cost of production as the scale of operations increases beyond a certain level.
Economies of scale
1. When a business increases its scale of operation (volume of outputs), it produces more in greater volume and become more efficient (accomplishing something with the least waste of resources). That situation means that the business has achieved economies of scale, reducing in average unit cost as the business increase in size.
  1. Total cost
    1. Measured in terms of costs of production per unit
      1. Total costs = Fixed costs + Variable costs
        Fixed costs
        Are costs that don’t change as production changes (e.g. rent)
        Variable costs
        Are costs that vary as production changes (e.g. raw materials)
  2. Average cost
    1. It’s the production cost per unit of output and it’s also known as unit cost or average cost
      1. Average cost = Total cost / Quantity produced
        AC = (FC + VC) / Q

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Growth and evolution

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