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  • IB Business Management
    • 01 Business Organization and the Environment >
      • 1.1 Introduction to Business Management
      • 1.2 Types of business organizations
      • 1.3 Organizational objectives
      • 1.4 Stakeholders
      • 1.5 External Environment
      • 1.6 Growth and Evolution
      • 1.7 Organizational planning tools
    • 02 Human Resources >
      • 2.1 Human Resource Planning
      • 2.2 Organizational Structure
      • 2.3 Leadership and Management
      • 2.4 Motivation
      • 2.5 Organizational and corporate cultures
      • 2.6 Employer and employee relations
    • 03 Finance and Accounting >
      • 3.1 Sources of finance
      • 3.2 Costs and revenues
      • 3.3 Break-even analysis
      • 3.4 Financial Accounts
      • 3.5 & 3.6 Ratio Analysis
      • 3.7 Cash flow
      • 3.8 Investment appraisal
      • 3.9 Budgets
    • 04 Marketing >
      • 4.1 The Role Marketing
      • 4.2 Marketing Planning
      • 4.3 Sales Forcasting
      • 4.4 Market Research
      • 4.5 Product >
        • 4.5 Price
        • 4.5 Promotion
        • 4.5 Place
      • 4.7 International Marketing and Globalization
    • The Exam
  • IB Economics
    • 01 Microeconomics >
      • 1. The Foundations of Economics
      • 1.1 Demand and Supply
      • 1.2 Elasticities
      • 1.3 Government Intervention
      • 1.4 Market Failure
    • 02 Macroeconomics >
      • 01 Level of Economic Activity
      • 2.2 Aggregate Demand
      • 2.3 Aggregate Supply
      • 2.4 Macroeconomic Equlibruim
      • 2.5 Unemployment
      • 2.6 Inflation
      • 2.7 Economic Growth
      • 2.8 Equity in the distribution of income
    • 03 International Economics >
      • 3.1 Free Trade
      • 3.2 Protectionism
      • 3.3 Exchange Rates
      • 3.4 Balance of Payments
      • 3.5 Economic Integration
    • 04 Development Economics >
      • 4.1 Economic Development
      • 4.2 Measuring Development
    • 05 Exam Preparation
  • Individuals & Societies 8
    • 01 Belief systems and their influence on culture
    • 02 How are societies governed?
    • 03 Japan 1603 - 1945: Isolation and then expansion
    • 04 What are natural hazards and how do societies respond to them? Case Study: Japan
  • Individuals & Societies 7
    • 01 Economic Growth and Development
    • 02 Where are all the people?
    • 03 What can we learn from Classical Civilizations (Greece) >
      • 03 What can we learn from Classical Civilizations?
    • 04 How has globalization shaped the world?
  • AP World History
    • Free Response Questions
    • 10,000 BCE - 600CE
    • 600 - 1450
    • 1450 - 1750
  • AP Human Geo
    • 01 Geography its nature and perspectives
    • 02 Population and Migration
    • 03 Cultural Geography
    • 04 Political Geography
    • 05 Urban Geography
    • 06 Economic Geography
    • 07 Agricultural Geography
    • Exam Review
  • Previously Taught Courses
    • G12 Economics >
      • Basic Economic Ideas
      • Producing and Consuming
      • Financial Capability
      • Managing the Economy
    • G10 World History >
      • 01 Exploration, Scientific Revolution and the Enlightenment
      • 02 The American Revolution
      • 03 France: Absolute Monarchy & Revolution
      • 04 The Industrial Revolution
      • 05 Imperialism and Nationalism
      • 06 WW1
      • 07 Inter-War Period
      • 08 WW2
    • G9 World History >
      • 01 Human beginnings and early civilizations
      • 03 Classical China
      • 04 The Muslim World
      • 05 Interregional Networks and Contacts 500 - 1450
      • 01 The Individuals and Societies Toolbox
      • 06 The Renaissance and Reformation >
        • Oral Presentations
    • G9 Social Studies >
      • History >
        • Analyzing Sources
      • Geography
    • G7 Social Studies >
      • Introduction to Empowerment
      • Economic Empowerment
      • Political Empowerment
      • Cultural Empowerment
      • National Empowerment
      • 04 Resources and the environment
      • Finance and Accounting >
        • 3.1 Sources of finance
        • 3.2 Investment appraisal
        • 3.3 Working capital
        • 3.4 Budgeting
        • 3.5 Financial Accounts
        • 3.6 Ratio Analysis
  • Extended Essay
    • 01 Getting Started
    • 02 Structuring the EE
  • Writing Skills
  • Critical Reading

1.6 External Growth

What we will study?

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By the end of this unit you should be able to:
  • Analyse the main types of economies and diseconomies of scale and apply these concepts to business decisions
  • Evaluate the relative merits of small versus large organisations
  • Explain the difference between internal and external growth
  • Analyse the advantages and disadvantages of franchising and evaluate it as a growth strategy
  • Evaluate internal and external growth strategies as methods of expansion
  • Discuss the impact of globalisation on business growth
  • Explain reasons for the growth of multinational companies
  • Evaluate the impact of multinational companies on host countries

Economies of scale

The advantages of large scale production that result in lower unit (average) costs (cost per unit)
Horizontal vertical integration
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Economies of scale
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Economies of scale can affect all aspects of a business.  McDonald’s 14,098 locations dwarf the next closest hamburger chain Wendy’s 5,876 locations. Assuming each chain spends the same amount per location on advertising, McDonald’s spends triple the amount Wendy’s does promoting its burgers. This marketing economy of scale serves McDonald’s in several ways.

First, the average person sees a McDonald’s ad three times more often than a Wendy’s ad, which should lead to greater sales. Second, McDonald’s has more locations at which to purchase hamburgers, so the advertising has a greater chance of pulling a consumer into a McDonald’s. Third, the large marketing expenditure created by combining 14,000 locations creates a massive moat protecting McDonald’s from competition.

The industrial revolution is over, and gone with it is some of the power of economies of scale. Today, businesses of all sizes can compete with large multinational corporations, particularly on the Internet. The Internet acts as a great equalizer, allowing small companies access to business resources previously reserved for large companies. The Internet allows businesses to
  • Reach customers all around the world without the expense of a physical outlet.
  • Market products very inexpensively.
  • Attack previously unprofitable, tiny niche markets.
  • Access vendors and talent from around the world.
  • Operate virtual offices, eliminating the need for expensive overhead.
  • Teleconference and videoconference for little or no money, eliminating the need for expensive travel.

By successfully using the Internet, companies of all sizes can remove the barriers of economies of scale.

When Amazon.com was launched, Jeff Bezos was operating out of his garage. Today Amazon boasts sales in excess of $50 million annually. Google was a school project of Serge Brin and Larry Page. Mark Zuckerberg was horsing around when he created Facebook in his dorm room. Some of today’s largest and most profitable businesses started as tiny ventures that have expanded through skillful use of the Internet.

What is a multinational corporation?

IMPORTANT NOTE: A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate group. 
A corporation that has its facilities and other assets in at least two countries other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries. Nearly all major multinationals are either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. Advocates of multinationals say they create jobs and wealth and improve technology in countries that are in need of such development. On the other hand, critics say multinationals can have undue political influence over governments, can exploit developing nations as well as create job losses in their own home countries. 
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Trade Blocs: Good or Bad?

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