Business Management - IB Business Management PDF

Topic 1: Introduction to Business Management REVIEWQUESTIONS KEYTERMS 1. How do mission and vision statements differ from one Corporate social responsibility (CSR) is the conscientious another?...

Topic 1: Introduction to Business Management REVIEWQUESTIONS KEYTERMS 1. How do mission and vision statements differ from one Corporate social responsibility (CSR) is the conscientious another? consideration of ethical and environmental practice related to business activity. A business that adopts CSR acts morally 2. Why are objectives important to business organizations? towards all of its various stakeholder groups and the well-being of society as a whole. 3. What does it mean for a business to protect shareholder value? An ethical code of practice is the documented beliefs and philosophies of an organization, so that people know what is 4. What is meant by ethical objectives? considered acceptable or not acceptable within the organization. 5. How does growth differ from profit as business objectives? Ethical objectives are organizational goals based on moral guidelines, determined by the business and/or society, which 6. How do strategic objectives differ from tactical objectives? direct and determine decision-making. 7. What is corporate social responsibility (CSR)? Ethics are the moral principles that guide decision-making and business strategy. Morals are concerned with what is considered 8. What are the advantages and disadvantages of business to be right or wrong, from society's point of view. acting in a socially responsible way? A mission statement refers to the declaration of an organization's overall purpose. It forms the foundation for setting the objectives of a business. Objectives specify what an organization strives to achieve. They are the goals of an organization, such as growth, profit, protecting shareholder value and ethical objectives. Strategic objectives are the longer-term goals of a business, such as profit maximization, growth, market standing and increased market share. Strategies are the various plans of action that businesses use to achieve their targets. They are the long-term plans of the organization as a whole. Tactical objectives are short-term goals that affect a unit of the organization. They are specific goals that guide the daily functioning of certain departments or operations. Tactics are the short-term plans of action that businesses use to achieve their objectives. A vision statement is an organization's long-term aspirations, i.e. where the business ultimately wants to be. Figure 3.8 - Ethics and CSRare important for the long-term success of a business 52  Chapter4 Unit 1.4 - Stakeholders "Knowledge is of no value unless you put it into perspective." - Anton P.Chekhov (1860 - 1904), Russian playwright Contents 1.4 Stakeholders SL/H L content Depth of teaching Internal and external stakeholders A02 Conflict between stakeholders A02 © IBO,2022 Internal stakeholders (A02) he word 'stake' means to have an interest or to be involved more employers have encouraged their workers to be involved T in something. A stakeholder is any individual, group or organization with a direct interest or involvement in the operations and performance of a business. Hence, stakeholders in decision-making. A motivated workforce is more dynamic and loyal. Hence, it is important for businesses to meet the needs of their employees as far as is possible. As American are impacted by the activities of the organization. Stakeholders comedian Fred Allen (1894-1956) said, "Treat employees like can be categorised as internal or external. partners and they act as partners." Internal stakeholders are members of the business, namely (i) British entrepreneur Sir Richard Branson would agree with employees, (ii) managers and directors and (iii) shareholders Charles Handy and Fred Allen. Branson famously declared that (owners) of the organization. he puts his employees first, customers second and shareholders third. He claims that by doing this, both customers and shareholders will benefit. After all, demotivated workers are {i} Employees unlikely to produce good quality products or deliver good customer service (see Chapter 10). Worse, disgruntled staff The staff of a business will have a direct stake in the organization might take industrial action (see Chapter 13). For example, they work for. Employees are likely to strive to improve their around 40,000 BMW workers went on a prolonged labour pay (including other financial benefits), working conditions strike at its South Africa car plant in late 2013 causing export (such as hours of work and the physical working environment), sales to fall by 75%. In 2019, a pilots strike at British Airways job security and opportunities for career progression. cost the company lost earnings of €215 million ($245m). Theorists such as Charles Handy (see Chapters 8 and 11) argue that employees are an organization's most valuable asset. It is the {ii}Managers and directors staff who produce goods and services for sale; they are the ones Managers are the people who oversee the daily operations who directly communicate with the customers. Consequently, of a business. Directors are senior executives who have been 53 Topic 1: Introduction to Business Management elected by the company's shareholders to take charge of business To maximise dividends (a proportion of the company's operations on behalf of their owners. profits distributed to shareholders). Senior managers and directors might aim to maximize their To achieve capital gain in the value of the company's shares own benefits, such as annual bonuses and other financial (a rise in the value of the shares). rewards (see Chapter 10). Hence, they are likely to aim for profit maximization (see Chapter 3). This would also please the shareholders, helping to safeguard the jobs of top executives. Common mistake Moreover, senior staff will look at the long-term financial Many students confuse the terms stakeholders health of their organization. For example, they might aim to with shareholders, treating them as the same thing. retain profits for further investment in the business. Shareholders are the owners of a limited liability company so are only one stakeholder group of the business, albeit an important one. {iii) Shareholders Limited liability companies (see Chapter 2) are owned by their shareholders. This stakeholder group invests money in a company by purchasing its shares. Shareholders (also known Exam tip! as stockholders) are a powerful stakeholder group as they have voting rights and a 'say' in how the company is run. Some shareholders are internal stakeholders (such as directors or employees who hold shares in the company) As the owners of the company, shareholders are entitled to a whilst others can be external stakeholders (those who share of its annual profits. Shareholders have two main interests own shares in the company but are not directly involved or objectives: in the daily operations of the business). Question 4.1 - Nokia and Microsoft Nokia was once the pride of Europe having been the market leader in the mobile phones industry from 1998 to 2008, enjoying up to 49.4% market share. In 2005, the Finnish company sold its one billionth mobile phone. By 2007, its market value was a staggering $150 billion, making it the 5th most valuable brand in the world. However, the huge popularity of Apple and Samsung smartphones eventually forced Nokia to be sold to Microsoft for 'just' €5.4 bn ($7.3bn) in November 2013. An overwhelming 99.5% of Nokia's 3,900 shareholders voted in favour of the deal after seeing its share price drop by 93% and its market share continually decline to only 3%. The company's 32,000 employees who worked in the mobile phones division were transferred to Microsoft Mobile in early 2014. (a) Define the term market share. [2 marks] (b) Explain the difference between Nokia's shareholders and stakeholders. [4marks] (c) Examine how different stakeholder groups are likely to be affected by Microsoft's takeover of Nokia. [6marks] 54  1.4 Stakeholders External stakeholders (A02) {ii} Suppliers Suppliers provide a business with stocks (inventory) of raw xternal stakeholders are not part of the business but materials, component parts and finished goods needed for E have a direct interest or involvement in the organization. These compromise of (i) customers, (ii) suppliers, (iii) financiers, (iv) pressure groups, (v) competitors and (vi) the production. They can also provide commercial services, such as maintenance and technical support. Suppliers strive for regular contracts with clients at competitive prices. They also request government. that customers pay any outstanding bills on time. Businesses try to establish a good working relationship with {i} Customers their suppliers in order to receive quality stocks on time and Customer care is very important in all aspects of business at a reasonable price. For example, long-haul airline carriers activity. Marshall Field (1834- 1906), founder of Marshall Field rely on their catering suppliers to provide sufficient meals for & Company (a chain of American department stores, which their customers, otherwise flights might have to be cancelled was subsequently acquired by Macy's in 2005) said, "Right or if there is a dispute between the airline and the caterers. A wrong, the customer is always right." Sam Walton (1918 - 1992), good working relationship can also mean that suppliers offer co-founder of the world's largest retailer Walmart, also believed preferential credit terms, which allows a business to purchase in this thinking. He argued that customers can simply choose to today but pay at a later date, thus improving its cash flow spend their money elsewhere, thereby threatening the survival position (see Chapter 20). of a business. {iii} Financiers In ever competitive markets, businesses have to increasingly listen to the opinions of their customers. Bill Gates, co- Financiers are the financial institutions (such as commercial founder of Microsoft, built his fortunes by meeting the needs banks and microfinance providers) as well as individual of customers all around the world. He said that dissatisfied investors (such as business angels) who provide sources of customers are the best source of learning for any business. finance for an organization. They are primarily interested in the borrowing organization's ability to generate sufficient Therefore, it is vital that businesses pay attention to the needs profits and to repay the debts as well as making regular interest of their customers. These interests or objectives include having payments. Financiers earn money by charging interest on the greater choice, better quality products and more competitive amount of money borrowed. prices. Businesses use market research (see Chapter 26) to find However, financiers will want to establish a long-term out what customers want. For example, many businesses such relationship with the borrower in order to generate subsequent as fast-food restaurants and hotels use customer 'suggestion earnings if the business requires subsequent loans for its schemes' and 'satisfaction surveys' to get feedback from their expansion or daily operations. customers. Complaints and suggestions can then be considered by the management team. Ultimately, these actions signify the organization's desire to keep customers happy and loyal. {iv} Pressuregroups Pressure groups consist of individuals with a common interest who seek to place demands on organizations to act in a particular way or to influence a desired change in their behaviour. Examples include organizations set up to campaign against smoking, deforestation, the harmful treatment of animals, as well as the protection of the natural environment. Pressure groups have increasingly influenced the decisions and actions of businesses. They often try to achieve their objectives by influencing government policy, such as lobbying for a change in legislation (see Box 4.1). Some pressure groups, such as Friends of the Earth and Greenpeace, do this by operating on an international level and getting support from the general Figure 4.1 - Customer feedback can provide invaluable public who are more aware and concerned about damage to the information for businesses environment. 55 Topic 1: Introduction to Business Management Casestudy 4.1 - Pressuregroup in practice Environmental pressure groups often help with beach clean-ups Pressure group campaigns such as anti-smoking or anti- littering have led to support from the general public, mass media and governments in many countries. For example, cigarette advertising is banned in Australia whilst littering carries a heavy financial and imprisonment penalty in Singapore. Animal protection groups, such as the World Wildlife Fund, use ethical marketing techniques to gain positive press coverage. (v) Competitors The local community might also put demands (pressure) on businesses to provide jobs in order to create extra income Competitors are the rival businesses of an organization. For and spending in the area. It might also pressurise businesses example, the main rivals of Japan Airlines include Singapore to be accountable for the impact of their activities on the local Airlines, Qantas, Cathay Pacific Airways and Air China. environment. Many popular holiday destinations, for example, have been negatively damaged by the influx of tourists, such It is common for competitors to also hold shares in the business. as litter, traffic congestion and ecological damage to beaches For example, Cathay Pacific Airways is partially owned by Air and rural areas. Finally, the local community might also put China (which holds 28.2% of the shares) and Qatar Airways pressure on businesses to sponsor local fund-raising events. (which owns 9.4% of the shares). Another example is Porsche, These considerations are paramount to the local community's who owns more than 31% of the shares in Audi (which itself is acceptance of businesses operating in their area. part of the Volkswagen Group). As a stakeholder group, competitors are interested in the activities of a business for several reasons. Their objectives include: To remain competitive - Businesses need to be aware of and respond to the activities of their rivals. To benchmark performance - Businesses will want to compare key performance indicators against their main 56  1.4 Stakeholders rivals (such as sales turnover, profit and market share Governments might also have a financial stake in a business. figures) in order to remain relevant. For example, Air Albania is 51% owned by the Albania government and 49% owned by Turkish Airlines. The Japanese To be creative and innovative - Businesses might benefit government owns 53.42% of Tokyo Metro Company. Hence, from some competition as rivalry can create incentives to such governments will have a direct interest in the finance keep up to date with changes in the internal and external performance of the businesses that they own shares in. environments (see Chapter 46), such as new production processes or product launches. Ultimately though, the government strives to ensure that businesses act in the interest of the general public. It can support businesses in this way by policies such as lowering ATLActivity 4.1 {Researchskills) interest rates and/or taxes to create employment and investment opportunities. The government might also offer incentives Investigate the great rivalries between the likes of to multinational companies (see Chapter 6) to locate in their Coca-Cola and Pepsi, Ford and General Motors, Boeing country, such as subsidised rent and tax concessions. It might and Airbus, McDonald's and Burger King, or Nike and introduce initiatives that benefit businesses, such as greater Adidas. investment in roads and communications networks. However, Be prepared to share your findings with the rest of the government intervention can also constrain business activities. class. For example, Microsoft was broken up into two smaller companies due to numerous lawsuits against the software giant for malpractice and unfair competition. {vi) Government The government is an important external stakeholder as it can Keyconcept have a significant influence on business activity. Its interests Is it unethical for a business to give one group of include assurances that: stakeholders priority over the interests of other stakeholder groups? Unfair business practices are avoided. The correct amount of corporate tax is paid from the net profits of the business. Business ManagementToolkit Health and safety standards are met. Consider the various stakeholder groups of an There is compliance with employment legislation. organizationand why they might be interestedin its businessplan(seeChapter48). Consumer protection laws are upheld. Question 4.2 - Stakeholdersof schools (a) In the context of high schools, distinguish between the internal and external stakeholders. [4marks] (b) Explain how the performance of a high school might impact on any two of its stakeholder groups. [6 marks] 57 Topic 1: Introduction to Business Management Conflict between stakeholders A common cause of stakeholder conflict is the remuneration (pay and benefits) of the company's directors. Shareholders and (A02) employees might argue that top management are 'overpaid' takeholder conflict refers to differences in the varying and that there should be a fairer distribution of profits to S needs and priorities of the various stakeholder groups of a business. Such conflicting interests mean that it is not possible for a business to meet all of its stakeholder objectives shareholders (in the form of dividends) and to staff (improved remuneration for employees). Senior executives would argue however that their compensation needs to be adequate to pay simultaneously. for the higher risks involved in decision-making. They claim that this would ultimately increase profits for the business, Stakeholder conflict exists in situations where people disagree leading to larger dividend payments and higher wages in the with each other due to differences in their opinions or values, future. thus creating tension between different stakeholder groups of the organization. Margaret Thatcher (1925 - 2013), the UK's first female British Prime Minister, said that standing in the Keyconcept middle of a road would get you hit by traffic coming from both In 2021, the Economic Policy Institute reported that CEOs sides, i.e. some of her decisions pleased certain members of the (chief executive officers) of the top 350 companies in public but she could not please everyone all of the time. This the US were paid 351 times more than a typical worker notion also applies to businesses. in the country. To what extent is it ethical for CEOsto be paid so many more times than the average worker? Conflict arises because a business cannot simultaneously meet the needs of all its stakeholders. For example, if shareholders want a greater share of the profits, then this may come Another source of potential conflict is that some stakeholders about by cutting staff benefits such as profit-related pay and have more than one role or set of interests in an organization. performance-related pay (see ChapterlO). However, this would For example, managers are employees too, whilst some obviously upset employees. Another example is that suppliers employees might also be shareholders of the company they would like their corporate customers to pay the full price in work for. A customer is also likely to be a member of the local one transaction, in order to improve their own cash flow, but community, so may face conflicting interests. Based on the businesses would expect to receive discounted prices for regular differing objectives of these stakeholder groups, some degree of purchases and for buying in large quantities. conflict is likely to occur. In deciding how to deal with conflicting stakeholder needs, managers need to look at three key issues: The type of business entity - A partnership (see Chapter 2) might strive for profit maximization, whereas a non- profit organization is likely to have different priorities. So, the owners in a partnership business might regard customers as the key stakeholder group whereas the local community could be the most important group for a charitable organization. A limited liability company will be accountable to its shareholders (owners), so will have to give them priority. The goals and objectivesof the business - If a firm targets Figure 4.2 - Stakeholder conflict exists due to incompatible growth and expansion as part of its business strategy, then goals of different stakeholder groups the proportion of profits allocated to its owners will be less important, at least in the short-term. Instead, the priorities of senior managers and directors are given a higher priority to facilitate the change process. 58  1.4 Stakeholders The source and degree of power (influence) for each stakeholder group - Customers will have more power if Examtip! the business is selling a product in a mass market where there are plenty of substitutes widely available. Access to Be prepared to answer examination questions about: the media can also give greater power to pressure groups. Likewise, a united workforce will strengthen the influence the differences between internal and external of employees via their trade union (see Chapter 13). stakeholders the differences between stakeholders and shareholders and ATLActivity 4.2 {Thinking skills) the various objectives of different stakeholder groups and how these might conflict with each other. In 2012, prior to Alibaba's record-breaking $25 billion initial public offering (see Chapters2 and 15), founder and CEO JackMa wrote in a letter to investors "Customersfirst, employeessecondand shareholders Business ManagementToolkit third:' He explained his reasoningbehind this by sayingthat To what extent might forcefield analysis(seeChapter "If the customer is happy, the businessis happy and 55) helpto resolvestakeholderconflict? the shareholdersare happy:· Discussthe extent to which you think this is the right prioritizationfor all businesses? Theory of Knowledge (TOK) Discuss whether it is possible to 'know' which stakeholder group is the most important to an organization. What knowledge issues would be made in such a case? Question 4.3 - The RoyalBank of ScotlandGroup British banking and insurance company The Royal Bank of Scotland Group (RBSGroup) has operations in Europe, North America and Asia. Before the global financial crisis of 2008, RBSGroup was one of the largest banks in the world. However, its inability to deal with the turmoil in the financial industry led to the UK government buying over 80% of the company's shares. The share price of RBSGroup dropped from £3.54 ($4.95) to just £0.11 ($0.16). To survive, RBSGroup had to sell its 4.26% stake in Bank of China, even though it did not make any profit on the deal. RBS Group holds the record for the largest loss in British corporate history; a staggering £24.1bn ($33.8bn) in 2008. (a) Outline the meaning of RBSGroup having a "stake" in Bank of China. [2 marks] (b) Calculate the percentage change in RBSGroup's share price. [2 marks] (c) Outline two reasons why the shareholders of RBSGroup might be concerned about its performance. [4marks] (d) To what extent should businesses like RBSGroup listen to the views of their various stakeholder groups? [10 marks] 59 Topic 1: Introduction to Business Management Question 4.4 - Skoda Auto Founded in 1895, Skoda Auto is one of the oldest automobile manufacturers in the world. In early 2007, the Czech company, which became part of the Volkswagen Group in 2000, entered China as part of its growth strategy. However, in the same year, its workforce in Europe went on strike over concerns regarding the remuneration of employees. It was reported that industrial action cost Skoda Auto, the country's largest exporter, 60 million crowns ($2.9m) per day in lost output. Nevertheless, China became Skoda's main market; by 2013, the company had produced its 1 millionth car in China. Today, one in four Skoda cars is sold in China. (a) Identify two external stakeholder groups of Skoda Auto. [2 marks] (b) Define the term remuneration. [2 marks] (c) Outline one source of conflict between Skoda Autos various stakeholders. [2 marks] (d) Examine how the conflict outlined in your answer above could have been minimized. [6 marks] Stakeholder conflict is a potentially ever-present phenomenon. However, modern management thinking suggests that there are mutual benefits in simultaneously meeting the competing or conflicting needs of different stakeholder groups. For example, addressing the needs of both employees and managers can lead to a highly cohesive, motivated and loyal workforce with low rates of staff absenteeism and labour turnover. This can lead to improved customer relations, a better corporate image, higher market share and greater profits in the long-term. As a result, shareholders will also be pleased. Furthermore, greater output might also lead to more employment opportunities in the local community. Hence, it is argued that meeting the needs of all stakeholder groups can be achieved, although this might only occur in the medium to long-term. 60  1.4 Stakeholders Question4.5 - RoyalDutch Shell Royal Dutch Shell (or Shell for short) is Europe's largest energy and oil company. It was formed in 1907 by the mergerofRoyal Dutch from The Netherlands and Shell from the UK. In 2020, the Anglo-Dutch company earned net income of $21.5 billion (that's $2.45m) per hour! This staggering figure obviously drew the attention of Shell's internal stakeholders. However, being a global energy and oil company also means that Shell's activities are carefully scrutinised by pressure groups, such as Greenpeace. In 2020, Shell's sales revenue exceeded $180.5 billion (about a fifth of the GDP of the Netherlands). (a) Define the term internal stakeholders. [2 marks] (b) To what extent should a global company such as Shell allow environmental and human rights groups to exert influence on their decision-making? [10 marks] Theory of Knowledge{TOK) Stakeholdersand the key concepts C Is it considered unethical if a business chooses to ignore onflict exists in every organization, at least to some the demands (or needs) of one particular stakeholder extent, so this needs to be managed carefully. At times, group? employees will disagree with management decisions about change (see Chapters 7 and 55); customers will be disgruntled, especially if the business acts unethically; suppliers will fail to deliver the right goods on time; shareholders will be unhappy with the performance of the business and so forth. Given the potential mutual benefits of meeting the contrasting interests of various stakeholder groups, conflict resolution is an important aspect of any sustainable business strategy. However, it is unlikely that a business can fulfil the objectives of all its stakeholders at the same time, all of the time. Nevertheless, it is unrealistic or undesirable to maximize the needs of just one single stakeholder group. If a particular group is not catered for, then it is possible that they will cause interruptions and problems for the business. Most strategies aim for a 'best fit' compromise so that the needs of all stakeholder groups are reasonably addressed. 61 Topic 1: Introduction to Business Management The outcome of any negotiation between various stakeholder Furthermore, external stakeholders such as pressure groups groups will depend largely on the culture of the organization (see have become increasingly effective in influencing business Chapter 11) and the relative bargaining power of the different activity through changes in digital social media platforms. Due stakeholders. For example, large multinational companies such to public awareness of the detrimental effects of globalization as Honda or Ford have better bargaining power with their (such as the exploitation of child labour or the impact of suppliers than mechanics operating as sole traders trying to business activity on global warming and sustainability issues), negotiate prices for motor vehicle parts. organizations are finding it ever more difficult to simply ignore ethical business behaviour and the associated pressures from A common stakeholder conflict management tool is external stakeholder groups. stakeholder mapping. This model considers the relative interest of stakeholders and their relative power (or influence) on businesses, as shown in Figure 4.3. Business ManagementToolkit Towhatextentmightthe useof forcefieldanalysis asa businessmanagementtool (seeChapterSS)helpwith Level of interest resolving stakeholder conflict? Low High..;:: GI s: 0 A B...J (minimum effort) (keep informed) - 0 D. 0 -C C D 'ii.S!> >... GI :t: (keep satisfied) (maximum effort) Figure 4.3 - Stakeholder mapping Theory of Knowledge (TOK) Stakeholder mapping lets managers assess how to deal with Are the values and beliefs of some stakeholders more changing and conflicting stakeholder objectives. Whilst it important than those of others? is extremely difficult to please all stakeholders at the same time, managers can prioritize their actions by using this model. Stakeholders in quadrant A are unlikely to receive much attention from the decision makers. Conversely, those in quadrant D will receive the most attention as they are the key stakeholders of an organization. Stakeholders in quadrant B need to be kept informed whilst those in quadrant C must be kept satisfied, perhaps by consulting them on strategic Keyconcept decisions. Does organizational change always lead to conflicting In reality, managers will deal with stakeholder conflict in stakeholder objectives? different ways depending on their management and leadership style (see Chapter 9) and the organizational culture (see Chapter 11). For example, paternalistic leaders would argue that although customers are vital to any business, it is the needs of employees that have to be considered first. They believe that by hiring the right people and devoting time and money to Keyconcept train and develop employees, workers will automatically deliver a first-rate service to their customers. With reference to an organization of your choice, examine how business ethics impact both internal and external stakeholders. 62  1.4 Stakeholders REVIEWQUESTIONS KEYTERMS 1. What is a stakeholder? Conflict refers to situations where stakeholders have disputes or differences regarding certain issues or matters. This can lead 2. How do internal stakeholders differ from external to arguments and tension between the various stakeholder stakeholders? groups. 3. Who are the main internal stakeholders of a business? Customers are the clients of a business. As a key external stakeholder group, customers seek to have value for money, 4. What examples are there of external stakeholders? such as competitive prices and good quality products. 5. What is the difference between a stakeholder and a Directors are senior executives who have been elected by the shareholder? company's shareholders to address business activities on behalf of their owners. 6. Why are shareholders a potentially powerful stakeholder group? Employees are the staff of an organization. They have a stake (an interest and involvement) in the organization they work for. 7. Why might competitors be considered as external stakeholders? External stakeholders are individuals and organizations not part of the business but have a direct interest in its activities 8. What is the role of the government as a stakeholder group and performance. Examples include customers, suppliers and in business activities? the government. 9. What is meant by stakeholder conflict? Financiers are the financial institutions and individual investors who provide sources of finance for an organization. They are 10. How might a business resolve stakeholder conflict in the interested in the organization's ability to generate profits and to workplace? repay debts. Government refers to the ruling authority within a state or country. As an external stakeholder group, the government is interested in businesses complying with the law with regards to the conduct of business activities. Internal stakeholders of a business are members of the organization, namely the employees, managers, directors and shareholders (owners) of the business. The local community refers to the general public and local businesses that have a direct interest in the activities of an organization, namely to create jobs and to conduct business activities in a socially responsible way. Managers are an internal group of stakeholder responsibly for overseeing the daily operations of the business. Pressure groups consist of individuals with a common concern (such as environmental protection) who seek to place demands on organizations to act in a particular way or to influence a change in their behaviour. 63 Topic 1: Introduction to Business Management Stakeholder conflict refers to differences in the varying needs and priorities of the various stakeholder groups of a business. Stakeholder mapping is a model that assesses the relative interest of stakeholders and their relative influence (or power) on an organization. Shareholders (or stockholders) are the owners of a limited liability company. Shares in a company can be held by individuals and other organizations. Stakeholders are individuals or organizations with a direct interest (known as a stake) in the activities and performance of a business, such as shareholders, employees, customers and suppliers. Suppliers are an external stakeholder group that provide a business with stocks of raw materials, component parts and finished goods needed for production. They can also provide commercial services, such as maintenance and technical support. Figure 4.3 - Suppliers are an important external stakeholder group 64  Chapter 5 Unit 1.5 - Growth and evolution "Itis not the strongest of the speciesthat survive,nor the most intelligent,but the one most responsiveto change." - Anton P.Chekhov (1860 - 1904), Russian playwright Contents 1.5 Growth and evolution SL/H L content Depth of teaching Internal and external economies and diseconomies of scale AO2 The difference between internal and external growth AO2 Reasons for businesses to grow AO3 Reasons for businesses to stay small A03 External growth methods: A03. Mergers and acquisitions (M&As). Takeovers. Joint ventures. Strategic alliances. Franchising © IBO,2022 Economiesand diseconomiesof scale(A02) Internal and external economies and diseconomies of scale © IBO, 2022 The average cost (AC) is the cost per unit of output. It is calculated by dividing total costs (TC) by the quantity of output major reason why businesses aim to grow is to benefit (Q), i.e. AC =TC+ Q. For example, if total costs of producing A from economies of scale. This refers to lower average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency. Economies 10,000 shirts is $78,000 then the cost of each shirt is $7.80. Average cost consists of two components: average fixed costs of scale can help businesses to gain a competitive cost advantage (AFC) and average variable costs (AVC). AFC is calculated by because lower average costs can mean a combination of lower dividing the total fixed cost (TFC) by the level of output, i.e. prices being charged to customers and a higher profit margin AFC = TFC + Q. Similarly, AVC is calculated by dividing the earned on each item sold. total variable cost by the level of output, i.e. AVC = TVC + Q. 65 Topic 1: Introduction to Business Management The average fixed costs of a firm will decline continuously Internal Economies of Scale with larger levels of output. This is because the TFC remains By operating on a larger scale, a business can reduce its average constant but is spread over an increasing amount of output, cost of production due to any combination of the types of i.e. the same (fixed) costs are being divided by a larger number internal economies of scale below. The relative importance of (level of output) as shown in Figure 5.1. each depends on the actual business under consideration. As a firm operates on a larger scale, economies of scale are Technical economies - Large firms can use sophisticated experienced, up to the optimal level of output (where average capital and machinery to mass produce their products. For costs are minimised). Thereafter, any further increases in example, due to the huge scale of production, the Philips output bring about diseconomies of scale, i.e. higher average factory in Shenzhen, China produces complete audio costs as output increases systems within a few seconds! The high fixed costs of their equipment and machinery are spread over the huge scale of output, thereby reducing the average cost of production. Small businesses do not find it feasible or cost-efficient to buy and use such technologies. ~ ~ cl Financial economies - Large firms can borrow large sums u of money at lower rates of interest compared to smaller competitors because the larger organizations are seen as less risky to financial lenders. In addition, a large and Optimal level of output output established business looking to borrow money will probably choose a lender that offers the most attractive interest rate, Figure 5.1 - Economies and diseconomies of scale i.e. there is rivalry amongst the financiers to lend to large and reputable businesses. By contrast, smaller firms often Firms minimize their costs by operating at the output level struggle to raise external finance and are charged higher where average costs are at their lowest (the optimal level of interest rates on their borrowing due to the higher degree output). Economies of scale that occur inside the firm and are of risk involved. within its control are known as internal economies of scale. Those that occur within the industry and are generally beyond an individual firm's control are known as external economies of scale. Case Study - The Airbus A380 The Airbus 380, the world's largest passenger plane, has 49% more seating capacity than its rival Boeing 787 Dreamliner, yet burns 17% less fuel per seat. Hence, the average cost of fuel for Airbus is lower. This is particularly important for Airline carriers operating in a highly competitive industry where fuel prices account for a large proportion of their costs (the A380 has a fuel capacity of 81,890 gallons or 310,000 litres) and where the price of aircraft is hugely expensive - the Boeing 787 Dreamliner costs over $257m and the Airbus A380 costs $418m per plane! However, low demand from airline carriers (especially following the aftermath of the global COVID-19 pandemic) meant that Airbus ceased to produce the A380 at the end of 2021. 66  1.5 Growth and evolution Managerial economies - A sole trader (see Chapter 2) by more favourable conditions in other sectors of the often has to fulfil the functions of marketer, accountant and conglomerate. Hence, a loss in one area of their business production manager. As people cannot be equally good at does not jeopardise the business overall. everything, specialisation leads to higher productivity. By contrast, large firms divide managerial roles by employing Case study 5.1 - Reliance Industries specialist managers. Through growth, a business can avoid a duplication of effort in planning, communication, Reliance Industries is an Indian multinational marketing, distribution and production processes. The conglomerate company headquartered in Mumbai, India. higher productivity means that average costs can fall It is one of the world's largest conglomerates and India's largest publicly held company. It has strategic business further. units in markets as varied as energy, financial services, logistics, mass media, natural gas, petrochemicals, retail, Specialization economies - This is similar to managerial telecommunications and textiles. economies of scale but results from division of labour of the workforce, rather than the management. Motor vehicle manufacturers that use mass production techniques benefit from having specialist labour including designers, Common mistake production staff, engineers and marketers. These specialists are responsible for a single part of the production process Many students define economies of scale as 'the and their skills and expertise mean that there is greater benefits of bulk buying'. However, even small businesses productivity thereby helping to reduce the average cost of can buy in bulk; the term refers to the cost-saving or output. cost-reducing benefits enjoyed by firms engaged in large scale operations. Financial, technologicaland Marketing economies - Large firms can benefit from managerial economies of scale are probably far more a lower average cost by selling in bulk, thus benefiting important in reducing the average cost of production from time savings and transactions costs. For example, a for most businesses than their ability to buy in bulk. small retail outlet might sell 1,000 cans of Coca-Cola in a month to hundreds of different customers. This will cost a lot more than the Coca-Cola Company that can sell 1,000 External economies of scale cans in just one transaction to a single customer (such External economies of scale are cost-saving benefits of large- as a supermarket). Global firms such as McDonald's and scale operations arising from outside the business due to its Nike can spread the high costs of their advertising by using favourable location or general growth in the industry. These the same marketing campaign across the world (language benefits are also enjoyed by other firms within the industry. translation is a minor part of the costs of a global marketing Examples of external economies include: budget). Technological progress increases the productivity level Purchasing economies - Large firms can also lower their within the industry. For example, the Internet has created average costs by buying resources in bulk. Note, however, huge cost savings for businesses engaged in e-commerce. that even relatively small firms can gain from purchasing Online retailers, for example, do not have to be located in economies of scale because they also gain discounts for central business districts thereby avoiding highly expensive bulk purchases. Of course, the larger the order the greater rent. the bulk discount might be, so there is still an advantage to being big in the corporate world. Improved transportation networks help to ensure prompt deliveries. Furthermore, employees who are late to work Risk-bearing economies - These savings can be enjoyed by due to poor transportation links cost the business money. conglomerates (firms with a diversified portfolio of products Customers and suppliers also want convenience (ease of in different markets). Conglomerates such as Reliance access). Ultimately, congestion and inefficiencies raise Industries (see Case study 5.1) can spread their fixed costs, business costs and reduce profits. such as advertising or research and development, across a wide range of their operations. Unfavourable trading conditions for certain products or industries can be offset 67 Topic 1: Introduction to Business Management An abundance of skilled labour might exist in the these difficulties slow down decision-making. Coordination local area, perhaps through government aided training and control problems also occur for organizations with programmes or reputable education and training facilities business operations in different locations throughout the in a certain location. This provides local businesses with world. Workers in larger organizations might feel a sense a suitable pool of educated and trained labour, thereby of alienation, which can harm staff morale (see Chapter helping to cut recruitment and training costs (see Chapter 10). These issues add to the firm's costs without any 7) without compromising productivity levels. corresponding increase in productivity, thereby raising its unit costs. Regional specialisation means that a particular location or country has a highly regarded and trustworthy reputation There is likely to be poorer working relationships in for producing a certain good or service. For example, an oversized business. With a larger workforce, senior Murano, in Venice, Italy, is famous for its glass products managers are more likely to become detached from those such as vases, jewellery and chandeliers. This allows the lower down in the organizational hierarchy, thereby industry to benefit from having access to specialist labour, making them feel distanced or out of touch. This can sub-contractors and suppliers, thus helping to reduce the damage communication flows and the motivation of staff, average cost of production for the industry. Its reputation thereby reducing their productivity and leading to higher also allows firms in Murano to charge premium prices (see average costs. Chapter 28) for its products. Outsized organizations are likely to suffer from the disadvantages of specialization and division of labour. Workers become bored with performing repetitive tasks. With a larger workforce, there may also be scope for slack (inefficiencies and procrastination). This leads to lower productive efficiency and hence an increase in the average costs of production. The amount of bureaucracy (excessive administration, paperwork and company policies) is also likely to increase as a business grows. This makes decision-making more time consuming and adds to production costs but is unlikely to contribute to a proportional rise in the output of goods and services. Bureaucracy can also make communication more Figure 5.2 - Growth brings benefits such as economies of challenging, thereby worsening working relationships and scale again contributing to higher unit costs. Complacency with being a large and dominant firm with market power or even being the market leader can also Internal diseconomies of scale cause many problems. Complacency (a lack of awareness Contrary to popular belief, businesses can become too large. of genuine risks or deficiencies) is most likely to reduce There comes a 'tipping point' when economies of scale no productivity thereby raising unit costs of production. longer exist. Diseconomies of scale are the result of higher unit costs as a firm continues to increase in size. This means that The potential for large firms to experience diseconomies of the business becomes outsized and inefficient, so the average scale means that some businesses prefer to grow via franchising cost of production begins to rise (see Figure 5.1). Internal (covered later in this Unit). Multinational companies such as diseconomies of scale usually occur due to problems of McDonald's and 7-Eleven have used this strategy to expand mismanagement. Examples include: their businesses and to raise brand awareness (see Chapter 27), without having to face the higher average costs of being large. As a firm becomes larger, managers may lack control and coordination as the span of control (see Chapter 8) is likely to increase and cause communication problems. Ultimately, 68  1.5 Growth and evolution External diseconomies of scale The difference between internal External diseconomies of scale occur once there is an increase and external growth (A02) in the average cost of production when a firm grows due to factors beyond its control. Such problems affect the whole nternal growth occurs when a business grows organically, industry, often because there are just too many firms competing in the market. Hence, average costs of production increase for all businesses in the industry. Examples include: I using its own capabilities and resources to increase the scale of its operations and sales revenue. It is typically financed through a combination of retained profits, borrowing and issuing of new shares. A business can grow internally in Too many businesses locating in a certain area causes land several ways such as: to become even more scarce thereby causing higher rents. This adds to the fixed costs of all businesses in the area Changing price - More customers tend to buy a product without any corresponding increase in output. Hence, unit at lower prices. However, if there are very few substitutes costs will rise. The high demand for businesses to locate for the product, demand is said to be price inelastic (see in busy districts such as Manhattan (New York City), Chapter 28), so the business will earn more revenue by Shinjuku (Tokyo), The City (London) and Silicon Valley raisingprices. For products in highly competitive markets, (San Francisco) has resulted in a sustained and continuous demand is price elastic so a reduction in the selling price rise in the rental value ofland in these prime city locations. will tend to generate proportionately more sales revenue Since workers have greater choice from a large number Improved promotion - People are more likely to buy a of employers in the local area, businesses might have to product if they are informed, reminded and/or persuaded offer higher pay and financial rewards to retain workers about its benefits. The Coca-Cola Company spends around or attract new staff. This will increase costs without $3bn each year on promoting its products, which is one necessarily increasing output, thereby raising average costs reason why it is the world's most recognised brand with of production for all firms in the industry. sales of 1.9 billion servings each day. Traffic congestion results from too many businesses being Producing improved or better products - Through methods located in an area. Deliveries are likely to be delayed due to such as market research, innovation and new product the overcrowding. This increases transportation costs for development, businesses can produce products that are businesses, thereby contributing to an increase in unit costs more appealing to the market, thereby raising their sales. of production. Most newly launched products actually fail, so it is quite common for businesses to improve on the design and/ or features of an existing product. Nevertheless, product innovation can be a lucrative source of internal growth. Case study 5.2-Apple Apple's internal growth strategy focuses on new product development and launching new product innovations. Examples include Apple's product launches of the iPod, iPad, iPhone, iMac Pro, MacBook Air, MacBook Pro, Apple TV, Apple Watch, HomePod, AirPod, iTunes and the App Store. Selling through a greater distribution network (placement) - If a product is widely available, customers are more likely to buy it. One of the world's most expensive production Figure 5.3 - Traffic congestion is a cause of external cars is the Lamborghini Veneno, with a selling price of diseconomies of scale $4.Sm (although the most expensive one was sold for $8.27 million). Apart from the price, the Lamborghini Veneno is very limited in supply, so this restricts the potential 69 Topic 1: Introduction to Business Management number of customers. Coca-Cola, on the other hand, is so careful planning and the use of additional tools such as widely available throughout the world in different places, investment appraisal (see Chapter 21) may be required. such as supermarkets, wholesalers, restaurants, cinemas, aeroplanes and vending machines. Having more retail Improved training and development - People (employees) outlets, despite the higher costs, can also help to achieve are often said to be a firm's most important asset (see internal growth. Chapter 7). Training and development are important as customers are unlikely to buy from salespeople who have Offer preferential credit - Customers are more likely to little or no product knowledge. Training and development make a purchase if they are offered the option to 'buy not only help to make employees more confident and now and pay later'. Allowing customers to pay in regular competent in their jobs, but it can also help to motivate instalments perhaps over 12 or 24 months for the purchase the workforce as they feel more valued by the employer of expensive products, such as motor vehicles, home (see Chapter 10). This can improve the quality of customer furniture or large-screen televisions, can attract more service, thus contributing to greater customer loyalty and customers to the market. However, businesses must be higher sales for internal growth. careful not to offer too much credit as this can affect their cash flow position (see Chapter 20). Providing overall value for money - Businesses that can provide improved value for money are most likely to Increased capital expenditure (investment spending) experience internal growth. Customers tend to look at more - This can be in the form of internal expansion of the than just the price when making purchasing decisions. business to new locations or the introduction of new Other factors may include product quality, after-sales production processes and technologies in order to improve care, brand image, maintenance costs and environmental productivity. However, investment risks might not pay off, considerations. Table 5.1 - The advantages and disadvantages of internal growth Advantages of internal growth Disadvantages of internal growth Better control and coordination - It is often easier to grow Diseconomies of scale - Higher average costs of production internally than to rely on external sources. Internal growth also can arise from internal growth. Hierarchical structures (see enables the organization to maintain control, whereas external Chapter 8) tend to be a feature of internal growth, causing growth can lead to a loss of control and ownership of the communication problems and slower decision-making as a business. business grows. Relatively inexpensive - The main source of internal growth is A need to restructure - Although a sole trader can control retained profits. There might also be a need to secure interest- and coordinate the business quite easily, if it grows into a bearing loan capital to fund the growth, but there is less risk multinational company then the organizational structure has involved with internal growth as the amount of capital tends to be changed. Restructuring takes time, effort and money, to be lower. The higher cost of external growth means that for such as training needs. Specialist managers also have to be many firms, internal growth is the only suitable option. hired as the firm and its workforce grows. Maintains the corporate culture -A major problem for mergers Dilution of control and ownership- Ifa firm grows by changing and acquisitions is that when two or more firms with very its legal status, say from being a partnership to a publicly held different cultures work together to create a new company. company, the owners (the partners) will have to share decision- By contrast, internal growth means there are no problems making power with the new owners (shareholders). With more related with culture clashes (see Chapter 11) or conflicting owners, decision-making is prolonged and conflicts between management styles. the different stakeholders are more likely. Less risky - Due to the above reasons, internal growth is the Slower growth - Internal growth is slower than external easiest and least risky method of growth and evolution for growth. Despite the risks, shareholders may prefer more rapid most businesses. Furthermore, internal growth builds on the methods of growth (such as mergers, acquisitions, takeovers or strengths of the organization, such as its brand value and franchising, in order to increase their return on investment. customer loyalty. 70  1.5 Growth and evolution Question 5.1 - Poundland British discount retailer Poundland has built a reputation for internal growth. Founded in 1990, Poundland opened its 500th store in 2014 and had more than 800 stores at the start of 2022. Pound land, which sells most of its products for£ 1 ($1.40) or less, serves 7 million customers each week and has reported annual increases in profits by as much as 29%. Its growth strategy is to focus on expansion in Ireland, the Netherlands and the UK in order to gain greater market share. (a) Define the term market share. [2 marks] (b) Describe two methods of internal growth that Pound land might have used. [4marks] (c) Discuss the extent to which internal growth is desirable for a business such as Pound land. [JO marks] External growth (or inorganic growth) occurs through dealings with outside organizations rather than from an increase in the organization's own business operations. External growth usually comes in the form of mergers and acquisitions (M&As), takeovers, joint ventures, strategic alliances, or franchising (all of which are explained below). These growth methods are collectively referred to as the amalgamation or integration of firms. The advantages and disadvantages of external growth are outlined in Table 5.2 Figure 5.4 - External growth helps to build a firm's market share. Table 5.2 - The advantages and disadvantages of external growth Advantages of external growth Disadvantages of external growth Quicker than organic growth - External growth tends to be More expensive than internal growth - M&As, JVs,strategic a faster way to grow and diversify as external resources and alliances and franchising tend to be more expensive than finances are used. internal growth methods. Synergies - Businessescan benefit from a greater pool of skills, Greater risks - Inadequate knowledge of new markets and the knowledge and the expertise of external parties. greater uncertainties of external growth create greater risks. Reduced competition - External growth is a relatively quick, Regulatory barriers - External growth, such as acquisitions albeit expensive, method of reducing the degree of competition and takeovers, can be blocked by governments if the move is and raising the firm's market share. deemed to be anti-competitive. Economies of scale-Rapid external growth can help businesses Potential diseconomies of scale - Increased complexities of to gain accessto larger markets and hence economies of scale internal growth can equally cause inefficiencies and hence a from operating on a larger scale. rise in average costs. Spreading of risks - External growth enables businesses to Organizational culture clash - It is often difficult to combine benefit from diversification. Hence,firms face fewer risks overall different cultures and management styles, especially if external from failures in any particular aspect of its business operations. growth leadsto a change in the nature and culture of a business. 71 Topic 1: Introduction to Business Management Question 5.2 - A.S.Watson Group With a history dating back to 1828, A.S.Watson Group has evolved into the world's largest international health, beauty and lifestyle retailer. It has operations in over 16,000 stores across 27 markets worldwide, with over 5.3 billion customers each year. A.S.Watson Group employs over 140,000 staff and its product portfolio includes some of Asia's best-known brands and retail chains, including Watsons (health and beauty), PARKnSHOP(supermarkets), Fortress (electrical appliances), Watson's Wine and Nuance-Watson airport duty free shops. It is also a major producer and distributor of water products and beverages, including brands such as Sunkist and Mr. Juicy. In Europe, its health and beauty brands include Superdrug, Rossmann, Trekpleister, Drogas and Spektr. Its luxury perfumery cosmetics brands include ICI Paris XL, Marionnaud and The Perfume Shop. Growing the business remains a long-term goal at A.S.Watson Group. Source: adapted from A.S.Watson Group (www.aswatson.com) (a) Define the term product portfolio. [2 marks] (b) Suggest the type of business entity that A.S.Watson Group might be classified as. [2 marks] (c) Explain how A.S.Watson Group benefits from synergy by its growth and evolution strategies. [4 marks] (d) Despite its enormous size and global presence, examine why A.S.Watson Group still aims to grow larger as part of its long-term corporate strategy [6 marks] Business ManagementToolkit Discusshow the use of descriptivestatistics(see ChapterSO)can assistdecision-makers about internal andexternalgrowthstrategies. Reasons for businesses to grow (A03) Size of workforce- the total number of employees hired by ll businesses have an appropriate scale of operation. the business per time period. A For instance, the market for smartphones is enormous whereas that for 1B textbooks is smaller. The size of a business can be measured in several ways: Profit - the value of a firm's profits per time period. Capitalemployed - the value of the firm's capital investment Market share - a firm's sales revenue as a percentage of the as recorded on its balance sheet (see Chapter 17). industry's total sales revenue. An increase in the value of any of the above measures would Totalsalesrevenue- the value of a firm's annual sales revenue suggest that the firm is growing. Essentially, the size of a business for a given time period, usually per year. This measure gives is measured in relative terms by comparing benchmark data to an indication of the size of the firm's customer base. those of its competitors. The interrelated benefits of being a large business organization are show in Table 5.3. 72  1.5 Growth and evolution Table 5.3 - Generic benefits of being a large business Advantages of external growth Disadvantages of external growth Economies of scale These are cost-saving benefits due to operating on a larger scale, which reduces the firm's average cost of production. Lower prices Larger firms are able to offer customers greater price discounts through their ability to enjoy economies of scale. Brand recognition Familiarity with the brand allows large businesses to sell to a wider market. Many firms are large and established enough to benefit from global brand recognition. Brand reputation Larger firms tend to be more trusted due to their brand image and brand reputation. Value- added services Larger firms have the resources to provide a wider range of services for their customers, such as longer opening hours and interest-free credit instalments. Greater choice Larger firms can provide more choice for their customer. For example, Amazon offers a larger range of books, toys and music compared to a small local book shop, toy store, or music retailer. Customer loyalty The above benefits mean that more customers are likely to remain loyal to the business, its products and its brands due to the perceived trust and overall value for money. Casestudy 5.3 - IKEA Founded in 1943, IKEA is the world's largest retailer of home furniture, kitchen appliances and home accessories. It was not until 1963 that IKEAopened its first overseas stores in neighbouring Norway and later in 1969 in Denmark. The Swedish company has since grown to over 445 stores in 50 countries and employs more than 225,000 people around the world. Casestudy 5.4-Amazon Figure 5.5 - Small firms tend to only sell a limited range of Amazon was founded in 1994 by Jeff Bezos, operating the goods business from his garage in Washington, USA. Originally an online bookstore, the business earned $20,000 in sales Large companies such as Apple, BMW, Coca-Cola and IKEA revenue per week within its first two months of trading. design and market their products to a global audience. However, it wasn't until 2001 when the company declared Consumers around the world easily recognize and trust their its first profit. Today, the company focuses on a lot more brands and products. In the case of McDonald's, even the than just books, with operations in e-commerce, cloud production processes are largely the same throughout the computing, digital streaming and artificial intelligence. world; burgers and fries are cooked in exactly the same way Amazon has continued to grow with operations across irrespective of where the McDonald's restaurant is located in North America, Latin America, Europe, Africa and Asia. It the world. The Coca-Cola brand is one of the most recognized employs over 810,000 workers in the USA and earns over in the world. Thus, these large businesses are able to exploit $386bn in annual sales revenue. Today, Bezos is one of global marketing and production economies of scale as they the world's wealthiest people. grow and evolve. 73 Topic 1: Introduction to Business Management Reasons for businesses to stay Business ManagementToolkit small {A03) Discusshow role of Ansoff'smatrix(seeChapter45) in decision making about organizationalgrowth espite the benefits of being large, small firms can still strategies. D thrive. The main reasons why businesses may stay small are outlined in Table 5.4. Table 5.4 - Reasons for staying small as a business Reason Explanation Cost control Large scale operations can mean that a firm encounters diseconomies of scale due to problems of control, coordination and communication. Owners of small firms might not want to expand as they could face higher unit costs. Growth can also require additional borrowing costs. Loss of control External growth through methods such as mergers and acquisitions (M&As) and takeovers may result in the dilution of ownership and control for the original owners. Financial risks As the costs of running a large global business are huge (such as the costs of research and development, marketing, recruitment and training), the financial risks are also high. By contrast, owners of small businesses can better manage and control their finances. Government aid Financial support in the form of grants and subsidies can be offered to small businesses to help them start up and to develop. Funds for training may also be available for small businesses that provide employment opportunities in the local community. Local monopoly power Small businesses may enjoy being the only firm in a particular location, such as a local restaurant, a franchised petroleum retailer, or a small convenience store located in a remote town. Large businesses may be reluctant to locate in remote areas (see Chapter 38), so this provides an opportunity for smaller firms to establish themselves in the area. Personalised services Smaller firms are more likely to have the time to devote to individual customers. For example, staff at a small local convenience store can get to know their customers better as employees are not pressurised by high sales targets. By contrast, large supermarkets rely on a high number of customers being served with many using self-checkout services. Flexibility Small businesses tend to be more flexible and adaptive to change. If a sole trader runs a beauty salon that is unsuccessful, then s/he might change the business to something completely different, such as a children's toy shop. Large businesses have large financial commitments and conflicting stakeholder objectives (see Chapter 4) which combine to reduce their ability to change in the same way. Small market size Some businesses, such as a local hair salon or private tuition firm, are unlikely to attract the attention of large firms due to the very limited size of the market. Large corporations may not find it financially worthwhile to compete with these small local firms, thereby enabling them to thrive. 74  1.5 Growth and evolution The optimal (most appropriate) size for a business depends on its internal structure, its finances and its aims and objectives. For example, Mars and IKEA are privately held companies (see Chapter 2) as the owners want the businesses to remain in the control of the founding families rather than external owners (shareholders and directors). If a firm operates beyond its optimal size (meaning it becomes too large) then diseconomies of scale will set in, which results in higher unit costs and lower profits. In reality, a firm might not operate at its optimal level due to a lack of resources. It cannot expand if it does not have appropriate resources and sufficient sources of finance. Furthermore, it cannot increase output if it lacks the productive capacity (see Figure 5.6 - Small businesses can thrive despite the Chapter 40) to do so. The firm will also choose not to expand existence and benefits of larger firms output if there is insufficient demand, even if producing more means lower average costs. Question 5.3 - Small versusLarge Businesses come in all different sizes. For example: The vast number of businesses are owned by sole traders who only supply a limited number of products. Airbus and Boeing dominate the commercial aircraft industry, manufacturing aeroplanes for airline companies only. Ferrari and Rolex supply luxury goods to a relatively small consumer market. Ford, General Motors and Toyota mass produce their cars to a global market. Samsung, Apple and Huawei collectively produce billions of smartphones. Burger King, KFCand McDonald's have fast-food restaurants across the world. Microsoft supplies computer s