IB DP Business Management: Growth and evolution and Multinational companies (MNCs) – Revision Notes

These notes condense sections 1.5 (Growth and evolution) and 1.6 (Multinational companies (MNCs)) of Unit 1 in the IB Business management guide, first assessment 2024. Neither section carries an HL-only label in the guide. Full explanations and longer worked examples are in the study guide. Test yourself with the practice questions, tick off topics on the checklist, and see the course page. To find weak spots first, try the free diagnostics.

The guide names these topics but defines none of them, so the definitions below are the standard textbook forms.

Command words for these sections

The guide classes “analyse”, “explain” and “suggest” as AO2, and “evaluate”, “justify”, “recommend”, “discuss” and “to what extent” as AO3. “Calculate” is AO4, “define”, “identify”, “state” and “outline” are AO1.

Command term	What the guide’s glossary asks for	Typical use here
Define	The precise meaning	Define franchising
Explain	A detailed account including reasons or causes	Explain one internal economy of scale
Evaluate	An appraisal weighing strengths and limitations	Evaluate a takeover
Justify	Valid reasons or evidence supporting a conclusion	Justify staying small
Recommend	An advisable course of action with supporting evidence	Recommend a growth method

1.5 Economies and diseconomies of scale

Average cost is found as total cost / output. With economies of scale, rising output comes with a lower average cost. With diseconomies of scale, rising output comes with a higher average cost.

Type	Internal (from the firm’s own size)	External (from the industry or area)
Economies	Bulk buying, large machinery, cheaper loans, shared advertising, specialist managers, wider product range	Skilled labor pool, supplier clusters, shared transport and infrastructure
Diseconomies	Slow communication, poor coordination, weak motivation	Congestion, higher rents and wages, competition for the same inputs

Quick test: if the saving would vanish when this one firm shrinks, it is internal. If it would vanish when the whole cluster shrinks, it is external.

Worked reminder

Tessaro Tiles makes 15,000 tiles at a total cost of 90,000 and 30,000 tiles at a total cost of 135,000 (all in $).

• Average cost at 15,000 tiles: 90,000 / 15,000 = 6.00.
• Average cost at 30,000 tiles: 135,000 / 30,000 = 4.50.
• Change: (4.50 - 6.00) / 6.00 = -25.0%.

The fall of 25.0% shows economies of scale, probably because the kiln and rent are spread over more tiles.

1.5 Internal growth versus external growth

	Internal (organic)	External (inorganic)
Source	Own resources, own sales effort	Another business involved
Pace	Gradual	Can be sudden
Risk	Lower	Higher, because of price and fit
Culture	Preserved	Two cultures to join

Ansoff Matrix (a suggested tool for Unit 1): market penetration, product development, market development, diversification. The further a firm moves from its current products and markets, the higher the risk, and the more likely it is to seek a partner.

1.5 Reasons to grow, reasons to stay small

Reasons to grow	Reasons to stay small
Lower unit cost	Keep control and personal service
Bigger market share	Serve a niche
Spread risk	Stay flexible
More profit and shareholder value	Avoid debt and stress
Better chance of survival	Limited finance or resources
Managers’ status and rewards	Owner goals other than profit

AO3 reminder: a reason is only worth credit if you tie it to the case. “Growth gives economies of scale” scores less than “growth lets this bakery buy flour in bulk, because 70% of its cost is ingredients”.

Short model of an AO3 paragraph

Claim: a niche leather workshop may be wise to stay small. Evidence: its prices are high because each bag is made by hand, and customers pay for that. Analysis: expansion would force machine production, so the selling point would weaken, and a second site could add coordination costs. Counterpoint: a larger output would lower average cost and raise income. Judgement: staying small is the better choice while the brand depends on craft, but this changes if demand outgrows capacity for a sustained period.

1.5 External growth methods at a glance

Method	Standard-form definition	Key advantage	Key risk
Merger	Two firms agree to combine into one new business	Shared costs and strengths	Culture clash
Acquisition	One firm buys a controlling share of another	Quick access to market or skills	Overpaying
Takeover	Gaining control of a company by buying its shares; friendly or hostile	Speed and control	Resistance and low morale if hostile
Joint venture	Separate new entity owned jointly by the partners	Shared cost, risk and local knowledge	Disputes, loss of know-how
Strategic alliance	Cooperation without a new entity	Flexible, easy to exit	Weak commitment
Franchising	Franchisor licenses brand and methods; franchisee pays fee and royalty	Fast growth with others’ capital	Brand damage, loss of control

Distinctions to know cold

• Merger (agreed combination) versus takeover (control gained, possibly against the board’s wishes).
• Joint venture (new entity, shared ownership) versus strategic alliance (agreement only, no new entity).
• Franchisor (owns brand, receives fees) versus franchisee (runs the outlet, pays fees).

Method in steps: evaluating a growth method

1. Name the method and the case’s objective, for example more market share.
2. Give one advantage with a number or fact from the case.
3. Give one limitation, again from the case.
4. Compare with at least one alternative, such as organic growth.
5. Judge, with a criterion (cost, speed, risk, fit) and a short reason.

Worked reminder: franchise and joint venture

Dorrowmere Scoops, a franchisor, has four outlets with annual sales of 250,000 each (all in $) and charges a 6% royalty: 4 x 250,000 x 6% = 60,000 a year.

A joint venture earns 2.5m profit and is owned 60% by one partner and 40% by the other: 2.5 x 0.6 = 1.5m and 2.5 x 0.4 = 1.0m.

1.6 Impact of MNCs on host countries

An MNC has operations in more than one country; the host country is where it sets up. Every answer needs both sides and a verdict.

Area	Possible positive	Possible negative
Employment	Jobs, wages, training	Low pay, insecure jobs, closure threats
Investment	Capital, technology	Profit sent abroad
Government	Tax revenue, export earnings	Tax avoidance, political influence
Local business	Supplier contracts	Local firms lose to bigger rivals
Consumers	More choice, often lower prices	Pressure on traditional products
Society and environment	Skills transfer, cleaner methods	Cultural change, pollution

Worked reminder

A mining MNC in a host country makes 18m profit (in $). Tax at 30% takes 5.4m, leaving 12.6m. If 60% is repatriated, 7.56m leaves and 5.04m is reinvested. Tax and reinvestment total 10.44m that stays in the host country, but the 7.56m leaving is significant. The judgement depends on wages, environmental costs and how long the mine lasts.

Method in steps: evaluating MNC impact

1. Pick the stakeholders (workers, government, local firms, communities).
2. Give one benefit and one cost for at least two of them.
3. Quantify when the case allows.
4. Weigh short term against long term.
5. Judge using a criterion such as long-term benefit to the host economy.

Quick self-test

1. Define “economies of scale”.
2. Total cost is 50,000 at 2,000 units and 66,000 at 3,000 units. Calculate the average cost at each output.
3. Is a cluster of specialist suppliers near a port an internal or external economy?
4. Name one internal diseconomy of scale.
5. State two reasons a business might choose to stay small.
6. A firm’s market share is 22% and it merges with a firm that has 9%. State the combined share.
7. Distinguish a joint venture from a strategic alliance.
8. A franchisor charges 6% royalty. Calculate the royalty on sales of 250,000.
9. Sales rise from 20m to 23m. Calculate the percentage growth.
10. State one possible cost of an MNC to a host country.

Answers

1. Falls in average (unit) cost as output rises.
2. 50,000 / 2,000 = 25.00; 66,000 / 3,000 = 22.00, so average cost falls.
3. External, because it comes from the industry cluster.
4. For example slower communication, poor coordination or lower motivation.
5. For example keeping control, serving a niche or avoiding debt.
6. 22% + 9% = 31%.
7. A joint venture creates a new jointly owned entity; an alliance is an agreement with no new entity.
8. 250,000 x 6% = 15,000.
9. (23 - 20) / 20 = 15.0%.
10. For example profits repatriated, local firms displaced or environmental damage.

Where marks are usually lost

• Naming a type of economy of scale but never connecting it to the case.
• Calling a cost rise a diseconomy when output has not risen.
• Writing “bigger is better” about growth without costs or risks.
• Treating takeovers, joint ventures and alliances as the same thing.
• Describing franchising from the franchisor’s side only.
• Answering “evaluate” or “justify” with a list and no verdict.
• Giving only positives or only negatives for an MNC.
• Quoting figures from the stimulus without saying what they show.
• Dropping the unit or the % sign from a result.

Frequently asked questions

How do you tell an internal economy of scale from an external one? Ask whether the saving would vanish if this one firm shrank (internal) or if the whole industry or area shrank (external). Bulk buying is internal; a skilled labour pool in a cluster is external.

How do you calculate average cost to show economies of scale? Average cost is total cost divided by output. If average cost falls as output rises, the business is gaining economies of scale; if it rises with output, diseconomies are appearing.

What is the difference between a merger and a takeover? A merger is an agreed combination of two firms into one new business. A takeover is gaining control of a company, often by buying enough of its shares, possibly against its board’s wishes.

What is the Ansoff Matrix? The Ansoff Matrix sorts growth into market penetration, product development, market development and diversification. It is a suggested tool for Unit 1, and risk rises as a business moves further from its existing products and markets.

Official syllabus

IB Diploma Programme Business management guide (first assessment 2024), International Baccalaureate Organization, Unit 1, sections 1.5 and 1.6.