Growth (Edexcel A Level Business): Revision Note

Reasons to grow

• Businesses grow to achieve a range of key objectives

1. Economies of scale

• Internal economies of scale

  • As a business grows, it can reduce its average costs

  • For example, it may be able to buy supplies in bulk or invest in more efficient machinery

• External economies of scale

  • These are benefits that come from being part of a growing industry, such as better infrastructure or access to a skilled workforce

2. Increased market power

• A larger business may have more control over customers and suppliers

• It can influence prices or force suppliers to offer better terms, such as longer trade credit periods

3. Increased market share and brand recognition

• Growth allows a firm to reach more customers and become better known

  • This can lead to higher sales and increased customer loyalty

• Increased brand recognition can help further growth as customers are familiar with and trust the brand

4. Increased profitability

• Profitability is a measure of how efficiently a company generates profit relative to its revenue or investment

  • As a firm grows, it may be able to generate more revenue while controlling costs, boosting profitability

Explaining economies of scale

• As a business grows, it can increase its scale of output generating efficiencies that lower its average costs of production

  • These efficiencies are called economies of scale

  • Economies of scale help large firms to lower their costs of production beyond what small firms can achieve

• As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase

  • The reasons for the increase in the average costs are called diseconomies of scale

• Internal economies of scale occur as a result of the growth in the scale of production within the firm

Economies of scale

Diagram analysis

• With relatively low levels of output, average costs are high

• As the business increases its output, it begins to benefit from economies of scale, which lower the average cost per unit

• At some level of output, a business will not be able to reduce costs any further - this point is called productive efficiency

• Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale

Types of internal and external economies

• Internal economies of scale occur as a result of the growth in the scale of production within the business

  • The firm can benefit from lower average costs (AC) generated by factors from inside the business

Types of internal economies of scale

• External economies of scale occur when there is an increase in the size of the industry in which the firm operates

  • The firm benefits from lower average costs generated by factors outside of the business 

Sources of external economies of scale

Problems arising from growth

• Rapid business growth may create challenges that can negatively impact a company's operations and financial performance

• Three of these challenges are diseconomies of scale, internal communication issues, and overtrading

Diseconomies of scale

• This occurs when a company grows too large, making it difficult to manage and control its operations

• It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control

• The cost per unit ends up increasing as a result of these inefficiencies

Internal communication

• Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination

• This may result in delays, errors, missed opportunities and impact on employee morale

Overtrading

• Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity)

• This may cause cash flow problems or decreased customer satisfaction

  • E.g . a company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers