Size of Firms & Internal Growth (Cambridge (CIE) A Level Economics): Revision Note
Exam code: 9708
Reasons for different sizes of firms
Firms vary in size because some firms benefit from expanding, while others choose to remain small.
Many firms start small and will grow into large companies or even multi-national corporations (Amazon started in a garage)
Reasons why some firms grow large
Reason | Explanation |
|---|---|
Economies of scale |
|
Access to finance |
|
Technology and capital requirements |
|
Market power and market share |
|
Ability to spread risk |
|
Reasons why some firms remain small
Reason | Explanation |
|---|---|
Owner objectives |
|
Niche markets |
|
Limited access to finance |
|
Avoiding diseconomies of scale |
|
Local market demand |
|
Internal growth of firms
Internal growth occurs when a firm expands using its own resources, rather than merging with other firms
Organic growth
Organic growth occurs when a firm increases its size by expanding output, sales or market share
Methods include:
opening new branches or stores
increasing production capacity
developing new products
entering new geographic markets
For example, Starbucks grew organically by opening new coffee shops around the world.
Advantages of organic growth:
lower risk compared with mergers
easier integration into existing operations
gradual expansion allows firms to maintain control
However, growth may be slow and limited by available finance
Diversification
Diversification occurs when a firm expands into new products or new markets
This can help firms:
spread risk across multiple products
exploit new market opportunities
reduce dependence on a single product
For example:
Amazon diversified from online bookselling into cloud computing, streaming services and consumer electronics
Diversification can be:
related diversification – new products linked to existing activities
unrelated diversification – expansion into completely different industries
Case Study
Diversification: Grab Malaysia
Grab began in Malaysia in 2012 as a ride-hailing platform connecting passengers with private drivers through a mobile app. As the business expanded across Southeast Asia, the company faced intense competition from other transport platforms and recognised that relying only on ride-hailing could limit future growth
Growth strategy
Grab pursued diversification by expanding into a range of new digital services beyond transport. The company launched GrabFood, allowing customers to order meals from restaurants through the same app. It later introduced GrabPay, a digital payment platform, and GrabMart, which delivers groceries and everyday items.
These services represent related diversification, as they build on Grab’s existing digital platform, customer base and delivery network. By using the same technology and logistics system, Grab could expand into new markets while leveraging its existing strengths.
Outcome
Diversification has transformed Grab into a “super-app”, offering multiple services through a single platform. This strategy has allowed the firm to:
spread risk across several business activities
generate multiple revenue streams
increase customer engagement by encouraging users to rely on the app for transport, food delivery and payments
As a result, Grab has become one of the largest digital platforms in South East Asia, operating in countries including Singapore, Indonesia, Thailand and Vietnam. Diversification has therefore played a key role in supporting the firm’s growth and long-term competitiveness in the region.
Unlock more, it's free!
Join the 100,000+ Students that ❤️ Save My Exams
the (exam) results speak for themselves:
Was this revision note helpful?
