To Grow or not to Grow? (DP IB Business Management): Revision Note
Reasons for growth
Many firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)
Reasons why businesses may seek growth
Owners or management may have the ambition to run a large business and actively pursue growth
There may be a desire to increase market share and profitability over time
Businesses may aim to strengthen their market power, gaining more control over customers and suppliers (potentially leading toward monopoly power)
Growth allows businesses to reduce costs by benefiting from economies of scale
Expanding provides opportunities for product diversification, helping firms to spread risk and target new markets
Larger firms often find it easier to access finance, as they are seen as lower-risk by lenders and investors
Examiner Tips and Tricks
One of the goals of growth is to improve profitability. It's important to remember the distinction between profit and profitability. Profit is the absolute amount of money a company makes, while profitability is a measure of how efficiently a company generates profit relative to its revenue or investment. Profitability is usually expressed as a percentage and is calculated by dividing the profit by the revenue.
Reasons to remain small
In 2021, 98.9% of firms in the European Union were considered to be small firms with less than 49 employees
Some firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)
While many firms grow, others do not or they intentionally choose to remain small
Reasons why small firms exist
They offer a more personalised service and focus on building strong relationships with their customers through excellent customer service
They may be unable to access the finance required for expansion, limiting their ability to grow
They operate in a niche market, which has a smaller customer base but can still be highly profitable
By staying small, they can respond quickly and flexibly to changing customer needs and preferences
Rapid growth can lead to diseconomies of scale, such as reduced efficiency or increased costs, which many owners choose to avoid
The owner’s goal may not be to maximise profit, but rather to achieve a satisfactory quality of life — a strategy known as satisficing
Other reasons why remaining small may be beneficial
Changes in technology often favour large scale operations but others can work to the advantage of small firms
The Internet offers low cost access to market for many firms
Modern technology can work in favour of the small-scale and personalised businesses rather than the mass produced and impersonal
Niche markets can be targeted profitably by small firms that have relatively small overheads and do not need to achieve the volume of sales required by larger competitors
This is especially true where technology reduces the cost differential between the mass produced and the niche product
Evaluation of remaining small
Advantages | Disadvantages |
|---|---|
|
|
Examiner Tips and Tricks
Do not focus too much on making a judgement about whether businesses are better big or small. Businesses of all sizes can - and do - succeed.
It is more important consider whether the size of the business allows it to achieve its mission and whether other factors, such as its culture and organisational structure, contribute to its success.
Unlock more, it's free!
Did this page help you?
