Benefits/Disadvantages of growth

As a business grows, it gains both major advantages and disadvantages over its smaller rivals.  Some firms are reluctant to take the risk of growing the business and opt to stay small.

Positives of growth

  • Large firms have influence over market price.
  • Large firms often enjoy economies of scale. This means that a business has lower unit costs because of its size. They can purchase their raw materials in bulk, which results in lower costs. They can also spread the cost of marketing and overheads across more sales, therefore they can increase both.
  • They have cost advantage because they buy in bulk. Eg. If Primark can produce a t-shirt for 10p while it costs its smaller rival an average of 80p, then the larger firm has a 70p per unit cost advantage. The larger firm can charge lower prices or enjoy a higher profit margin.
  • Attracts and retain new customers. To grow a business, the firm adds new products to their portfolio and moves into new markets (diversifying.) Growing a loyal customer base achieves stable and growing profits.
  • Growing a business may help to overcome falling sales and strong competition, and attract new customers if it moves to larger premises and increase resources and stock.

Negatives of growth

  • They could have to compromise quality. By aiming to increase market share by growing a firm, it may have to compromise quality to reduce costs. This will lower reputation and lose sales to competitors. 
  • Growth can lead to loss of control of a company if a company becomes so big and employees from different countries are working on the same things because of language barriers. This will increase costs.
  • Could outgrow premises. There may not be enough efficient short-term workspace.
  • Morale may drop if staff cannot cope with the extra work. Productivity could decrease.
  • There may be a shortage of cash to meet expansion costs. Taking on more and more work to generate more income places additional pressure on premises and staff.
  • More staff may quite because of heavy workloads. Vital knowledge and expertise could be lost as staff leave. Hiring and training new staff takes time and money.

Organic Growth

Organic growth is expanding from within a business - internal. You could learn this type of growth by memorising it as 'natural' (organic.)

Organic growth is achieved through:
  • Adding new customers or markets
  • Increasing sales
  • New products and services
It is a lot less risky approach and uses existing expertise and knowledge. 

Inorganic Growth

Inorganic growth involves merging with, or acquiring other businesses - external.
You could learn this type of growth by memorising it as 'artificial' or 'unnatural' (inorganic.)

Inorganic growth is achieved through either:
  •  A merger or 
  • An acquisition

Merger

Two companies of similar size join together to create a new company, with new shares. This is often described as a 'merger of equals'.

Acquisition

One company takes over another company by buying up 51% or more of the shares in a 'target company'.

This is much higher risk approach but it is a faster way to grow a company compared to organic growth and immediately gains customers and sales of the acquired business, as well as its assets and market position. 

However, it is a more risky strategy than organic growth as it involves taking over over a new business, which may have a different culture and way of doing things. It can also 

How can the expansion of a business / firm be measured?

Measurements include:
  • Profits
  • Sales revenues
  • Cash flows
  • Capital invested
  • Production output
  • Number of employees
  • Market share / market value (market capitalisation)
  • Number of shops / locations
Most businesses want to expand as it leads to a growth in sales and increases profits, which allows them to purchase new locations or extra shops and to employ more staff. 

Both internal and external growth are an option for most firms, and a lot of businesses do both!
Expansions is about making a business grow. We can measure the size of a business in different ways. By viewing the yearly statistics and checking for an increase of one of the below measurements indicates that the business is growing - but not necessarily. For example, an increase in sales could lead to more profits, but not always. It depends on whether these extra sales have been profitable (i.e. what additional costs have been incurred to each them, e.g. decrease the sale price to increase sales.)