|In this lesson you will learn:|
✅ Why the owners of a business may want to expand the business
✅ Different ways in which businesses can grow
✅ Problems linked to business growth and how these might be overcome
✅ Why some businesses remain small
Some companies grow to global domination like the tech giants Facebook, Apple, Amazon, Netflix and Google (FAANG), with a combined market capitalization of over $4.1 trillion as of January 2020. Others stay small like your local corner store.
Business growth may not come up too often as a stand alone question, but it is crucial in understanding other concepts. The importance of business growth is often an important part of longer, higher-scoring questions.
Profit is the easiest one to remember. The bigger a company grows, the more products or services it can sell. Therefore, if a business grows there is a greater potential to make profit.
Economies of scale: as companies grow larger they can cut costs by buying in bulk, and can afford to invest in technology or machinery that lowers the unit cost of each item they produce, cutting costs and increasing profits.
Diversification or spreading risk. As a business grows it can produce different products and it lowers its dependence on one product. For example, a car rental company may expand to also offer van and truck rental. This means if there is a downturn in the car rental market the business can can still rely on revenue from the truck market.
Market domination: as companies grow they gain greater market share and greater control of the market. For example, if a coffee shop in a small town has a number of outlets, it can have a large influence over setting prices for of a cup of coffee in that town.
For IGCSE two different examples of how a business can grow is sufficient.
External Growth is when a business expands by taking over or merging with another business. For example, Facebook took over photo-sharing platform social Instagram for $1 billion in 2012.
Internal Growth (or organic growth) is when a company expands by building another outlet or adding another service rather than taking over another business. For example, Ed’s Coffee expands by renting another shop, redecorating, employing staff and starts operating.
External growth is quicker than internal growth, but riskier and requires higher capital investment. It’s more expensive to buy an existing business than expand your own operations from scratch, but much quicker, as the business is already running and has a customer base and suppliers.
As growth is a major change in how a business operates, the disruption brings challenges which must be overcome.
We’ll look at two examples of problems linked to growth and how they could be solved.
Communication: as a business grows, more people are employed in more locations. It becomes increasingly difficult to ensure everyone is getting clear messages, and for management to know what is going on in every part of the business.
To overcome this, businesses can set up clear communication channels with the assistance of modern technology (email and instant messaging) to keep all staff updated. We’ll look at this further in Unit 2.4.
Finance: expansion involves a high capital cost which puts pressure on a company’s finances and cash flow.
The solution can be to expand more slowly, and ensure that there are suitable long term sources of finance available.
Some businesses decide to stay small, but for others expansion is never an option because of a lack of capital. In this section we find out the different reasons why some businesses stay small.
Owner’s objectives: some business owners start their own business as they want to have control over their lives. If a business expands it will involve more responsibility, stress, risk and a higher workload. So the business stays small to allow the owners greater work-life balance.
Access to capital: some business owners can’t expand due as they have no access to capital. This may be because they can’t get a bank loan or find an investor to finance business growth. This is particularly the case in the developing world, where there are millions of small business owners who can’t expand because of high-interest rates, or they lack the assets required as collateral for a bank loan.
Contact with customers: for many small business owners what makes them successful and what motivates them is the close relationship with customers. For example, a yoga teacher may expand her business by employing other teachers and operating more classes. However, this would mean she would spend less time giving a personalised service to her loyal customers, and more time in the office controlling and organising.
|Past Paper Question Example Paper 2 (a) Explain two possible reasons why Roscoe wants the business to remain small. |