3.2.1 - growth

business growth

business grwoth is the point at which a business needs to expand and seeks options to generate more profit

objectives of growth - intro

1. Achieve economies of scale (internal & external) → lower average costs

2. Increase market power over customers and suppliers → stronger negotiation position

3. Boost market share & brand recognition → competitive advantage

4. Raise profitability → higher returns for owners and reinvestment potential

to achieve economies of scale

• Growth allows businesses to reduce average costs

• Lower production costs = higher profit margins or lower prices

• Lower prices can help gain market share

• Example: Tesco leads UK grocery market with 27.1% share (Kantar, 2021)

benefits of economies of scale 

• Larger businesses can:

  • Buy in bulk → lower unit costs

  • Hire specialist staff → improved efficiency

  • Access cheaper finance → better reputation with banks

• EOS = cost advantages from growth, boosting competitiveness and profitability

economies of scale and average costs

• EOS = falling unit/average costs as output increases

• “The more they make, the cheaper it gets per item”

• Key exam point: increased output → lower average costs → higher efficiency and competitiveness

economies of scale formula

• Total Costs (TC) = Variable Costs × Output + Fixed Costs

• Average Cost per Unit = Total Costs ÷ Output

➡ As output increases, average cost decreases — core principle of economies of scale

different times of economies of scale

Type	Benefit for Large Firms
Financial	Cheaper loans, wider finance options, more investor appeal
Marketing	Specialist buyers/sellers, bulk buying discounts
Technical	Specialist labour, efficient production, lower unit costs
Managerial	Expert managers → better decisions and efficiency
Risk-Bearing	Diversified products → reduced impact from demand shocks

increase makret power over customers and suppliers 

• Growth helps reduce supplier and customer power

• This supports the long-term goal of profitability

• Businesses can achieve this by:

• Dominating supply chains

• Controlling pricing and distribution

•  Using Porter’s Five Forces to analyse:

• Supplier power

• Buyer power

• Threat of substitutes

• Threat of new entrants

• Industry rivalry

increased market share and brand recognition 

• In competitive markets (e.g. UK FMCG), businesses grow to increase market share

• Growth can occur via mergers or acquisitions of recognised brands

• Benefits of brand recognition:

• Customer trust and loyalty

• Higher sales and repeat purchases

• Premium pricing power

• Stronger market positioning

increase profitability 

• Businesses grow to boost profitability

• Higher output = lower cost per unit (Economies of Scale)

• Lower costs → higher profit margins

• Growth makes the entire business more efficient and profitable 

differnece between profit and profitibality

Profit	Shared	Profitability
Total money earned after costs	Both measure business performance	Efficiency of generating profit
Absolute figure (£)	Linked to growth and cost control	Relative measure (% or ratio)
Used to assess financial success	Affected by revenue and cost structure	Used to compare across businesses

problems arising from growth introduction

1. Diseconomies of scale → rising average costs due to inefficiency

2. Internal communication issues → harder to coordinate across departments

3. Overtrading → expanding too fast without enough working capital

diseconomies of scale

• Occur when a business grows beyond minimum efficient scale

• Result: average costs per unit start to rise

🔹 Internal Diseconomies

• Poor communication, weak coordination, low motivation

🔹 External Diseconomies

• Overcrowding, traffic congestion, rising land and labour costs

• lakc of motivation 

diseconomies of scale formulas

• Total Costs (TC) = Variable Costs × Output + Fixed Costs

• Average Cost per Unit = Total Costs ÷ Output

overtrading 

• Happens when a business accepts more orders than it can fulfil

• Leads to cash flow problems if payments are delayed

• Example: large order paid in 3 months → no cash to buy stock for new orders

• Risk: unsustainable growth without enough working capital

internal communication

• Larger workforce = less face-to-face communication

• More management layers = slower message flow

• Poor communication leads to:

• Mistakes

• Wastage

• Higher average unit costs

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