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 grow
Owners or management desire to run a large business & continually seek to grow it | Owners desire higher levels of market share and profitability | The desire for stronger market power (monopoly) over its customers and suppliers |
Desire to reduce costs by benefitting from economies of scale | Growth provides opportunities for product diversification | Larger firms often have easier access to finance |
Exam Tip
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 relationships with their customers (excellent customer service) | They are unable to access finance for expansion | They provide a product that is in a niche market - smaller market size but can be very profitable |
By remaining small, there is a high ability to respond quickly to changing customer needs/preferences | Rapid growth can cause diseconomies of scale which can be difficult to deal with and so many owners choose to avoid these | Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing) |
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
An Evaluation of Remaining Small
Advantages | Disadvantages |
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Exam Tip
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.
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