IBBusiness ManagementHLRevision Notes1. Introduction to Business Management1.5 Growth & EvolutionTo grow or not to grow?

To grow or not to grow? (HL IB Business Management)

Revision Note

Lisa Eades

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)

 

  • Many changes in technology 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

  • Small firms often provide highly customised goods/services e.g. pet grooming in the customer's home

  • They often create personal relationships with their customers which helps to generate customer loyalty and word-of-mouth advertising

  • They often provide very unique products which are sold in small quantities at high prices - this can be very profitable

  • Smaller firms can respond quickly to changing market conditions

  • Small firms are more susceptible to changes in the wider economy than large firms, especially during recessions

  • Less financial resources available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all

  • It is harder to recruit/retain staff as the wage & non-wage benefits are less competitive than those offered by bigger firms

  • Owners may struggle to take a holiday/sick leave as revenue slows/stops coming in when they stop working

  • Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms resulting in lower profit margins

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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    Lisa Eades

    Author: Lisa Eades

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.