3.2.1 - Growth
Businesses often treat growth as a major objective because larger scale can improve costs, bargaining strength and profits. For exams, the key is not just to list these objectives, but to explain the chain: growth changes the size and position of the business, which can then change average costs, market power, market share and profitability.
Why growth matters
Growth
An increase in the scale of a business, often measured by sales revenue, output or capacity, usually pursued in the hope of improving performance.
Growth is not an objective simply because managers want a bigger business. It is usually pursued because a larger business may become more efficient, more powerful in the market and more profitable. In other words, size matters only if it creates an advantage.
A good exam answer keeps the main objectives linked together. If a business grows, it may spread costs over more output, gain stronger bargaining power, become better known to customers and increase the proportion of total sales it takes in the market. Because lower average costs and stronger sales can improve profit, growth can support several objectives at the same time.
Economies of scale
Economies of scale
When average costs can fall as total output increases in a business.
This is one of the most important objectives of growth. If output rises and costs are spread more efficiently, the cost per unit can fall. That gives the business more room to lower prices, keep prices unchanged and raise margins, or reinvest in the business.
The specification expects you to distinguish clearly between internal and external economies of scale.
Internal economies of scale
Reductions in average cost arising from an individual business expanding its own scale of operations.
Internal economies come from the business itself becoming larger. As it grows, it may be able to afford better equipment, specialist managers and cheaper finance, while also buying in bulk and spreading risk more widely.
| Internal economy | What happens as the firm grows | Why average cost may fall |
|---|---|---|
| Technical | It can afford better capital equipment or larger-scale production methods | Output rises faster than costs |
| Specialisation/managerial | It can employ specialist managers | Decision-making and operations can become more efficient |
| Purchasing/marketing | It can buy in bulk and spread marketing costs | Input and promotion cost per unit falls |
| Financial | It can access more sources of finance and better rates | Borrowing becomes cheaper |
| Risk-bearing | It can spread risk across more products or activities | Less dependence on one activity can improve stability and financing terms; a lower average cost is not automatic |
External economies of scale
The average cost reductions available to all businesses as the industry grows.
External economies do not come from one firm getting bigger on its own. They come from the whole industry expanding. As an industry grows, there may be a larger pool of skilled labour, more specialist support services and more co-operation in areas such as logistics or research. Because the business is operating inside a more developed industry, its average costs may fall even if the cost saving is not created internally.
In the UK supermarket market, large chains such as Tesco can spread warehousing, distribution and national advertising across very high sales volumes. At the same time, a large grocery industry supports specialist logistics firms and trained labour, which can reduce costs further across the sector.
Stronger market position
Growth can also increase market power over both customers and suppliers. Market power means a business has more ability to influence prices or trading terms because its size and position matter in the market.
Over suppliers, a large firm may place very large orders. Because suppliers do not want to lose that contract, they may accept lower prices, longer credit periods or more favourable terms. This can cut input costs and improve profit margins.
Over customers, growth may strengthen market share and brand recognition. Market share is the proportion of total sales in a market taken by one business. Brand recognition means customers can quickly identify and recall the brand. If more customers know and trust the brand, the business may find it easier to attract repeat purchases, launch new products and, in some markets, charge a premium price.
This helps explain why increased profitability is also an objective of growth. Lower average costs, stronger buying power, higher sales volume and a more recognisable brand can all raise profit. However, profitability is not guaranteed. It increases only if the gains from growth are greater than the extra costs of managing the larger business.
In the smartphone market, Apple benefits from very strong brand recognition. That makes new product launches highly visible to customers from the start, which helps support sales and pricing power and shows why growth can contribute to profitability as well as market share.
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