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Business Studies

Expanding a business

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Business expansion has potential benefits and drawbacks. Some owners are reluctant to take the risk of growing the business and opt to stay small.

Benefits of a growing business

As a business grows it gains two major advantages over its smaller rivals. Large firms have more influence over market price. They're big enough to be price setters.

A pair of sunglasses

Large firms also often enjoy economies of scale. This means that a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales.

For example, if a large firm can produce a given type of sunglasses for £20 while it costs its smaller rival an average of £30, then the larger firm has a £10 per unit cost advantage. Larger firms can charge lower prices or enjoy a higher profit margin.

Economies of scale are a major source of competitive advantage for large firms.

Methods of expansion

A business can grow in size through:

  • Internal (organic) growth: the business grows by hiring more staff and equipment to increase its ouput [output: the term denoting either an exit or changes which exit a system and which activate/modify a process ].
  • External growth: where a business merges with or takes over another organisation. Combining two firms increases the scale of operation.
  • Franchising: where a business leases its idea to franchisees. This allows new branches to open across the country and internationally.

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