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.

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 ouputoutput: A systems block or component that is activated by the process block. For example, this could be an LED, a buzzer or a motor..
• 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.

Profits or growth?

money, accounting records and a calculator

Owners can face a dilemma in deciding whether to expand. Expansion is risky. There's always the chance that any expansion plans can fail and result in losses rather than profit. Owners are then worse off than before the growth of the business.

The risk of expansion means that some owners are reluctant to chance funds. They opt instead to stay small and earn a relatively risk-free profit.

There is potentially a major drawback to avoiding growth. Small businesses can be at a cost disadvantage compared to their larger rivals enjoying economies of scaleeconomies of scale: When big companies can produce things cheaper than smaller companies. There are two reasons for this. Firstly, they can buy in bulk, so can negotiate with suppliers to pay less. Secondly, the more a company produces the lower the average cost per product will be of overheads (fixed costs, such as buildings).. As small firms cannot compete with the low prices set by their larger rivals, they have to compete on service or quality.

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