Methods of growth
Business growth has potential benefits and drawbacks. Some owners are reluctant to take the risk of growing the business and opt to stay small. Any business growth will need to be funded.
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 and are big enough to be price setters
- often enjoy economies of scale
Economies of scale 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
- enjoy a higher profit margin
Economies of scale are a major source of competitive advantage for large firms.