THEME 3 – Business Behaviour and Labour Market
Business Growth
Firms often choose to expand due to opportuniies for large profts as well as gaining
benefts from economies of scale howe er there are man reasons a frm ma decide to sta
small:
Economies of scale may be small relatve to market size: In industries where economies of
scale are small then benefts of growth are limited. Larger frms ma experience
diseconomies of scale and ma sufer with implemening new technolog . Small frms can
exploit this.
Goals of the owner: The owner ma not want to expand the business be ond a certain
point and deal with muliple shops and ma be saisfed with proft from one shop. In
expanding the ma also lose control through the di orce of ownership.
Barriers to entry may be low: It ma be the case that it’s eas to establish a small frm in the
market. If products are simple to produce and sell and fnance is a ailable there ma be no
need to be a large frm.
Niche market: If the market is niche or the frm pro ides a unique product then a small frm
can act a monopolist in this niche. The industr ma not be large enough to expand majorl .
There ma also be constraints to growth such as:
- Access to fnance
- Owner objeci es
- Regulaion such as the CMA
Reasons for businesses to grow:
- Economies of scale
- Build brand name and reputaion
- Greater market infuence and control, such as reducing compeiion
- Reduce risk
- Di orce of ownership, managers use to jusif higher salaries
How Businesses Grow
Organic Growth – A frm increasing its sizee through in esing in increasing its factors of producion
Merger/Takeover – The joining of two or more frms under common ownership
Organic growth co ers almost all growth. It is much easier to control and much safer and
does not sufer from an of the disad antages that mergers do. Howe er it is much slower
than a takeo er and in some cases a merger ma be easier such as tr ing to expand into a
new market.
Business Growth
Firms often choose to expand due to opportuniies for large profts as well as gaining
benefts from economies of scale howe er there are man reasons a frm ma decide to sta
small:
Economies of scale may be small relatve to market size: In industries where economies of
scale are small then benefts of growth are limited. Larger frms ma experience
diseconomies of scale and ma sufer with implemening new technolog . Small frms can
exploit this.
Goals of the owner: The owner ma not want to expand the business be ond a certain
point and deal with muliple shops and ma be saisfed with proft from one shop. In
expanding the ma also lose control through the di orce of ownership.
Barriers to entry may be low: It ma be the case that it’s eas to establish a small frm in the
market. If products are simple to produce and sell and fnance is a ailable there ma be no
need to be a large frm.
Niche market: If the market is niche or the frm pro ides a unique product then a small frm
can act a monopolist in this niche. The industr ma not be large enough to expand majorl .
There ma also be constraints to growth such as:
- Access to fnance
- Owner objeci es
- Regulaion such as the CMA
Reasons for businesses to grow:
- Economies of scale
- Build brand name and reputaion
- Greater market infuence and control, such as reducing compeiion
- Reduce risk
- Di orce of ownership, managers use to jusif higher salaries
How Businesses Grow
Organic Growth – A frm increasing its sizee through in esing in increasing its factors of producion
Merger/Takeover – The joining of two or more frms under common ownership
Organic growth co ers almost all growth. It is much easier to control and much safer and
does not sufer from an of the disad antages that mergers do. Howe er it is much slower
than a takeo er and in some cases a merger ma be easier such as tr ing to expand into a
new market.
