Business Growth

What Business Growth covers

Business growth is examined in Unit A2 1, Business Economics. It covers how and why firms grow, and why some stay small, organic growth versus merger and acquisition, horizontal, vertical and conglomerate integration and evaluating the motives for and consequences of growth.

The 4 subtopics

Each one has its own page.

• How and why firms grow, and why some stay smallGrowth increase a firm's market power, how growth can reduce the risk a firm faces and growth serve the interests of managers as well as owners.Open →
• Organic growth versus merger and acquisitionOrganic growth, hostile takeover and how does it work and three advantages of growing by acquisition rather than organically.Open →
• Horizontal, vertical and conglomerate integrationHorizontal integration, vertical integration and conglomerate integration.Open →
• Evaluating the motives for and consequences of growthArgument that growth improves a firm's dynamic efficiency, whether a firm should grow by diversifying into unrelated markets and trade-off between growth and short-run profitability.Open →

What you need to know

Answer each one before you reveal it.

Take Business Growth further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Backward vertical integration vs Forward vertical integration

  Backward vertical integration: moving towards the supplier, as when a manufacturer buys a component maker. Forward vertical integration: moving towards the customer, as when a manufacturer buys a retail chain.

Questions from this topic

Each one with the model answer underneath.

1. 1

   In what different ways can the size of a firm be measured?

   Model answer

   A firm's size can be measured by its turnover, by the number of people it employs, by the value of its capital employed, by its market capitalisation or by its share of the market it serves. The measures can disagree sharply, because a capital-intensive firm such as an oil refiner may have huge turnover and few employees while a labour-intensive service firm shows the reverse. Choosing a measure therefore matters before any statement about which firm is larger.

2. 2

   What cost-based reasons might a firm have for wanting to grow?

   Model answer

   Growth allows the firm to move down its long-run average cost curve and capture internal economies of scale, so unit costs fall. Technical economies from indivisible machinery, purchasing economies from bulk discounts and financial economies from cheaper borrowing all require a larger scale to exploit. Reaching the minimum efficient scale also removes the cost disadvantage a small firm suffers against larger rivals.

3. 3

   How does growth increase a firm's market power, and why does that matter to the firm?

   Model answer

   A larger share of the market makes the firm's demand curve less elastic, because customers have fewer close alternatives, so it can raise price with a smaller loss of sales. Greater size also gives it bargaining power over suppliers and distributors, allowing it to negotiate lower input prices and better shelf space. Both effects widen the gap between price and cost and so raise profit.

4. 4

   Analyse how growth can reduce the risk a firm faces.

   Model answer

   A firm operating in a single market with a single product depends entirely on conditions in that market, so a downturn or a change in taste threatens the whole business. Growth into other products or other countries spreads the risk, because the various markets are unlikely to move together. Larger firms also have deeper reserves and easier access to credit, so they can survive a period of losses that would destroy a smaller rival.

5. 5

   Why does growth serve the interests of managers as well as owners?

   Model answer

   Managerial salaries, status and career prospects are typically linked to the size of the operation supervised, so running a larger firm brings higher pay and greater standing. A larger firm also offers more internal promotion opportunities and is harder to take over, which protects the manager's position. Growth is therefore attractive to managers even at points where it no longer raises profit for shareholders.

6. 6

   What is the difference between internal and external routes to business growth?

   Model answer

   Internal or organic growth means the firm expands its own operations by investing in extra capacity, opening new outlets, recruiting more staff or developing new products. External growth means combining with another firm, either by merger, where two firms agree to join, or by acquisition, where one firm buys a controlling interest in another. The first builds new productive capacity; the second transfers existing capacity into new ownership.

What is inside Levo

Six ways to work the same material.

Business Growth revision questions

What does Business Growth cover in CCEA A-Level Economics?

4 subtopics: how and why firms grow, and why some stay small, organic growth versus merger and acquisition, horizontal, vertical and conglomerate integration and evaluating the motives for and consequences of growth. Each one has its own page with questions and model answers.

How is Business Growth organised?

By the CCEA 4410 specification, subtopic by subtopic, so it matches the order you are taught it in.