The Benefits & Drawbacks of Business Growth5.3.2

Learning Outcomes To understand the difference between

internal and external growth. To understand the main external means

of growth — acquisition, merger and takeover.

To understand some of the costs and benefits of both internal and external business growth.

Starter Why might shareholders prefer external

growth while other stakeholders prefer internal growth?

Hint – what are shareholders? Why do they buy shares? What different types of stakeholder are there (i.e Staff, customers etc) and what are their wants & needs?

Benefits of GrowthThe benefits of growth are called Economies of Scale and happen as a business becomes larger. Some examples are:- Suppliers often offer discounts for large orders. As firms

grow they gain market power, such as Tesco, and then the supplier becomes more dependent on their custom. These discounts can then be passed on to customer and can attract more customers leading to further growth.

Larger businesses are more likely to be able to secure high level investment.

Larger companies can fund innovation and development which can give them a competitive advantage and lead to further growth.

Staff in small businesses often have to do a number of roles whereas in a larger business they can hire an expert in the field (i.e advertising). This is known specialisation.

Benefits of Growth Task 1 Consider Tesco, for the stakeholders below

write at least one advantage of growth to each of the following stakeholders:- Shareholders Managers Suppliers Customers Staff

Drawbacks of GrowthThese are known as diseconomies of scale and happen as a business becomes larger. Successful smaller businesses often have entrepreneurs that are able to inspire and motivate a small team as each person feels part of the team and that they help in the success of the business. Some of the drawbacks of growth are:- Business leaders often find communication more

difficult as there can be issues passing messages through layers of management.

Decision making can be slow. Staff can often become less productive as they do not

feel as involved in the success of the business and customer service can suffer.

Disadvantages of Growth Task 2 Consider Tesco, for the stakeholders below

write at least one disadvantage of growth to each of the following stakeholders:- Shareholders Managers Suppliers Customers Staff

Rates of Growth & Diseconomies of Scale

Some diseconomies of scale can be avoided if the business plans growth carefully. This can be done by:- Planning the recruitment & training of new staff

carefully. Investing in technology to make communication

quick & efficient. Having a flexible structure that means the

business can respond quickly to change.However, careful planning of growth is not always possible, particularly in times of slow growth as it may be difficult to maximise opportunities.

The Science bit!Economists often draw a diagram to illustrate the benefits & drawbacks of growth

As the business grows the cost of producing each unit falls initially as the firm benefits from economies of scale. However, these costs eventually start to rise as the firm falls victim to diseconomies of scale.

Cost

per

unit

Size of business

Revision Essentials Economies of Scale – when a business

benefits from its growth Diseconomies of Scale – when a

business suffers as a result of business growth

Specialisation – focusing on one job role, making it easier to become steadily more expert

Exercise Pg 78