problems linked to business growth

1.3.3 Why Some Businesses Grow and Others Remain Small

Learning Objective

Explain why firms choose to expand, identify the problems that can arise during growth, understand why some businesses deliberately stay small, and evaluate and justify appropriate growth strategies – all in line with the Cambridge IGCSE/A‑Level Business Studies syllabus.

Actionable Review of the Current Notes

Key Concepts

• Growth – an increase in size, turnover, market share or profit.
• Growth rate (percentage) –
  \[ \text{Growth rate} = \frac{\text{Current size} - \text{Previous size}}{\text{Previous size}}\times100\% \]
  
  Both sizes must be measured in the same unit (e.g., revenue, number of employees).
  Example: Revenue rises from £500 000 to £600 000 → growth rate = ((600‑500)/500)×100 % = 20 %.
• Internal (organic) growth – expansion using the firm’s own resources (retained profits, new product development, opening new outlets).
• External (inorganic) growth – expansion by acquiring or merging with other businesses, franchising, or forming strategic alliances.

Why Businesses Choose to Grow

• Higher profits – larger sales volumes can increase absolute profit even if margins stay constant.
• Market opportunities – new geographic markets, new customer segments, or new product lines.
• Economies of scale – average costs fall as output rises (e.g., bulk buying, spreading fixed costs).
• Access to resources – finance, technology, skilled labour, or brand reputation that become available at a larger size.
• Owner ambition / succession planning – desire for greater influence, legacy, or to provide a career path for family members.

How Businesses Can Grow

Why Some Businesses Remain Small

Reasons can be grouped into two broad categories.

Owner‑driven factors

• Personal preference – the owner values lifestyle balance, personal control, or low stress.
• Risk aversion – reluctance to take on debt or the uncertainties of larger markets.
• Succession choice – the business is intended to stay within the family at its current scale.

Environment‑driven factors

• Limited resources – insufficient finance, technology, or skilled staff to support expansion.
• Niche market focus – a specialised market where a small scale is sufficient and profitable (e.g., bespoke jewellery).
• Regulatory constraints – licences, permits, or industry rules that make larger operations impractical.
• Strategic positioning – staying small preserves a premium brand image or keeps operating costs low.

Problems Linked to Business Growth

Each problem area can directly limit further expansion or even cause a decline if not managed.

1. Financial Problems

• Insufficient working capital for larger inventories, new equipment or additional staff.
• Higher borrowing → increased interest costs and risk of over‑leveraging.
• Cash‑flow mismatch – sales may rise faster than cash receipts.
  Example: Turnover grows 20 % from £500 000 to £600 000, but only 70 % of sales are collected within the period, creating a cash‑flow shortfall of £30 000.

2. Managerial Problems

• Owner‑manager may lack the skills to run a larger, more complex organisation.
• Poor delegation – decisions become bottlenecked at the top.
• Difficulty recruiting and retaining qualified managers and specialists.
• Leadership style may become unsuitable (e.g., micromanagement is unsustainable with many staff).

3. Operational Problems

• Existing production capacity becomes a bottleneck; lead times increase.
• Quality control can deteriorate as volume rises.
• Supply‑chain strain – suppliers may be unable to meet larger orders, causing stock‑outs.
• Inadequate systems for inventory, scheduling, or information flow.

4. Market‑Related Problems

• Over‑extension into markets where the firm lacks expertise.
• Increased competition; larger firms often become primary targets for rivals.
• Brand dilution if expansion is too rapid or inconsistent with the original brand image.

5. Legal & Regulatory Problems

• Compliance with health, safety, employment, tax and environmental legislation becomes more complex.
• International expansion introduces foreign‑exchange risk, differing legal systems and import/export controls.

Linking Problems to Targeted Growth Strategies

Strategies to Overcome Growth Problems (Summary Checklist)

1. Develop a detailed growth plan with realistic financial forecasts, including cash‑flow projections.
2. Choose the most suitable form of growth (internal or external) and justify the choice.
3. Secure finance that matches the scale of the plan (equity, retained profits, staged loans).
4. Recruit and train managers; establish clear delegation and leadership structures.
5. Upgrade operational systems (inventory, production scheduling, quality assurance) to match increased demand.
6. Carry out market research and protect the brand before entering new markets.
7. Obtain professional advice on legal, tax and regulatory requirements, especially for overseas expansion.

Application Question (AO2/AO4)

Scenario: A family‑run bakery generates £250 000 turnover per year and wants to double its sales within three years. The owners are considering either opening a second shop (internal growth) or buying a small existing café (external growth).

Task: Recommend the most suitable growth method and justify your choice by linking it to the financial, managerial, operational, market‑related and legal problems discussed above.

Suggested Marking Rubric (6 marks)

• 2 marks – Identify the two growth options and state a clear recommendation.
• 2 marks – Explain how the chosen option solves at least three of the problem categories.
• 2 marks – Use specific examples from the scenario (e.g., cash‑flow, capacity, brand) to support the justification.

Model Answer Outline (8‑10 marks – extended response)

1. State recommendation (e.g., “Buy the café – external growth”).
2. Financial: acquisition provides immediate customer base and assets, reducing the cash‑flow gap; financing can be spread via a bank loan.
3. Managerial: the café comes with an experienced manager, alleviating the owners’ lack of senior staff.
4. Operational: existing kitchen and equipment increase capacity, avoiding a bottleneck in the bakery’s current premises.
5. Market‑related: the café’s location gives access to a new geographic market and diversifies the product range, protecting against brand dilution.
6. Legal: acquisition triggers due‑diligence, but the owners can use professional advisers to ensure compliance with health‑safety licences.
7. Conclude by linking the benefits back to the goal of doubling sales within three years.

Summary

Businesses grow for profit, market opportunities, economies of scale, access to resources, and owner ambition. Growth can be achieved internally (organic) or externally (inorganic), each with distinct advantages and disadvantages. Expansion inevitably brings inter‑related problems – financial, managerial, operational, market‑related and legal – which must be recognised and addressed through targeted strategies. By linking problems to suitable strategies and carefully evaluating the most appropriate growth method, learners can produce well‑justified recommendations that meet the Cambridge IGCSE/A‑Level Business Studies assessment criteria.

Key Points to Remember (Quick‑Fire Checklist)

• Growth is not automatically positive; problems may outweigh benefits.
• Accurate financial planning and cash‑flow monitoring are essential.
• Effective delegation and skilled management become critical as the firm expands.
• Operational capacity must be matched to demand to avoid bottlenecks and quality loss.
• Market research prevents over‑extension and protects brand reputation.
• Legal and regulatory compliance becomes increasingly complex with size and geographic spread.