why some businesses remain small

1.3.3 Why Some Businesses Grow and Others Remain Small

Learning Objective

Explain the key reasons why many businesses choose to remain small rather than expand, and contrast these with the main drivers of business growth. In doing so, consider the objectives of different stakeholders, the ways business size is measured, and the limitations of those measures.

1.3.3.0 Definition of Business Growth

• Internal growth: expansion achieved by using the firm’s own resources – e.g., reinvested profits, increasing output, hiring more staff.
• External growth: expansion through external means such as mergers, acquisitions, franchising or joint ventures.

1.3.3.1 Measuring Business Size (link to 1.3.2)

1.3.3.2 Owner’s Objectives & Personal Preferences

• Many entrepreneurs start a “lifestyle business” to achieve a particular way of life rather than to become a large corporation.
• Typical personal goals:
  • Flexible working hours.
  • Direct involvement in day‑to‑day operations.
  • Close relationships with customers.
• If the owner’s objectives align with a small‑scale operation, there is little incentive to grow.

1.3.3.3 Stakeholder Objectives & Potential Conflicts (1.5.2)

Prompt for students: Discuss a scenario where a lifestyle‑oriented owner’s desire for work‑life balance conflicts with shareholders’ demand for higher profits.

1.3.3.4 Limited Financial Resources

• Growth typically requires additional capital for premises, equipment, staff or marketing.
• Common constraints:
  • Difficulty obtaining bank loans or investor funding.
  • Insufficient retained profits for reinvestment.
  • Limited access to government grants or subsidies.
  • Interest rates and loan terms – high rates increase repayment burden, making expansion less attractive.
• Illustrative capital comparison:

  Business type	Typical start‑up capital (£)	Capital needed to expand (e.g., second site) (£)
  Home‑based craft shop	2 000 – 5 000	15 000 – 30 000
  Small café	30 000 – 50 000	120 000 – 180 000
  Local IT services	10 000 – 20 000	70 000 – 100 000

1.3.3.5 Management Capacity

• Larger firms need more sophisticated management:
  • Strategic planning and delegation.
  • Human‑resources functions (recruitment, training, payroll).
  • Complex financial control and budgeting.
• If the owner lacks these skills or is unwilling to develop them, expansion becomes impractical.

1.3.3.6 Market Niche

• Some firms deliberately target a narrow, specialised market that does not support large‑scale production.
• Examples for 14‑16‑year‑olds:
  • Hand‑crafted jewellery sold to boutique shoppers.
  • Specialist tutoring for GCSE physics.
  • Artisan soap made for a local health‑food store.
• Operating within a niche can be profitable without the need for growth.

1.3.3.7 Risk Aversion

• Expansion introduces new risks:
  • Market saturation or new competitors.
  • Higher fixed costs (rent, salaries, utilities).
  • Uncertainty about future demand.
• Owners who are risk‑averse may prefer the certainty of a small, stable operation.

1.3.3.8 Regulatory & Legal Constraints

• Many industries face stricter licensing, health & safety, or environmental rules as they grow.
• Specific legal controls (syllabus 1.5.3):
  • Food‑service licences and regular health‑inspection checks.
  • Building permits for larger premises.
  • Data‑protection (GDPR) compliance for firms handling personal information.
  • Sector‑specific licences – e.g., pharmacy dispensing licences, broadcasting licences.
  • Environmental regulations (waste disposal, emissions) that become costlier at scale.
• The cost and administrative burden of compliance can deter expansion.

1.3.3.9 Family or Community Considerations

• Family‑run enterprises often aim to keep ownership, employment and profits within the family or local area.
• This desire can limit geographical spread or the size of the workforce.

1.3.3.10 Technological Limitations

• Access to modern production equipment, e‑commerce platforms or management information systems is crucial for scaling.
• Without appropriate technology, increasing output becomes inefficient or impossible.

1.3.3.11 Opportunity Cost of Staying Small

Choosing to remain small means forgoing potential benefits of growth (higher profits, market power, economies of scale). The opportunity cost is the value of these missed benefits, which must be weighed against the owner’s personal goals and the risks identified above.

1.3.3.12 Why Some Businesses Grow – The Opposite Forces

• Ambitious owner objectives – desire for market leadership or legacy.
• Ready access to finance – favourable loan terms, venture capital, or strong retained earnings.
• Strong management capacity – ability to delegate, plan strategically and control finances.
• Large or expanding markets – offering economies of scale and scope.
• Willingness to accept risk – pursuit of higher returns.
• Supportive regulatory environment – tax incentives, grants, streamlined licences.
• Family / community support for diversification – willingness to create jobs and invest locally.
• Adoption of new technology – automation, digital marketing, cloud‑based MIS.

1.3.3.13 Summary Table – Factors Influencing Business Size

1.3.3.14 Suggested Diagram

1.3.3.15 Summary Points

1. Businesses remain small when the owner’s personal goals align with a limited operation.
2. Internal constraints such as limited finance and insufficient management capacity are common barriers to growth.
3. External factors – market size, competition, regulation, technology and stakeholder objectives – also shape the decision to stay small.
4. Understanding both the reasons for staying small and the opposite drivers of growth enables students to analyse real‑world cases and assess future growth potential.