why the owners of a business may want to grow the business

1.3.3 Why Some Businesses Grow and Others Remain Small

Objective

To explain the motivations that drive owners to expand, the routes by which growth can be achieved, how business size is measured, the problems that may arise and how they can be mitigated, and why some owners deliberately keep their firms small. This satisfies Cambridge IGCSE Business Studies (0450) syllabus point 1.3.3 and links to stakeholder objectives (1.5.1) and the choice of business organisation (1.5.2).

1. Motivations for Business Growth

Owners seek growth for a mixture of financial, strategic and personal reasons. Each motivation reflects the objectives of key stakeholders (owners, shareholders, employees, customers, suppliers).

• Increase profits – Larger sales volumes spread fixed costs, raising profit margins.
• Achieve economies of scale – Bulk buying, more efficient production techniques and spreading overheads reduce the average cost per unit (and may eventually lead to diseconomies of scale if the firm becomes too large).
• Gain market power – A bigger market share can give influence over prices, suppliers and distribution channels.
• Diversify risk – Expanding into new products or markets lessens reliance on a single revenue stream.
• Personal ambition / legacy – Owners may seek reputation, personal satisfaction or wish to leave a lasting family business.
• Improved access to finance – Larger firms are viewed as less risky and can attract bank loans, equity investors or venture capital.
• Respond to market opportunities – Emerging trends, new technologies or unmet consumer needs can prompt expansion.
• Regulatory or legal incentives – Tax breaks, grants or other government support can make growth financially attractive.

2. Routes to Growth

Growth may be achieved organically (internal) or by combining with other organisations (external). The chosen route often determines the most suitable form of business organisation (sole trader, partnership, limited company, franchise, joint‑venture, etc.) and must be justified in terms of stakeholder objectives.

2.1 Internal (Organic) Growth

• Product development – Adding new products or improving existing ones (e.g., a bakery introducing gluten‑free cakes).
• Market penetration – Increasing sales of current products in existing markets (e.g., a coffee shop launching a loyalty card).
• Market development – Selling existing products in new geographic areas or to new customer groups (e.g., a retailer opening a second shop in a neighbouring town).
• Diversification – Entering a completely new market with new products (e.g., a clothing retailer launching a line of home textiles).

2.2 External Growth

• Acquisition – Buying another company to increase market share or acquire new capabilities (e.g., a small tech firm purchasing a rival’s software).
• Merger – Two businesses combine to form a larger entity, sharing resources and risks.
• Franchising – Allowing others to use the brand and operating system for a fee (e.g., a fast‑food chain expanding through franchisees).
• Joint venture – Partnering with another firm to undertake a specific project or enter a new market together.

Link to Business‑Organisation Choice

When selecting a growth route, students should recommend the most appropriate form of organisation and justify it. For example, a franchise model suits rapid geographic expansion while retaining limited liability for the franchisor; a joint venture may be preferable when entering a foreign market where local knowledge is essential.

3. Measuring Business Size

Size can be indicated by several quantitative measures, each with advantages and limitations. Remember that **profit is a performance measure, not a size measure** and must not be used to classify business size.

4. Small Business vs. Growing Business – Comparison

5. Illustrative Calculation – Break‑Even Before and After Growth

Linking the motivation “increase profits” to a simple financial analysis.

Scenario 1 – Small business (before growth)

• Fixed costs (FC) = $50 000
• Variable cost per unit (VC) = $20
• Selling price per unit (SP) = $30

Break‑even quantity (Q) = FC ÷ (SP – VC) = 50 000 ÷ (30 – 20) = 5 000 units

Scenario 2 – After growth (economies of scale)

• Fixed costs rise to $80 000 (larger premises, more staff)
• Variable cost falls to $15 (bulk purchasing, more efficient production)
• SP remains $30 (in practice, growth may also allow a premium price – e.g., brand‑strengthening – but the syllabus does not require a price change)

New break‑even quantity = 80 000 ÷ (30 – 15) = 80 000 ÷ 15 ≈ 5 333 units

Although the break‑even quantity is slightly higher, each unit sold beyond 5 333 now generates $15 profit instead of $10, illustrating how economies of scale can increase overall profitability. If the firm later experiences diseconomies (e.g., coordination problems), variable costs could rise again, highlighting the need for careful management.

6. Potential Drawbacks of Growth and How to Overcome Them

• Increased complexity – More products, locations or staff require formal structures.
  Mitigation: Introduce clear organisational hierarchies, written procedures and delegated authority.
• Higher financial risk – Expansion often needs additional borrowing.
  Mitigation: Conduct thorough financial forecasting, maintain cash reserves and consider staged investment.
• Loss of personal control / dilution of ownership – New shareholders or partners may influence decisions.
  Mitigation: Use shareholder agreements, retain a majority stake, or choose growth routes (e.g., internal growth or franchising) that preserve control.
• Risk of over‑extension – Entering unfamiliar markets without adequate research.
  Mitigation: Carry out market studies, pilot launches, and develop contingency plans before full rollout.
• Potential diseconomies of scale – Coordination, bureaucracy or reduced flexibility can raise per‑unit costs.
  Mitigation: Regularly review organisational structure, invest in information systems and keep decision‑making as decentralised as feasible.

7. Why Some Businesses Remain Small

Owners may deliberately choose to stay small for strategic or personal reasons that align with their stakeholder objectives.

• Desire to retain full control – Small owners often prefer informal, owner‑centric decision‑making.
• Limited access to finance – Without collateral or a strong credit record, external funding may be unavailable.
• Niche market focus – Specialising in a narrow segment can be more profitable than scaling up.
• Risk aversion – Avoiding the financial and operational risks associated with expansion.
• Lifestyle considerations – Owners may value work‑life balance over higher profits.

8. Linking Growth Decisions to Stakeholder Objectives

When evaluating a growth option, students should consider how the decision meets the objectives of the key stakeholders:

• Owners/Shareholders – profit, return on investment, control.
• Employees – job security, career progression, wages.
• Customers – product variety, price, quality.
• Suppliers – order volume, reliability of payment.
• Community / Government – employment, tax revenue, compliance.

9. Suggested Diagram