Key Idea: A business can grow by doing more of what it already does, or by joining with other businesses. This topic is how each way works, why size lowers costs up to a point, and why some owners choose to stay small.
Growing from within
- Internal (organic) growth: more shops, more products, more customers, paid from its own profits or loans.
- Slower and lower risk; the owners keep control.
- Some stay small on purpose: control, personal service, a niche market, less risk.
Growing by joining others
- Merger: two firms agree to become one. Acquisition or takeover: one buys control of the other.
- Joint venture: a new business owned by both. Strategic alliance: working together, staying separate.
- Franchising: others run outlets under your name for a fee and a royalty.
Size and cost
- Economies of scale: average cost falls as output grows (buying, technical, financial, marketing, managerial).
- Diseconomies of scale: past a point, communication, coordination and motivation push average cost back up.
- External economies come from the whole industry growing nearby.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Internal (organic) growth | growing by expanding the business's own activities | external growth, which joins with another business |
| External (inorganic) growth | growing by joining with or buying other businesses | exporting, which is selling more abroad |
| Merger | two businesses agree to combine into one | a takeover, where one buys control of the other |
| Takeover (acquisition) | one business buys a controlling stake in another; hostile if the target's board opposes it | a merger by agreement |
| Joint venture | two businesses set up a new, jointly owned business for a shared project | a strategic alliance, where no new business is created |
| Strategic alliance | two businesses agree to work together while staying independent | a joint venture |
| Franchise | the right to run a business under another firm's name and system, for a fee and royalties | a branch the firm owns and runs itself |
| Economies of scale | the fall in average cost per unit as a business grows | a fall in total cost |
| Diseconomies of scale | the rise in average cost per unit when a business grows too large | higher total costs from producing more |
Name the growth method, say how it works, then show it in the case: what this business would gain and what it would risk. For a 'should it grow this way' question, weigh speed and scale against cost, risk and loss of control, then decide.
Exam-style question
Lena's Bakery Ltd opened its fourth shop last year and has now been offered the chance to buy Bertorelli's, a forty-year-old bakery across town. With reference to Lena's Bakery Ltd, distinguish between internal and external growth.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: A merger is agreed; a takeover buys control, sometimes against the target's will. A joint venture creates a new business; a strategic alliance does not. Name the method the case describes, and use its correct word throughout.
Tap each card to check yourself.
Internal or external: Lena opens a stall at the Saturday market? Internal. The bakery is expanding its own operations; nobody else is involved.
Joint venture or strategic alliance: Lena and a coffee chain create a new company to run station cafés? Joint venture. A new business owned by both. In an alliance neither creates a new company.
Name two internal economies of scale. Any two: purchasing (bulk buying), technical, financial (cheaper borrowing), marketing, managerial.
Why might a business stay small? To keep control, keep personal service, serve a niche, avoid diseconomies of scale, or limit risk.
What does a franchisee pay the franchisor? An initial fee and a royalty, usually a percentage of sales, for the name, the system and support.
What is a hostile takeover? Buying control of a company against the wishes of its board, by buying shares directly from its shareholders.
Exam tips
- Internal growth expands what the business already does; external growth joins with another business.
- Merger is agreed, takeover buys control; joint venture creates a new business, alliance does not.
- Economies of scale are about average cost per unit, not total cost.
- For any growth method, weigh speed and scale against cost, risk and control.
- Staying small is a real choice: know two reasons for it.