size-of-business business-growth

When more people want a company’s products, it can open new stores or hire extra staff to meet that need

Deliveroo expanded into new cities when food-delivery orders surged during lockdown

As firms get bigger, they spread fixed costs over more units, cutting the unit cost and boosting profits

A carmaker that builds 1 million vehicles each year pays less per car for parts and factory costs than a business that builds 100,000 cars

By selling to new customer groups or introducing related products, a business can find extra sources of revenue

Netflix moved from DVD rentals to streaming and then launched in dozens of countries worldwide

The pace of growth is manageable

Less risky, as growth is financed by profits and there is industry expertise

Avoids diseconomies of scale

The management knows & understands every part of the business

The pace of growth can be slow and frustrating

Not necessarily able to benefit from economies of scale

Access to finance may be limited

Acquiring another company to enter new markets, offer new products, or gain new technology

In 2010, Kraft Foods bought Cadbury to expand its product range and boost sales in the UK

Growing larger lets companies cut costs and work more efficiently by combining operations and spreading fixed costs over more output

When a factory doubles output, its cost per unit falls because overheads are spread across more items

Benefits that arise when two companies combine, such as higher revenue, lower costs, or better products

Two merged airlines share routes and staff, reducing costs and offering more flight options

Buying rivals removes competition and increases the buyer’s market share

Meta (Facebook’s parent company) acquired WhatsApp in 2014, adding its users to Facebook’s network

Mergers and takeovers can boost profits, dividends, and share prices, creating higher returns for investors

After a merger, a company’s combined profits rise, leading to a higher dividend and a stronger share price

Reduces the cost of production as middleman profits are eliminated

Lower costs make the firm more competitive

Greater control over the supply chain reduces risk as access to raw materials is more certain

The quality of raw materials can be controlled

Forward integration adds additional profit as the profits from the next stage of production are assimilated

Forward integration can increase brand visibility

Diseconomies of scale occur as costs increase, e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Possibly little expertise in running the new firm results in inefficiencies

The price paid for the new firm may take a long time to recoup

A rapid increase of market share

Reductions in the cost per unit due to economies of scale

Reduces competition

Existing knowledge of the industry means the merger is more likely to be successful

The firm may gain new knowledge or expertise

Diseconomies of scale may occur as costs increase, e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Spreads risk across industries

Uses surplus cash and skills elsewhere

Key expertise, such as strong financial management or marketing know-how, can be shared with all part of the business

Limited management know-how in unfamiliar sectors

Research may be required to understand trends and customer needs

Greater organisational complexity