Learn: Expanding a Business

Welcome!You've already learned about the purpose of businesses, ownership types, and business planning. Now, let's build on these ideas by exploring how businesses grow and expand strategically.

Why do businesses expand?Businesses expand to achieve goals like increasing profit, gaining more market share, or improving their reputation. Growth can also help them compete better and reduce unit costs through economies of scale.

Types of Business GrowthThere are two main ways businesses can grow:Organic growth: This happens naturally through selling more products or opening new locations.External growth: This involves joining with another business through a merger or takeover.

Methods of External GrowthExternal growth can involve:Mergers: Two businesses join together to become one.Takeovers: One business buys another and takes control of it.Both methods can help a business grow quickly and enter new markets or gain new customers.

Economies of ScaleAs businesses grow, they often benefit from economies of scale. This means they can reduce their unit costs (cost per product) by:Bulk buying: Purchasing supplies in larger quantities at discounted prices.Using efficient equipment: Investing in technology for faster and cheaper production.

Diseconomies of ScaleAs businesses grow too large, they can face diseconomies of scale. This happens when growth causes inefficiencies, such as:Poor communication: It becomes harder to share information across a large business.Low motivation: Employees may feel less connected to the business as it grows larger.

Measuring Costs and ProfitTo understand whether growth is successful, businesses measure:Unit cost: Total cost divided by output (e.g., £500/50 products = £10 per product).Profit: Revenue minus costs (e.g., £1,000 - £800 = £200 profit).Lower unit costs and higher profits show efficient growth.

Review Time!Great work! You've learned about why businesses expand, methods of growth, economies of scale, and diseconomies of scale. Let's test your understanding with some final questions.