Compare the ways of measuring the size of a business, explain why and how businesses grow, the difference between internal and external growth, and why some firms stay small

What this dot point is asking

This outcome wants you to compare the ways of measuring how big a business is, to explain why and how businesses grow, to distinguish internal (organic) from external growth, and to explain why some firms stay small. The central idea is that size can be measured in several ways that may disagree, and that growth brings both gains and risks.

The answer

Ways of measuring business size

There is no single perfect measure of size. The common ones are:

• Number of employees - more workers usually means a bigger business, but not always.
• Value of sales (revenue) - higher sales suggest a larger firm.
• Value of output - the value of goods or services produced.
• Capital employed - the value of money invested in the business.
• Market share - the firm's share of total industry sales.

These measures can disagree. A capital-intensive firm (many machines, few workers) may have high sales but few employees, while a labour-intensive firm may have many workers but lower sales. Because of this, size is best judged using more than one measure.

Why businesses grow

Owners may want to grow in order to:

• Increase profit by selling more.
• Gain economies of scale (lower cost per unit) as output rises.
• Win a larger market share and more power over the market.
• Reduce risk by spreading into different products or markets.
• Satisfy the owners' or managers' ambition and status.

Internal versus external growth

There are two ways to grow:

• Internal (organic) growth - the business grows by selling more of its own products, opening new branches or launching new products, funded from profits or borrowing. It is slower but lower-risk and keeps the firm under the owners' control.
• External growth - the business grows by joining with another firm. A merger is when two firms agree to combine into one; a takeover (acquisition) is when one firm buys control of another. External growth is faster but more expensive and riskier, because the two firms may be hard to integrate.

Why some businesses stay small

Not every firm wants or manages to grow. Reasons to stay small include:

• The owner prefers control and a personal, hands-on role.
• The market is small or local (for example, a village shop).
• The firm offers specialist or personal service that does not scale well.
• Lack of finance to fund expansion.
• Growing too fast can cause problems (cash-flow strain, loss of control, falling quality), so some firms grow only slowly on purpose.

Small firms can be very successful by serving a niche and giving personal service that large rivals cannot match.

Examples in context

Example 1. A capital-intensive firm versus a labour-intensive one. An automated bottling plant may employ only a handful of staff yet produce and sell millions of dollars of drinks, while a cleaning company may employ hundreds of workers but have far lower sales. By employees the cleaning firm looks bigger; by sales the bottling plant does. This shows why a single measure of size can mislead and why analysts use several.

Example 2. A staying-small specialist. A bespoke tailor making hand-stitched suits may deliberately remain a one-shop business. Its appeal is the owner's personal craftsmanship and service, which would be hard to maintain across many branches, and the market for handmade suits is limited. Staying small protects quality and control, illustrating that not growing can be a sound, deliberate strategy rather than a failure.

Try this

Q1. State two ways the size of a business can be measured. [2 marks]

• Cue. Any two of: number of employees, value of sales (revenue), value of output, capital employed, or market share.

Q2. Explain the difference between internal and external growth. [3 marks]

• Cue. Internal (organic) growth is when a firm expands using its own resources, such as opening new branches or selling more, which is slower but keeps control. External growth is when a firm grows by combining with another through a merger or takeover, which is faster but more expensive and riskier to integrate.

Q3. Analyse one reason a successful business might choose to stay small. [4 marks]

• Cue. The owner may value keeping close control and offering personal service that large firms cannot match. Growing would mean delegating decisions, hiring more managers and risking lower quality and a loss of the personal touch that won customers. By staying small, the owner keeps control, stays flexible and protects the niche or local reputation the business was built on, which can be more important to them than higher profit from expansion.