Growing the business
Businesses can grow organically, also called internal growth, by expanding using their own resources and profit, for example opening new branches or launching new products, or externally, by joining with or buying another existing business through a merger or takeover.
Before you start
Make sure you're comfortable with these topics first:
Method
- Learn the difference between organic, or internal, growth, expanding using the business's own resources and profit, for example opening new branches or launching new products, and external growth, joining with or buying another existing business through a merger or takeover.
- Learn the benefits of growth: economies of scale, the average cost of producing each unit falls as output rises, for example through bulk-buying discounts, greater market share and market power, and higher total profit.
- Learn the term overtrading: a business grows so fast that its cash flow or available finance cannot keep up with the costs of expansion, causing cash-flow problems even though sales are rising.
- Learn the extra risks of external growth specifically, such as culture clashes between merging businesses' staff and management styles, and the high upfront cost of a takeover.
- For explain questions, name the growth method or risk and link it to a specific consequence for that business's costs, cash flow or control.
- For analyse or evaluate questions, weigh the benefits of the specific growth route against its specific risks, referring to details given in the case.
Worked example
A regional bakery chain with 6 shops is considering opening 4 new shops within the next year, funded mainly by a bank loan, without changing its current small head-office team. Analyse the risk that the bakery could face if it grows this quickly.
- Identify the scale of the planned growth: nearly doubling from 6 to 10 shops within a single year.
- Identify the resource that is not growing alongside the shops: the small head-office team, and the fact that expansion is funded mainly by debt rather than existing cash.
- Link this to overtrading: the loan must be repaid alongside the new shops' set-up and running costs, while an unchanged head office may struggle to manage the extra shops, orders and staff effectively.
- Link this to the cash-flow consequence: if the new shops take time to become profitable while loan repayments and running costs are due immediately, the bakery could run short of cash even though it now has more shops trading.
- Write the analysed conclusion, naming the risk as overtrading and explaining why growing this fast, funded by debt with unchanged management capacity, could cause cash-flow problems.
Practice questions
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Q1State the difference between organic and external growth.Show answer
Answer: Organic growth is expanding using the business's own resources and profit, for example opening new branches; external growth is joining with or buying another existing business, a merger or takeover.
Q2Identify which type of growth, organic or external, a merger is an example of.Show answer
Answer: External growth.
Q3Define economies of scale.Show answer
Answer: The fall in the average cost of producing each unit of output as a business increases the scale of its production.
Q4Give one example of an economy of scale.Show answer
Answer: For example, bulk-buying discounts on raw materials as order sizes increase.
Q5Define overtrading.Show answer
Answer: When a business grows so quickly that its cash flow or available finance cannot keep up with the costs of expansion, causing cash-flow problems.
Q6State one risk specific to growth through a merger or takeover, other than cost.Show answer
Answer: For example, a clash between the two businesses' cultures, staff or management styles.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Explain two benefits a business could gain from growing organically by opening new branches.
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A successful independent coffee shop with one profitable branch is deciding how to grow. Option A is organic growth, opening two new branches funded by a bank loan over the next 18 months. Option B is external growth, taking over a small, struggling three-branch coffee chain with a different, more casual brand image, funded by a larger loan. Evaluate which growth option the coffee shop should choose.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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