How do we measure the size of a business?

There is no single measure. OCR expects you to know several and to evaluate which is most useful in context:

• Revenue (turnover) — easy to compare, but a low-margin supermarket can dwarf a high-margin software firm.
• Number of employees — misleading for capital-intensive firms (an oil refinery is huge but employs few).
• Capital employed — the long-term finance invested in the business.
• Market share — size relative to rivals, which is often what matters strategically.
• Market capitalisation (plcs) — share price × number of shares issued.
• Output / units produced and number of outlets.

Your turn — market share

Your turn — market growth

Organic vs inorganic growth

Organic (internal) growth — expanding from within: opening new outlets, launching products, entering new markets, franchising.

• Pros: slower and more controllable, financed from retained profit, culture preserved, less risk of overpaying.
• Cons: slow; rivals may take the market first.

Inorganic (external) growth — merger (two firms combine as equals) or takeover/acquisition (one buys a controlling stake in another).

• Pros: fast, buys market share, brands, patents and expertise instantly; can achieve synergy ("2 + 2 = 5").
• Cons: expensive, culture clash, integration problems, diseconomies of scale, often destroys value; may attract Competition and Markets Authority scrutiny.

Types of integration

• Horizontal integration — joining a firm at the same stage of the same industry (two supermarket chains). Gives market share and economies of scale; risks a competition inquiry.
• Backward vertical integration — buying a supplier (a brewer buys a hop farm). Secures supply and quality, captures the supplier's margin.
• Forward vertical integration — buying a customer/distributor (a brewer buys a pub chain). Secures a route to market and controls the customer experience.
• Conglomerate integration — buying a firm in an unrelated market. Spreads risk (diversification), but managers may lack expertise.

Exam edge: always link the type of integration to the objective. Vertical integration is about control of the supply chain; horizontal is about market power; conglomerate is about spreading risk.

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Sort the growth strategies

Tap a move, then tap the type of growth it represents.

Economies of scale

Economies of scale are falling average (unit) costs as output rises. Total costs still rise — but they rise more slowly than output.

Internal economies (within the firm):

• Purchasing (bulk-buying) — discounts on large orders.
• Technical — expensive machinery spread over more units; larger, more efficient plant.
• Managerial — specialist managers employed and their salaries spread over more output.
• Financial — large firms borrow more cheaply (lower perceived risk).
• Marketing — the cost of an advertising campaign is spread over more units.
• Risk-bearing — a wide product range spreads risk.

External economies come from the growth of the whole industry in an area: a skilled local labour pool, specialist suppliers and infrastructure (e.g. tech firms clustering in Cambridge).

Your turn — unit cost

Your turn — the size of the economy of scale

Diseconomies of scale and the MES

Grow too far and unit costs start to rise again — diseconomies of scale:

• Communication — messages distort through long chains of command; more memos, fewer decisions.
• Co-ordination — controlling many sites and divisions gets harder and slower.
• Motivation — workers feel like a number; alienation raises absenteeism and labour turnover.

The output at which unit cost is lowest is the minimum efficient scale (MES). Plot output against unit cost and you get the classic U-shaped long-run average cost curve.

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Choosing the scale of operations

The scale of operations is the maximum output a business can produce with its current resources. Deciding it means weighing:

• Demand — forecast level and how variable it is.
• Finance available — bigger scale means heavier fixed capital investment.
• Capital vs labour intensity — capital-intensive operations give low unit costs at high volume but high fixed costs and low flexibility.
• Flexibility and risk — large scale is hard to reverse if demand falls, leaving expensive spare capacity.

Evaluation: "bigger is better" is not automatic. A small niche firm may earn far higher margins than a large low-margin volume producer. Growth must be judged against the objective — profit, market share or survival.

Match the economy of scale to the example

Tap a card on the left, then its partner on the right.

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Franchising as a growth route

In a franchise, the franchisor sells the right to trade under its brand and business format to a franchisee, who pays an initial fee plus ongoing royalties.

• Franchisor gains: very fast growth funded largely by other people's capital; motivated local owner-managers; royalty income.
• Franchisor risks: a single bad franchisee damages the whole brand; less direct control; profit is shared.
• Franchisee gains: a proven format, training and national marketing — so a far lower failure rate. But high fees, tight rules and little freedom to innovate.

When growth goes wrong

• Overtrading — expanding faster than working capital allows: stock and wages must be paid long before customers pay. Profitable firms fail this way.
• Culture clash after a takeover destroys the value that justified the price paid.
• Loss of control and focus — the founder can no longer oversee everything, and diseconomies set in.
• Regulatory intervention — the Competition and Markets Authority can block a merger or force disposals.

Evaluation: growth should be judged against the objective and against the firm's capacity to finance and manage it. Profitable, controlled organic growth often beats a headline-grabbing acquisition.

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