AQA A-Level Business (7138)

## Learning Outcomes

- Understand what **business growth** means and how it can be measured
- Identify why businesses choose to grow or retrench
- Explain the difference between **organic growth** and **external growth**
- Distinguish between **mergers**, **takeovers**, and different types of **integration**
- Analyse how growth can create **economies of scale** and stronger competitiveness
- Evaluate the risks of growth, including **diseconomies of scale**, culture clash, and overtrading
- Apply these ideas to exam-style analytical and evaluative questions

## AQA A-Level Business (7138) Syllabus

For the AQA A-Level Business (7138), you are expected to understand business growth as a strategic method, with a focus on the following syllabus points:

- Know that business growth means an increase in the size of a business and can be measured in different ways
- Identify reasons why businesses grow, including profit, market share, economies of scale, survival and diversification
- Explain the difference between **organic growth** and **external growth**
- Understand the distinction between a **merger** and a **takeover**
- Identify and explain **horizontal integration**, **backward vertical integration**, **forward vertical integration**, and **conglomerate integration**
- Analyse how growth may create **economies of scale** but also **diseconomies of scale**
- Understand problems of growth and retrenchment, including morale issues, overtrading and implementation risk
- Evaluate which growth strategy is most suitable in a given business context

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is meant by business growth, and how can it be measured?
2. What is the difference between organic growth and external growth?
3. How does horizontal integration differ from vertical integration?
4. Why might growth improve profitability?
5. Why might a business choose retrenchment instead of growth?

## Introduction

Growth is often seen as a sign of success, but exam answers need more than that simple idea. A business can grow in sales revenue, outlets or staff numbers without becoming more profitable. The key question is whether growth improves performance and helps the business meet its objectives.

In AQA Business, growth is a strategic choice. That means it is linked to long-term aims, available finance, market conditions, management capability and competitive pressure. Strong answers explain not just how a business grows, but whether that method fits the business in the case study.

> **Key Term: business growth**
> An increase in the size of a business, measured by indicators such as sales revenue, market share, profit, number of employees, outlets, or value of assets.

### Why businesses grow and how growth is measured

Businesses may pursue growth for several reasons:

- to increase **profit**
- to increase **market share**
- to gain more **market power**
- to benefit from **economies of scale**
- to improve long-term survival
- to diversify and reduce risk
- to satisfy shareholders
- to increase brand presence

Growth can be measured in more than one way. Common measures include:

- **sales revenue**
- **profit**
- **market share**
- number of employees
- number of outlets
- value of assets or capital employed

These measures do not always move together. A retailer might open many new stores and increase revenue, but profit may fall if costs rise faster than sales. This is a common evaluation point.

> **Key Term: market share**
> The percentage of total market sales achieved by one business.

A simple calculation may help.

Worked example:

A business has sales of **£8 million** in a market worth **£40 million**.

Market share = business sales ÷ total market sales × 100

Market share = 8 ÷ 40 × 100  
Market share = **20%**

If the next year its sales rise to **£10 million**, but the market grows to **£60 million**:

Market share = 10 ÷ 60 × 100  
Market share = **16.7%**

So sales have grown, but market share has fallen.

This is exactly the sort of distinction AQA likes.

> **Test Tip:** If the question says a business has "grown", do not assume profit has increased. Check whether the growth is in revenue, profit, market share, assets, or outlet numbers.

Sometimes businesses do the opposite of growth and choose **retrenchment**. This means reducing the scale or scope of the business. Reasons include surviving a recession, removing unprofitable product lines, cutting fixed costs, improving competitiveness through delayering, or focusing on core products.

> **Key Term: retrenchment**
> A reduction in the scale or scope of a business, often used to cut costs, improve efficiency or focus on core activities.

Retrenchment is not always failure. It may be a sensible strategic move if a business has over-expanded or if demand has fallen sharply.

### Organic growth and external growth

There are two main routes to growth.

> **Key Term: organic growth**
> Expansion from within the business using its own resources, such as opening new outlets, increasing capacity or launching new products.
>
> **Key Term: external growth**
> Growth achieved by combining with or acquiring another business, usually through a merger or takeover.

Organic growth is internal. A manufacturer might build a new factory. A service business might open more branches. This method is usually slower, but it tends to be easier to control.

Advantages of organic growth:

- lower risk than buying another firm
- less chance of culture clash
- growth can be paced more carefully
- existing systems and brand standards are easier to maintain

Disadvantages of organic growth:

- slower
- may be limited by finance
- competitors may grow faster through acquisition
- entering new markets can take time

External growth is usually faster.

> **Key Term: merger**
> When two businesses agree to join together to form one business.
>
> **Key Term: takeover**
> When one business gains control of another, usually by buying a majority shareholding.

A merger is normally presented as an agreed combination. A takeover involves one business taking control of another. In exams, keep the distinction simple and accurate.

Advantages of external growth:

- rapid increase in market share
- quick access to new markets, brands or technology
- possible cost savings from removing duplication
- faster route to larger scale

Disadvantages of external growth:

- expensive
- risky if the business overpays
- difficult to integrate systems and staff
- culture clash may damage performance
- expected gains may never happen

A common reason for external growth is **combined benefit**.

> **Key Term: combined benefit**
> The extra benefit gained when two businesses combine, so the total benefit is greater than if they operated separately.

This could be:

- **cost savings**: one head office, one distribution system, fewer duplicated jobs
- **revenue gains**: wider product range, cross-selling, stronger market presence

But many mergers and takeovers fail because combined benefit is promised more easily than it is achieved.

> **Test Tip:** In 9-mark and 20/25-mark questions, compare speed against risk. External growth is often faster, but organic growth is often easier to manage.

### Types of integration and how growth can raise profitability

When businesses combine, the type of integration matters.

> **Key Term: integration**
> The joining together of businesses through merger or takeover.
>
> **Key Term: horizontal integration**
> Joining with a business in the same industry and at the same stage of production.
>
> **Key Term: vertical integration**
> Joining with a business in the same industry but at a different stage of the supply chain.
>
> **Key Term: backward vertical integration**
> Vertical integration towards suppliers.
>
> **Key Term: forward vertical integration**
> Vertical integration towards distributors, retailers or customers.
>
> **Key Term: conglomerate integration**
> Joining with a business in a different industry, often to diversify and spread risk.

Horizontal integration usually means buying or merging with a competitor. Possible benefits:

- larger market share
- fewer competitors
- economies of scale
- better use of production capacity
- stronger bargaining power

Vertical integration is about supply chain control.

Backward vertical integration can:

- improve security of supply
- improve quality control
- reduce dependence on outside suppliers
- reduce input costs by absorbing supplier profit margins

Forward vertical integration can:

- improve control over distribution
- give better access to final customers
- improve product display and pricing control
- absorb retail margins

Conglomerate integration is different. It spreads risk across different industries, but managers may know little about the new market, so this route can be difficult.

How should growth lead to higher profitability?

The best chain of analysis is:

growth → larger scale → lower average costs → stronger competitiveness → higher sales and/or higher profit margins → increased profitability

This mainly depends on **economies of scale**.

> **Key Term: economies of scale**
> Cost advantages from operating on a larger scale, causing average or unit costs to fall as output rises.

Main types include:

- **purchasing economies**: bulk-buying discounts
- **technical economies**: more efficient machinery
- **managerial economies**: specialist managers improve efficiency
- **marketing economies**: promotion costs spread over more units
- **financial economies**: easier access to cheaper finance
- **risk-bearing economies**: losses in one area can be balanced by gains in another

Worked example:

A business has fixed costs of **£200,000**.

Current output = **50,000 units**  
Fixed cost per unit = 200,000 ÷ 50,000 = **£4**

After growth, output = **100,000 units**  
Fixed cost per unit = 200,000 ÷ 100,000 = **£2**

If variable cost per unit stays at **£3**:

Before growth, average cost per unit = 4 + 3 = **£7**  
After growth, average cost per unit = 2 + 3 = **£5**

If the selling price is **£8**, then:

Before growth, profit per unit = 8 - 7 = **£1**  
After growth, profit per unit = 8 - 5 = **£3**

This shows how growth can improve profitability.

However, the word is **can**, not **will**.

### Problems of growth, diseconomies of scale and how to evaluate answers

Growth can create serious problems.

> **Key Term: diseconomies of scale**
> The rise in average or unit costs that can happen when a business becomes too large and difficult to manage efficiently.

Causes include:

- communication problems
- slower decision making
- more layers of management
- bureaucracy
- weaker control
- poor coordination between departments
- lower employee motivation

A business may also suffer **overtrading** if it grows too quickly.

> **Key Term: overtrading**
> When a business expands too quickly without enough working capital to support the growth.

This matters because expansion often requires large cash outflows before the new stores, factories or outlets start generating inflows. A business may be profitable on paper but short of cash.

Problems of retrenchment also need attention. Redundancies can lower morale, damage productivity and create industrial relations problems. Businesses may reduce these problems by consulting employees and unions, and by using voluntary redundancies first.

Strategic growth decisions are hard because the external environment may change. A plan that looked sensible when designed may become unsuitable later because of changing consumer tastes, interest rates, competition or technology. This is why some businesses prefer an **emergent strategy**, which is more flexible, over a fixed planned strategy.

For exam evaluation, use an "on the one hand / on the other hand / it depends on" structure.

How to structure an evaluative answer:

Start with one side:

- On the one hand, growth may improve competitiveness through economies of scale, wider market presence and stronger bargaining power.

Then the other side:

- On the other hand, rapid growth may increase risk, weaken cash flow, create culture clash or lead to diseconomies of scale.

Then explain what changes the judgement:

- It depends on the business's finance, management capacity, market conditions, and whether speed matters more than control.

Use financial and non-financial evidence:

- financial: profit, margin, revenue, costs, cash flow, market share
- non-financial: staff morale, culture, quality control, speed of change, customer response

Avoid weak evaluation such as "it depends" on its own. Say what it depends on and why.

Common student errors:

- confusing **organic growth** with buying another business
- mixing up **backward** and **forward** vertical integration
- assuming all growth improves profit
- describing methods without analysing impact
- evaluating without using case evidence or business context
  > **Test Tip:** For AO3 and AO4, build a chain. For example: "Horizontal integration may cut average costs because duplicated marketing and distribution can be removed, which could raise profit margins and give the business more pricing flexibility."

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Business growth means an increase in the size of a business, but size can be measured in different ways
- Growth can be measured by sales revenue, profit, market share, outlets, employees and assets
- Businesses may grow to increase profit, market share, economies of scale, survival chances and diversification
- Retrenchment means reducing the scale or scope of a business to improve performance or survive difficult conditions
- Organic growth is internal expansion using the business's own resources
- External growth happens through mergers or takeovers
- A merger is an agreed joining together, while a takeover involves one business gaining control of another
- Horizontal integration is at the same stage of production, while vertical integration is at a different stage
- Backward vertical integration moves towards suppliers; forward vertical integration moves towards retailers or customers
- Growth may improve profitability through economies of scale and combined benefit
- Growth may also create diseconomies of scale, culture clash and overtrading
- The best growth strategy depends on objectives, finance, management capability, market conditions and the level of risk the business can accept

## Key Terms and Concepts

- business growth
- market share
- retrenchment
- organic growth
- external growth
- merger
- takeover
- combined benefit
- integration
- horizontal integration
- vertical integration
- backward vertical integration
- forward vertical integration
- conglomerate integration
- economies of scale
- diseconomies of scale
- overtrading


Strategy - Business growth