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Study notes

Why do businesses grow?

  • Levels: AS, A Level, IB, BTEC Level 3
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

There are many reasons that help to explain the motivations for businesses to grow over time.

1. Profit motive:

  • Businesses grow to achieve higher profits and provide better returns for shareholders
  • The return to shareholders might be a combination of a rising share price allied with a share of profits via dividend payments.
  • The stock market valuation of a firm is influenced by expectations of future sales and profit streams so if a company achieves disappointing growth figures, this can be reflected in a fall in the share price. This opens up the risk of a hostile take-over and also makes it more expensive for a quoted company to raise fresh capital by issuing new shares

2.Cost motive:

  • Economies of scale in the long run increase the productive capacity of the business whilst also leading to lower average costs (LRAC). Experiencing economies of scale help a business to raise their profit margins at a given market price

3.Market power motive:

  1. Firms may wish to increase market dominance giving them increased pricing power
  2. This market power can also be used as a barrier to the entry of new businesses in the long run
  3. Larger businesses can build and take advantage of buying power (also known as monopsony power)

4.Risk motive:

  1. Growth might be motivated by a desire to diversify production and/or sales so that falling sales in one market might be compensated by stronger demand in another sector.
  2. This is known as achieving economies of scope and is a feature of conglomerates

5.Managerial motives: Behavioural theories of the firm predict that business expansion might be accelerated by the demands of senior and middle managers whose objectives differ from major shareholders. Managers may want the power and kudos that comes from running larger corporations.

Market capitalization of the biggest internet companies worldwide as of May 2018 (in billion U.S. dollars)

Social network market share held by Instagram in the United Kingdom (UK) from January 2017 to October 2018

The next chart shows a revenue comparison of Apple, Google/Alphabet, and Microsoft from 2008 to 2017 (in billion U.S. dollars)

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