How do businesses grow and what are the effects of scale and globalisation?
Methods of growth including organic and external growth, mergers and takeovers, economies and diseconomies of scale, retrenchment, and the impact of globalisation and multinational corporations.
A focused answer to AQA A-Level Business 3.9, covering methods of growth including organic and external growth, mergers and takeovers, economies and diseconomies of scale, retrenchment, and the impact of globalisation and multinational corporations.
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What this dot point is asking
AQA wants you to explain the methods of growth (organic and external, including mergers and takeovers), economies and diseconomies of scale, retrenchment, and the impact of globalisation and multinational corporations. Questions are evaluative, often asking you to recommend a growth method.
Organic and external growth
Mergers and takeovers
Mergers and takeovers can be horizontal (with a firm at the same stage of the same industry, gaining market share and scale), vertical (with a supplier or customer, securing supply or distribution), or conglomerate (with an unrelated firm, spreading risk). They promise synergies (combined strengths, cost savings), but many fail to deliver them because of culture clashes, duplicated functions, the high cost (often debt-funded, raising gearing), and the difficulty of integration. Evidence suggests a large share of takeovers destroy rather than create value.
Economies and diseconomies of scale
There is an optimum size at which unit cost is lowest; beyond it, diseconomies outweigh economies and unit costs rise again.
Retrenchment
Retrenchment is deliberately reducing the scale of a business, by closing sites, cutting products, delayering or selling off divisions. It is often a response to poor performance, over-expansion or a downturn, aiming to cut costs and refocus on core strengths. Though it sounds negative, retrenchment can restore profitability and is a legitimate strategic choice, not just a failure.
Globalisation and multinationals
Globalisation, the increasing integration of world economies, has widened markets, lowered trade barriers and increased the role of multinational corporations (MNCs), which operate across countries. It offers firms access to huge new markets, cheaper inputs and economies of scale, but intensifies competition, exposes firms to global shocks and raises ethical concerns over labour and the environment. Growth strategy increasingly means deciding whether and how to compete internationally.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 202116 marksEvaluate whether external growth through a takeover is the best method for a medium-sized firm seeking rapid expansion. (16 marks)Show worked answer →
Contrast external and organic growth, weigh the takeover specifically, and judge.
External growth through a takeover is fast: the firm instantly gains the target's market share, assets, customers and capabilities, and can access economies of scale quickly, which suits a firm wanting rapid expansion. It can also remove a competitor.
Against: takeovers are expensive and often funded by debt (raising gearing and risk); integration is hard, with culture clashes, duplicated roles and the risk that the expected synergies never materialise (many takeovers destroy value); and rapid growth can bring diseconomies of scale. Organic growth is slower but cheaper and lower risk, building on the firm's own strengths.
Judgement: a takeover suits a firm that needs speed and can fund and integrate it well, but for many medium-sized firms the integration risk and cost mean organic growth, or a less risky merger, is safer. The best answers weigh speed against risk and cost. Markers reward the external versus organic contrast, applied evaluation of the takeover, and a supported conclusion.
AQA 20184 marksExplain one diseconomy of scale a business might face as it grows very large. (4 marks)Show worked answer →
Diseconomies of scale are rises in unit cost that occur when a firm grows beyond its optimum size.
One example is communication problems: in a very large firm with many layers and sites, messages take longer to pass, become distorted and decisions slow down, so coordination worsens and mistakes rise, pushing up costs per unit. (Other valid diseconomies: weaker control and motivation as staff feel remote from management.) Markers reward naming a valid diseconomy and explaining the chain from greater size to the problem to higher unit costs, ideally in context.
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Sources & how we know this
- AQA A-level Business (7132) specification — AQA (2015)