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How do businesses grow, and why might they choose to stay small?

Business growth: the difference between internal (organic) and external (inorganic) growth, methods of growth including mergers and takeovers, the benefits and drawbacks of growth, economies of scale, and reasons some businesses remain small.

A focused answer to OCR GCSE Business J204 topic 1.6, covering internal and external growth, mergers and takeovers, economies of scale, the benefits and drawbacks of growth, and why some businesses stay small.

Generated by Claude Opus 4.811 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

Internal or organic growth means a business expanding using its own resources, for example by opening new branches, launching new products or selling online. External or inorganic growth means growing by joining with another business through a merger (two firms agree to combine) or a takeover (one firm buys control of another). Growth can bring economies of scale (lower average costs as output rises), higher market share, larger profits and a stronger position against rivals. But growth can also bring diseconomies of scale, harder management and control, the cost and risk of takeovers, and a possible loss of quality or culture. Some businesses stay small deliberately, to keep control, offer a personal service, target a niche, or because the owner does not want the extra risk and workload.

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What this topic is asking
Internal (organic) growth
External (inorganic) growth
Economies of scale
Benefits and drawbacks of growth
Why some businesses stay small
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What this topic is asking

OCR J204 topic 1.6 wants you to distinguish internal (organic) from external (inorganic) growth, know the methods of external growth (mergers and takeovers), explain the benefits and drawbacks of growth including economies of scale, and give reasons why some businesses choose to stay small. The exam typically gives a firm deciding how (or whether) to expand and asks you to weigh the options.

Internal (organic) growth

Methods include opening new branches or outlets, launching new products, entering new markets (including selling online or exporting), and increasing output and marketing. Organic growth keeps the owner in control and is funded from retained profit or modest borrowing, so the risk is lower.

External (inorganic) growth

External growth is fast: it instantly adds the other firm's customers, products, staff and outlets, and can remove a competitor. But it is expensive (often funded by borrowing or share issues) and risky, because the two businesses' systems and cultures may not fit together well.

Economies of scale

Calculating the effect of economies of scale on unit cost

Set out the figures

A firm has fixed costs of $50{,}000$ and variable costs of $4$ per unit. Compare the average cost per unit when output is $10{,}000$ units and when it grows to $25{,}000$ units.

Average cost at 10,000 units

\text{Total cost} = 50{,}000 + (4 \times 10{,}000) = 50{,}000 + 40{,}000 = 90{,}000.

\text{Average cost} = \frac{90{,}000}{10{,}000} = 9 \text{ per unit.}

Average cost at 25,000 units

\text{Total cost} = 50{,}000 + (4 \times 25{,}000) = 50{,}000 + 100{,}000 = 150{,}000.

\text{Average cost} = \frac{150{,}000}{25{,}000} = 6 \text{ per unit.}

Interpret the result

Average cost falls from $9$ to $6$ per unit as output grows, because the $50{,}000$ of fixed costs is now spread across far more units. This $3$ -per-unit saving is an economy of scale, and it lets the larger firm either cut prices to win customers or earn a bigger margin.

Benefits and drawbacks of growth

Benefits: economies of scale (lower unit costs), higher market share and market power, larger profits, a stronger position against competitors, and a higher profile that can attract customers and finance.

Drawbacks: diseconomies of scale (a very large firm can become harder to manage, with slower communication and lower staff morale, pushing unit costs back up), the difficulty of managing and controlling a bigger business, the cost and risk of takeovers, and the danger of losing the quality, culture or personal service that made the firm successful.

Why some businesses stay small

Not every business wants to grow. Reasons OCR expects you to recognise include the owner wanting to keep control and avoid extra risk, the desire to offer a personal, flexible service, serving a niche market that is too small to support a large firm, and simply being content with the current size and income. A small firm can also be more responsive to customers and changes in the market.

Try this

Q1. State the difference between a merger and a takeover. [2 marks]

Cue. A merger is two firms agreeing to combine; a takeover is one firm buying control of another.

Q2. A firm's fixed costs are $20{,}000$ and variable cost is $5$ per unit. Calculate the average cost per unit at an output of $4{,}000$ units. [2 marks]

Cue. Total cost $= 20{,}000 + (5 \times 4{,}000) = 40{,}000$ ; average cost $= 40{,}000 \div 4{,}000 = 10$ per unit.

Exam-style practice questions

Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

OCR J204/01 20203 marksExplain one way a business could grow internally (organically). (Paper 1, Section A)

Show worked answer →

A 3-mark AO1 and AO2 question. Internal (organic) growth is expansion from within the business using its own resources, rather than by joining with another firm. One way is to open new branches or outlets, so the business reaches more customers in new locations and increases sales. Other valid routes include launching new products, selling online to reach new markets, or increasing output and marketing. One mark for naming a valid method, up to two more for developing how it grows the business. A common error is to describe a takeover, which is external growth.

OCR J204/01 20229 marksA regional bakery chain is deciding whether to grow by taking over a rival chain. Evaluate whether external growth through a takeover is the best way for this business to expand. (Paper 1, Section B)

Show worked answer →

A 9-mark "evaluate" needing a two-sided argument and a judgement applied to the bakery chain. For external growth: a takeover is fast, instantly adding the rival's outlets, customers and staff, and it removes a competitor, so market share and economies of scale rise quickly. Against: takeovers are expensive and often funded by borrowing, the two firms' cultures and systems may clash, and rapid growth can be hard to manage, so the expected savings may not appear and quality could slip. Alternative: organic growth (opening its own branches) is slower but cheaper and easier to control. Judgement: a takeover suits the bakery if it has the finance and management capacity and the rival is a good fit; otherwise steady organic growth may be safer. The top band needs a supported conclusion weighing speed against cost and risk for this business.

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Sources & how we know this

OCR GCSE Business (J204) specification — OCR (2017)