Unit 1.3 — Growth of business
Learning outcomes (from the 9587 syllabus). This note is complete when every bullet below is covered.
Learning outcomes
- Criteria to measure size of business (e.g. labour force, capitalisation, market share, output)
- SMEs: importance and role in the economy; benefits and challenges
- Large businesses: importance and role in the economy; benefits and challenges
- Economies and diseconomies of scale: types; distinction between internal and external economies of scale
- Organic and external growth: ways to grow organically; ways to grow externally (joint ventures, strategic alliances, mergers, takeovers)
Running example used throughout this note: Sunrise Bakery, a small Bedok bakery that now wants to grow from one outlet into a small chain.
Big picture
In plain English: “growth” means getting bigger. But we first need to agree how to measure “bigger” (size), then understand why being big helps (economies of scale) and hurts (diseconomies), and finally how a business actually grows (organically or by joining with others).
Analogy: a growing business is like a growing family. Bigger families can share costs (buy in bulk, one big house) — but they also have more arguments and harder coordination. Growth has both benefits and costs.
Core content
1. Measuring the size of a business
There is no single measure; the syllabus gives four:
| Measure | What it counts | Limitation |
|---|---|---|
| Labour force | Number of employees | A capital-intensive firm (many machines, few workers) looks “small” |
| Capitalisation | Value of capital/money invested | A labour-intensive firm (many workers, little capital) looks “small” |
| Market share | % of the total market it controls | A big fish in a small pond looks “large” |
| Output | Quantity produced / sales revenue | A firm making expensive goods has high sales but low output |
Sunrise Bakery employs 4 people (small by labour force) but has a 60% market share of Bedok’s fresh bread market (large by market share). Depending on the measure, it is both small and large — which is why we should use more than one measure.
2. SMEs (small and medium-sized enterprises)
In Singapore, a firm is generally an SME if its annual sales are ≤ $100 million or it has ≤ 200 employees.
- Importance and role: SMEs are the backbone of the economy — they create jobs, supply larger firms, serve local needs, and can be flexible and innovative.
- Benefits: flexible (can change quickly), close to customers, low start-up cost, owner has direct control.
- Challenges: limited capital, difficulty attracting skilled staff, cannot enjoy big economies of scale, vulnerable to economic downturns.
In Singapore, SMEs make up about 99% of enterprises and employ around 70% of the workforce. Sunrise Bakery is an SME — it responds quickly when customers ask for a new bread flavour (flexibility), but it struggles to get bank loans and cannot buy flour in bulk as cheaply as a big chain (challenge).
3. Large businesses
- Importance and role: provide many jobs, produce at large scale for export, invest in research and development, and enjoy economies of scale.
- Benefits: economies of scale (lower unit costs), more resources for R&D and marketing, easier to raise finance, can attract better staff.
- Challenges: slower decision-making, bureaucracy, poorer communication, risk of diseconomies of scale.
BreadTalk (a large Singapore bakery chain) buys ingredients in huge bulk, negotiates cheap rents as a big tenant, and markets nationally — advantages Sunrise Bakery cannot match. But BreadTalk also has layers of management, so a menu change takes far longer than at Sunrise Bakery.
4. Economies and diseconomies of scale
Economies of scale = cost advantages that come from producing on a larger scale (lower average cost per unit).
- Internal economies of scale (from the firm growing
itself):
- Purchasing — bulk buying gets discounts.
- Technical — large machines are more efficient per unit.
- Financial — banks lend more cheaply to large, safe firms.
- Marketing — advertising cost is spread over more units.
- Managerial — can afford specialist managers.
- Risk-bearing — can spread risk across many products/markets.
- External economies of scale (from the
industry growing, not the firm):
- A pool of skilled labour develops, suppliers cluster nearby, infrastructure improves, and the area gains a reputation.
If Sunrise Bakery opens 10 outlets (internal growth), it can buy flour in bulk (purchasing economy). If many bakeries open in Bedok and a flour mill moves nearby, even Sunrise Bakery benefits from cheaper local supply (external economy) without growing itself.
Diseconomies of scale = rising average costs when a firm grows too big:
- Communication problems — messages get lost across many layers.
- Coordination problems — harder to manage many outlets/departments.
- Motivation problems — workers feel like a small cog, so productivity falls.
A bakery chain with 100 outlets may suffer diseconomies: head-office decisions are slow (coordination), and staff feel unimportant and quit often (motivation), pushing up costs.
5. Organic and external growth
- Organic (internal) growth — the business grows using its own resources: opening new outlets, launching new products, hiring more staff, increasing output.
Sunrise Bakery grows organically by saving its profits to open a second outlet and launching a new sourdough range.
- External growth — the business grows by joining
with another business:
- Joint venture — two firms create a new, separate business together, sharing costs, risks and profits.
- Strategic alliance — two firms cooperate on a project but stay separate (no new company).
- Merger — two firms agree to combine into one.
- Takeover (acquisition) — one firm buys another (which may or may not agree).
A large food company and Sunrise Bakery could form a joint venture to launch a halal bread line for a new market; or Sunrise Bakery could merge with a rival to combine their outlets. External growth is faster than organic growth but riskier and harder to control.
Analysis & evaluation points (AO3/AO4)
- No single size measure is perfect — use several together, or the answer is misleading.
- SME vs large is a trade-off: SMEs are flexible but weak; large firms are efficient but slow.
- Economies of scale eventually run out — beyond a point, diseconomies set in, so “bigger” is not always “better”.
- Organic vs external growth: organic is slower but lower-risk and keeps control; external is faster but expensive, risky, and can cause culture clashes.
- Joint ventures share risk but also share profit and control — partners’ objectives may clash.
Language bank: however · on balance · it depends on · trade-off · up to a point ·
Worked examples (PEEL)
PEEL = Point → Explain → Example → Link. Use this structure for every written answer.
Worked example 1 — “Explain” (6 marks)
Question: Explain one internal and one external economy of scale.
- P (Point — internal): A purchasing economy of scale lowers unit costs through bulk buying.
- E (Explain): A larger firm buys bigger quantities, so suppliers give discounts and the average cost per unit falls.
- E (Example): A 10-outlet bakery buys flour by the tonne at a discount, unlike a single shop buying small bags.
- L (Link): This lowers costs and raises profit margins.
- P (Point — external): An external economy arises from the industry, not the firm.
- E (Explain): When an industry grows in one area, skilled workers and suppliers gather there, lowering costs for all firms in the area.
- E (Example): Many food businesses in a food hub attract a shared logistics network that cheaply delivers ingredients to all of them.
- L (Link): So even a small firm benefits from the industry’s growth without growing itself.
Worked example 2 — “Evaluate” (10 marks)
Question: Evaluate whether organic or external growth is better for a business.
- P (Point): Organic growth is lower risk and keeps control.
- E (Explain): It uses the business’s own resources and existing knowledge, so there are no integration or culture problems, and the owners keep full control.
- E (Example): Sunrise Bakery opening a second outlet keeps Mdm Tan in full control and uses her proven recipes.
- L (Link): This suits a business that values control and has limited cash.
- Evaluate (AO4): However, organic growth is slow, and in a fast-moving market the business may be overtaken. External growth (merger or takeover) is much faster and can instantly remove a competitor or enter a new market. On balance, the best method depends on the business’s objectives and finances — a cash-rich firm wanting speed should grow externally, while a cautious, well-run firm should grow organically.
Application bank (Singapore quick reference)
| Idea | Singapore example |
|---|---|
| SME importance | SMEs ≈ 99% of enterprises, ~70% of jobs in Singapore |
| Organic growth | BreadTalk grew organically from one outlet (2000) to many outlets before expanding abroad |
| External growth (merger) | Grab’s acquisition of Uber’s SEA operations (2018) |
| Joint venture | Many foreign firms JV with local partners to enter Singapore |
| Economies of scale | Singapore Airlines buying fuel and aircraft in bulk |
| Diseconomies of scale | Very large MNCs suffering slow, bureaucratic decision-making |
Exam technique
- How it appears: data-response questions often ask you to measure a business’s size, or to explain why a firm should/should not grow.
- Model skeleton for “should the business grow?” weigh economies of scale (for) against diseconomies and risk (against), then judge based on the firm’s situation.
- Common pitfalls: quoting only one measure of size; confusing internal and external economies; forgetting diseconomies; describing organic vs external without comparing risk/speed/control.
Self-test checklist
Essay practice: “Evaluate the view that the main benefit of becoming a large business is economies of scale.” (25 marks)