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Cambridge IGCSE Business Studies Section 1 Understanding business activity
Increase in profits
When a business grows, its profits may increase. Growth must result in an increase
in output – goods and services produced. If this output is sold, then sales increase.
Increased sales usually increase revenue and, if the business has kept control of its
costs during its growth, then this should also increase profi ts.
Increase in market share
An increase in market share may also result from business growth. Th is benefi ts
the business because its products and brand become more widely known and this
makes it easier for the business to continue to grow. Launching new products onto
the market is less risky. However, the growth in the value of a business’s sales does
not automatically increase its market share.
Look at the data for Company Z in Table 3.2.
Value of annual Value of total Market share
sales ($000s) market ($000s)
2011 100 100,000 (100/100,000) % = 10%
2012 120 144,000 (120/144,000) % = 8.5%
Table 3.2 Data for Company Z
You can see that Company Z has increased its sales between 2011 and 2012,
although its market share has fallen from 10% to 8.5%. This is because the growth
in Company Z’s market share is less than the growth in the total market.
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Economies of scale
The concept of economies of scale will be studied in a later chapter. For now,
all you need to know is that as a business grows it may benefit from reduced
Economies of scale: see
Chapter 16, page 219. average costs as a result of economies of scale. If a business can lower the cost of
producing its products its profits will increase. Instead, it may decide to
lower the price of its products and become more competitive – resulting in
higher sales.
Greater power to control the market
Larger businesses in an industry have greater power to control market activities.
They have greater control over their own prices and may even be able to set the
price for all other businesses in the industry to follow. Large and powerful fi rms
may even be able to influence government policy to their advantage.
Protection from the risk of takeover
Public limited companies are often at risk of takeover. This is achieved by buying
Public limited companies: at least 51% of the company’s shares. Sometimes the takeover is welcomed by the
see Chapter 4 page 48. company’s directors and shareholders. However, this is not always the case and
a hostile or unwanted takeover might happen. The larger the company, the more
difficult and more expensive it is for this to happen because a greater number of
shares must be bought.
Different ways businesses can grow
Businesses can grow in different ways, either through internal growth (also known
as organic growth) or external growth (also known as integration).
