Start-Ups and Growth (3.2)

Thiago Casarin Lucenti

2 days ago

3 min read

Chapter 3 - Enterprise, Business Growth, and Size

Learning Objectives: To understand the importance of startups to economies

We all heard that trendy word... Start-ups:

A business start-up is a newly formed business. They usually start small but might grow bigger.

Start-ups have a great importance in a country's economy and therefore governments support business start-ups in different ways:

Low interest loans;
Grants (e.g. lower taxation or other financial incentives);
Rent-free agreements;
Training for workers by govt. agencies;
Organization of business/trade fairs.

There are many reasons on why governments support start-up businesses:

Jobs creation;
Increased variety of products and services to the population;
Competition (leads to lower price and higher quality);
Chance of becoming larger businesses in the future (taxes);
Increased economics activity (improve a country's economy).

As you can see, start-ups are of great importance to an economy. These businesses may become even more important to a country's economy if they grow. Although it might sound weird at first, understand that some businesses want to grow but some businesses might not want to grow:

Some businesses prefer to remain small for different reasons:

Owner's choice (responsibility, control, relationship with workers and customers, risk);
Market size: local businesses (e.g. hairdressers);
Access and availability of capital is an important limitation;
Size of the market can limit growth - especially for specialist businesses.

It is more common, however, that some businesses focus on growth. And there are some reasons for that:

Increased profit:

Growth means higher sales (revenue) which can lead to higher profits if costs were kept low during the growth stage.

Larger market share:

As the business' products become more popular during growth it sells larger amounts and therefore is able to take on a larger portion of the market. It becomes easier to launch new products.

Economies of Scale - Lower Avg. Costs:

As a business grows it may benefit from reduced costs which can, therefore, increase its profits.

Spreading Risk:

New/more markets and products - larger businesses do not rely on one customer or product.

Explain two reasons a business might want to grow. [6]

Since we are discussing business growth, let's talk about the different methods a business can actually grow:

Internal Growth
External Growth

Internal Growth (e.g. organic growth) happens when a company expands on its own, for example:

By opening new branches and shops;
By expanding production capacity (factories);
By launching new successful products;
By attracting new and more customers - finding new markets.

Organic Growth is usually slow but steady which helps preventing problems of businesses that expand too fast through external growth. For example, problems with losing control.

External Growth, on the other hand, happens through mergers and takeovers. This process can happen within the same industry or with companies in different industries - it's called integration:

Horizontal Integration;
Forward Vertical Integration;
Backward Vertical Integration.

Horizontal Integration is when two firms in the same industry and the same sector of business activity come together (e.g. two banks, two chocolate manufacturers, or two cocoa producers);

Good for reducing competition (higher market share);
Potential for bulk buying;
It is risky since you are doubling down on the same industry;

Vertical Integration, on the other hand, can be of two types:

Forward Vertical Integration brings together two firms in the same industry, but one is a customer of the other (e.g. a car manufacturer taking over a car garage);
Backward Vertical Integration: brings together two firms in the same industry, but one is a supplier to the other (e.g. a car garage taking over a car manufacturer).
- Easier/better access to suppliers and outlets;
- Helps spreading risks;
- But no opportunity for economies of scale.