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Business size and methods of growth
Edexcel IAL Economics · WEC13 Business behaviour
Some firms stay small while others become global giants. This lesson compares SMEs with large firms and sets out the ways firms grow: organically, or by merger and takeover.
SMEs and large firms
Small and medium-sized enterprises (SMEs) are firms below set limits of employees, turnover or balance sheet size; each country or trading bloc sets its own thresholds. In most economies SMEs are the large majority of businesses and employ a large share of workers, even though large firms produce much of the output.
Large corporations can exploit economies of scale, fund research and operate in many countries, but may suffer from diseconomies of scale and slow decision-making.
Organic growth
Organic (internal) growth: the firm expands using its own resources, by opening new outlets, launching new products, hiring more staff or reinvesting profit.
- Advantages: lower risk, keeps the firm's culture and control, can be financed from retained profit.
- Disadvantages: slow; may miss opportunities that rivals take.
Mergers and takeovers (integration)
A merger is two firms agreeing to join; a takeover is one firm buying a controlling stake in another.
- Horizontal: firms at the same stage of production in the same industry (two supermarket chains).
- Vertical backward: a firm buys a supplier, towards the raw material (a chocolate maker buys a cocoa plantation).
- Vertical forward: a firm buys a business closer to the customer (a brewer buys a chain of pubs).
- Conglomerate: firms in unrelated industries (a food company buys an insurance company).
Advantages and disadvantages of each
| Type | Main advantages to the firm | Main drawbacks |
|---|---|---|
| Horizontal | Economies of scale; more market share and pricing power; removes a rival | May be blocked by competition authorities; clash of cultures; consumers may face higher prices |
| Vertical backward | Secures supply and quality; removes supplier's profit margin; can restrict rivals' access to inputs | Firm may lack expertise in the new stage; less flexible if better suppliers appear |
| Vertical forward | Controls distribution and the customer experience; gains retail margins | Retailing needs different skills; rivals may refuse to deal |
| Conglomerate | Spreads risk across markets | Few cost savings; managers may not understand the new market; diseconomies of scale |
Worked example
A coffee shop chain buys a coffee bean roasting company that already supplies it. Identify the type of integration and give one advantage and one drawback.
- The roaster is an earlier stage of production in the same supply chain.
- So it is backward vertical integration.
- Advantage: guaranteed supply and control over bean quality; the roaster's profit margin now stays in the group.
- Drawback: roasting needs different expertise; if world bean prices fall, the chain is tied to its own roaster.
Answer: Backward vertical integration: secures supply but brings new management challenges.
Check yourself
- A national bank takes over a smaller rival bank. This is
- backward vertical integration
- horizontal integration
- forward vertical integration
- conglomerate integration
Show answer
horizontal integration. Same industry, same stage of production.
- A car manufacturer buys a chain of car showrooms. This is
- backward vertical integration
- horizontal integration
- conglomerate integration
- forward vertical integration
Show answer
forward vertical integration. Showrooms are closer to the final customer.
- A smartphone maker buys a company that makes its chips. This is
- forward vertical integration
- backward vertical integration
- horizontal integration
- a joint venture
Show answer
backward vertical integration. The chip maker is an earlier stage: a supplier.
- What is the main advantage to a firm of conglomerate integration?
- It gives the largest technical economies of scale
- It secures supplies of raw materials
- It spreads risk across unrelated markets
- It removes a direct competitor
Show answer
It spreads risk across unrelated markets. If one market declines the other may not, so risk is diversified.
- Which is a disadvantage of organic growth compared with a takeover?
- It is usually slower
- It always needs a bank loan
- It means losing control to another firm
- It is always blocked by regulators
Show answer
It is usually slower. Growing from within takes time, while a takeover adds capacity at once.
- Which type of integration is most likely to be investigated by competition authorities?
- Organic growth of a small firm
- A conglomerate merger of two small firms
- Horizontal integration between two large rivals
- A firm opening one new branch
Show answer
Horizontal integration between two large rivals. Horizontal mergers directly raise market share and reduce competition.
- Explain one advantage to a firm of backward vertical integration.
Show answer
It secures the supply of inputs and their quality, and the supplier's profit margin is kept within the firm, which can lower costs.. Link the integration to control of inputs and a resulting benefit (cost, reliability, quality).
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.