Organic (internal) growth
Organic growth means the business grows using its own resources, usually its profits.
- New stores or factories: open more outlets in new towns.
- E-commerce: sell online to reach customers far away, any time.
- Franchising: let others open copies of the business for a fee and royalty.
- Outsourcing: pay another firm to do some tasks (delivery, cleaning, call centres) so the business can grow its main work.
- New products or new markets (including abroad).
Plus: low risk, owner keeps control. Minus: slow, limited by profit.
External growth: mergers and takeovers
External growth happens by joining with other firms. It is fast but risky.
- Merger: two firms agree to join and become one.
- Takeover (acquisition): one firm buys more than 50% of another firm's shares and controls it.
Types: horizontal (same industry, same stage), vertical (with a supplier or a seller), conglomerate (unrelated business).
Benefits: quick growth, more market share, new skills and customers, economies of scale. Problems: cost of buying, clash of cultures, job losses and a firm that is hard to manage.
Average unit cost and economies of scale
Average unit cost (AUC) = total cost ÷ number of units made. It is the cost of making one item.
Economies of scale are the cost savings a firm gets by growing, so its AUC falls:
- Purchasing economies: buying in bulk gets discounts from suppliers.
- Technical economies: big firms can afford large, fast, modern machines that make each unit more cheaply.
- Other kinds: cheaper loans for big firms (financial), lower advertising cost per unit (marketing), and specialist managers (managerial).
Lower AUC lets the firm charge lower prices and still make profit, which helps it compete.
Diseconomies of scale and retrenchment
Diseconomies of scale happen when a firm grows too big and its AUC starts to rise:
- Poor communication: messages pass through many layers and get slow or confused.
- Poor coordination: many departments and sites are hard to keep working together.
- Low motivation: workers feel like a small part of a huge machine.
So the AUC curve is U-shaped: it falls, reaches a lowest point, then rises.
Retrenchment means cutting back the size of a business: closing branches, reducing staff or selling parts, to bring costs down or focus on what works.
Try it
In the 3D free play, slide the output from 100 to 2,000 units and write down the AUC at 100, 500, 1,000 and 2,000. Where is it lowest? At home: compare the price per 100 g of a small and a big pack of the same biscuits. Why is the big pack cheaper per gram?
Key formulas and definitions
- Average unit cost (AUC) = total cost ÷ output (units)
- Total cost = AUC × output
- Economies of scale → AUC falls as output rises
- Diseconomies of scale → AUC rises when the firm is too big
- Organic = internal growth; merger/takeover = external growth
Worked examples
1. Total cost is ₹60,000 for 3,000 units. Find the AUC.
AUC = 60,000 ÷ 3,000 = ₹20 per unit.
2. A firm makes 500 units for $4,000. After growing, it makes 2,000 units for $10,000. Find AUC before and after. Is this an economy of scale?
Before: 4,000 ÷ 500 = $8. After: 10,000 ÷ 2,000 = $5. AUC fell, so yes, it shows economies of scale.
3. A supplier gives 15% off flour orders above 1 tonne. Flour normally costs ₹40 per kg. What is the price per kg in bulk, and what kind of economy is this?
₹40 × 0.85 = ₹34 per kg. This is a purchasing economy of scale.
4. AUC is ₹12 at 10,000 units and ₹14 at 15,000 units. What is happening, and give one reason.
AUC is rising as output grows: diseconomies of scale. A reason could be poor communication across too many managers.
5. A café chain opens 5 new cafés from its own profits and starts online ordering. Which type of growth is this?
Organic (internal) growth: new outlets and e-commerce, funded by its own profits.
6. Fixed costs are ₹50,000 and each unit costs ₹30 to make. Find AUC at 1,000 and at 5,000 units.
At 1,000: total = 50,000 + 30,000 = ₹80,000; AUC = ₹80. At 5,000: total = 50,000 + 1,50,000 = ₹2,00,000; AUC = ₹40. Spreading fixed costs over more units lowers AUC.
Common mistakes
- Thinking total cost falls with economies of scale. Total cost usually rises; it is the cost per unit that falls.
- Calling a takeover organic growth. Buying another firm is external growth.
- Believing bigger is always cheaper. Past a point, diseconomies push AUC up.
- Mixing up purchasing and technical economies: bulk buying is purchasing; better machines are technical.