Size of Firms & Internal Growth (Cambridge International A-Level Economics)

Reasons for growth & reasons to remain small

Reasons for different sizes of firms

• Firms vary in size because some firms benefit from expanding, while others choose to remain small.
• Many firms start small and will grow into large companies or even multi-national corporations (Amazon started in a garage)

Reasons why some firms grow large

Reasons why some firms remain small

Internal growth of firms

• Internal growth occurs when a firm expands using its own resources, rather than merging with other firms

Organic growth

• Organic growth occurs when a firm increases its size by expanding output, sales or market share

• Methods include:

  • opening new branches or stores
  • increasing production capacity
  • developing new products
  • entering new geographic markets

• For example, Starbucks grew organically by opening new coffee shops around the world.

• Advantages of organic growth:

  • lower risk compared with mergers
  • easier integration into existing operations
  • gradual expansion allows firms to maintain control

• However, growth may be slow and limited by available finance

Diversification

• Diversification occurs when a firm expands into new products or new markets

• This can help firms:

  • spread risk across multiple products
  • exploit new market opportunities
  • reduce dependence on a single product

• For example:

  • Amazon diversified from online bookselling into cloud computing, streaming services and consumer electronics

• Diversification can be:

  • related diversification – new products linked to existing activities
  • unrelated diversification – expansion into completely different industries

Case Study Diversification: Grab Malaysia

Grab began in Malaysia in 2012 as a ride-hailing platform connecting passengers with private drivers through a mobile app. As the business expanded across Southeast Asia, the company faced intense competition from other transport platforms and recognised that relying only on ride-hailing could limit future growth

Grab diversified into multiple industries

Growth strategy

Grab pursued diversification by expanding into a range of new digital services beyond transport. The company launched GrabFood, allowing customers to order meals from restaurants through the same app. It later introduced GrabPay, a digital payment platform, and GrabMart, which delivers groceries and everyday items.

These services represent related diversification, as they build on Grab’s existing digital platform, customer base and delivery network. By using the same technology and logistics system, Grab could expand into new markets while leveraging its existing strengths.

Outcome

Diversification has transformed Grab into a “super-app”, offering multiple services through a single platform. This strategy has allowed the firm to:

• spread risk across several business activities
• generate multiple revenue streams
• increase customer engagement by encouraging users to rely on the app for transport, food delivery and payments

As a result, Grab has become one of the largest digital platforms in South East Asia, operating in countries including Singapore, Indonesia, Thailand and Vietnam. Diversification has therefore played a key role in supporting the firm’s growth and long-term competitiveness in the region.