- Constraint on growth
- A constraint on growth is a limit on how large a firm can become, set by its market, its finance, its owners' aims or the law.
- Diseconomies of scale
- Diseconomies of scale are the rise in average cost that comes when a firm grows so large that it becomes hard to manage.
Four constraints on growth
Can you name the four things that can stop a firm growing, however much it wants to?
Two limit what the firm can do, one what its owners want, one what the law allows.
The size of the market limits growth when there are too few buyers to take a larger firm's extra output at a profitable price.
Can you think of an example?
A workshop making hand-made violin bows has few possible buyers nationwide. A bigger workshop would double its output, not the number of violinists.
Access to finance limits growth because expansion is paid for from profits, borrowing or selling shares, and a young firm has few profits and no record to borrow against.
Can you think of an example?
A new café made £10,000 profit last year and wants an £80,000 second site. With no record of steady profits, its bank lends only part.
Owner objectives limit growth when a firm's owners choose to keep it small, to hold on to control, a manageable workload or a way of working they value.
Can you think of an example?
A family bakery turns down investors who would pay for five new shops, because they would take a share of ownership and a say in running it.
Regulation limits growth because competition law gives the government power to block certain mergers, or to allow them only if the firm sells off some parts.
Can you think of an example?
Two large supermarket chains propose to merge. If shoppers would lose choice, the Competition and Markets Authority can block the deal or demand some shops are sold.