3.2.1 Growth*

Objectives of growth

• Economies of scale
• Market power
• Market share
• Brand recognition
• Profitability

1. To Achieve Economies of Scale

• Economies of Scale: Cost advantages that a business can exploit by expanding its scale of production. 2. Increased Market Power Over Customers and Suppliers

• Market Power Over Customers:

  • As a firm grows, it can dominate the market, reducing competition and gaining more control over pricing and product offerings.
  • Larger firms can influence customer behaviour and preferences through strong branding and marketing.

• Market Power Over Suppliers:

  • A larger firm can negotiate better terms with suppliers, such as lower prices or more favourable payment terms, due to its significant purchasing power.
  • This power can lead to cost reductions, enhancing profitability.

3. Increased Market Share and Brand Recognition

• Market Share:
  • Growth often aims at capturing a larger portion of the market, making the firm a market leader.
  • Increased market share can lead to higher sales volumes and better brand visibility.
• Brand Recognition:
  • As a firm grows, its brand becomes more recognisable, increasing customer loyalty and attracting new customers.
  • A well-recognised brand can command premium pricing, further increasing profitability.

4. Increased Profitability

• Profitability:
  • Growth is often driven by the objective of increasing profits through higher sales, cost efficiencies (economies of scale), and stronger market presence.
  • Larger firms can diversify their product range, entering new markets or segments, thereby spreading risk and enhancing overall profitability.

Challenges

• Diseconomies of scale

• Internal communication

• Overtrading 1. Diseconomies of Scale

• Diseconomies of Scale:

  • As firms grow beyond a certain point, they may experience an increase in per-unit costs due to inefficiencies.
  • Examples:
  • Larger firms can become harder to manage, leading to inefficiencies.
  • Increased layers of management can slow down decision-making and reduce responsiveness to market changes.
  • In very large firms, employees might feel alienated, reducing productivity. 2. Internal Communication

• Communication Issues:

  • As a firm expands, maintaining effective communication becomes more challenging.
  • Problems:
  • Complex Structures: Larger organisations often have complex hierarchical structures, which can lead to miscommunication or delays in information flow.
  • Geographical Spread: Firms that grow internationally or across regions may face difficulties in coordinating across different time zones and cultures.
  • Loss of Vision: The original vision of the company may become diluted as more employees and managers are added, leading to misalignment in goals and strategies. 3. Overtrading

• Overtrading:

  • Overtrading occurs when a business grows too quickly without securing the necessary financial resources to support that growth.
  • Consequences:
  • Rapid growth can strain cash flow, as the firm may need to invest heavily in inventory, equipment, and new staff before the increased revenues are realised.
  • Overtrading can lead to excessive borrowing, creating a burden of debt that the company may struggle to repay.
  • The company may not have the capacity to handle the increased demand, leading to service or product quality issues.