firm growth

business

firm growth

The process of growth is initiated and facilitated by a combination of managerial, economic, financial and ‘chance’ factors:

1. Managerial. A typical catalyst underpinning firm growth is an ambitious ENTREPRENEUR, he or she establishing a new firm and setting out to create a ‘big business’. Over time, as a firm expands, the original founder is usually unable to manage all facets of the business and will need the assistance of other directors and professional managers. While firms may develop a growth philosophy and impetus, however, serious management ‘mistakes’ may occur in the form of a failure to identify changing customer needs (see, for example, the recent setbacks at the retailing group Marks & Spencer and the car producer BMW/Rover), or ill-judged diversifications may reverse growth potential and put the very survival of the firm under threat;
2. Economic. Some firms thrive and grow whilst others decline or go bankrupt (or are taken over) because the former firms are superior in creating and sustaining COMPETITIVE ADVANTAGES, which enables them to ‘meet and beat’ rival firms (see RESOURCE-BASED THEORY OF THE FIRM). Firms that are able to take full advantage of ECONOMIES OF SCALE and the EXPERIENCE CURVE are able to expand their sales and market shares by producing their products at lower cost and selling them at lower prices than rivals; similarly, firms that are able to exploit PRODUCT DIFFERENTIATION advantages, particularly through developing new products are able to expand at the expense of less innovative rivals. For example, Microsoft has gained a worldwide dominance of software systems through its ‘Windows’ technology. ECONOMIES OF SCOPE are often important in underpinning growth through concentric diversification, where firms ‘transfer’ resources and skills from their core activities into related areas of business;
3. Financial. As they grow, firms will need to obtain additional financial resources. This may involve the firm in steadily ploughing back profits over the years. A quicker way to fund expansion, however, often involves the firm converting from a ‘sole proprietor’ status to one of public JOINT-STOCK COMPANY (Plc) by floating the business on the STOCK MARKET (see FLOTATION). Plcs typically continue to finance their expansion by issuing new shares to their existing share-holders (see RIGHTS ISSUE), by increased borrowing from the COMMERCIAL BANKS and investors (see CORPORATE BOND) and financing mergers and takeovers by exchanging new shares in the enlarged company for those of target companies;
4. Chance or luck factors. Being in the ‘right place at the right time’ often affects the fortunes of firms. A growth opportunity may occur, for example, through the discovery of a hitherto unknown North Sea oilfield by an oil company such as BP; or from the UK government's decision to deregulate the telecommunications and bus markets, which have provided growth opportunities for new suppliers to enter these markets such as Vodaphone and Stagecoach, respectively The comparative rates of growth achieved by firms determines the eventual number and size distribution of the firms supplying a particular market and thus affects MARKET STRUCTURE.

firm growth

(see MULTINATIONAL COMPANY) through either/or ORGANIC GROWTH and EXTERNAL GROWTH (MERGERS, TAKEOVERS and STRATEGIC ALLIANCES). Firms may expand in ir original lines of business (HORIZONTAL INTEGRATION), become VERTICALLY INTEGRATED or they may expand into new business activities (DIVERSIFICATION). See PRODUCT MARKET MATRIX.

The process of growth is initiated and facilitated by a combination of managerial, economic, financial and ‘chance’ factors:

1. Managerial: a typical catalyst underpinning firm growth is an ambitious ENTREPRENEUR, he or she establishing a new firm and setting out to create a ‘big business’. Over time, as a firm expands, the original founder is usually unable to manage all facets of the business and will need the assistance of other directors and professional managers. Edith Penrose developed a ‘managerial theory of firm growth’ based on the idea that once directors/managers are fully on top of running an existing business activity, they develop ‘slack’, which can then be used to extend their time and expertise to running other lines of business. While firms may develop a growth philosophy and impetus, however, serious management ‘mistakes’ may occur in the form of a failure to identify changing customer needs (see, for example, the recent setbacks at the retailing group Marks & Spencer and the car producer Rover), or ill-judged diversifications may reverse growth potential and put the very survival of the firm under threat;
2. Economic: some firms thrive and grow while others decline or go bankrupt (or are taken over) because the former firms are superior in creating and sustaining COMPETITIVE ADVANTAGES, which enables them to ‘meet and beat’ rival firms (see RESOURCE-BASED THEORY OF THE FIRM).

   Firms that are able to take full advantage of ECONOMIES OF SCALE and the EXPERIENCE CURVE are able to expand their sales and market shares by producing their products at lower cost and selling them at lower prices than rivals (see SURVIVOR PRINCIPLE); similarly, firms that are able to exploit PRODUCT DIFFERENTIATION advantages, particularly through developing new products, are able to expand at the expense of less innovative rivals. For example, Microsoft has gained a worldwide dominance of software systems through its ‘Windows’ technology. ECONOMIES OF SCOPE are often important in underpinning growth through concentric diversification, where firms ‘transfer’ resources and skills from their core activities into related areas of business;

3. Financial: as they grow, firms will need to obtain additional financial resources. This may involve the firm in steadily ploughing back profits over the years. A quicker way to fund expansion, however, often involves the firm converting from a ‘sole proprietor’ status to one of public JOINT-STOCK COMPANY (Plc) by floating the business on the STOCK EXCHANGE (see FLOTATION). Plc's typically continue to finance their expansion by issuing new shares to their existing shareholders (see RIGHTS ISSUE), by increased borrowing from COMMERCIAL BANKS and investors (see CORPORATE BOND) and financing mergers and takeovers by exchanging new shares in the enlarged company for those of target companies;
4. Chance or luck factors: being in the ‘right place at the right time’ often affects the fortunes of firms. A growth opportunity may occur, for example, through the discovery of a hitherto unknown North Sea oilfield by an oil company such as BP; or from the UK government's decision to deregulate the telecommunications and bus markets, which have provided growth opportunities for new suppliers to enter these markets such as Vodafone and Stagecoach, respectively

See also LAW OF PROPORTIONATE EFFECT.

The comparative rates of growth achieved by firms determine the eventual number and size distribution of the firms supplying a particular market and thus affects MARKET STRUCTURE. The differential growth of firms provides some justification for the existence of OLIGOPOLY or MONOPOLY, in particular positions of market dominance by the leading firms in a market that is secured through a superior MARKET PERFORMANCE. See MARKET CONCENTRATION.