Why Do Businesses Grow?
- Jojo owns a small bakery.
- Jojo's pastries are popular, but Jojo faces rising ingredient costs and fierce competition.
- How can you ensure your business thrives?
Growth might be the answer.
Motivations for Business Growth
1. Increasing Profits
Higher Sales Revenue: Growth enables businesses to reach more customers, increasing sales.
Example
* Walmart's bulk purchasing power allows it to offer low prices while maintaining profitability.
2. Gaining Market Share
Dominance: Growing businesses can capture a larger share of the market, reducing competition.
Example
* Amazon's expansion into various sectors (e.g., cloud computing, streaming) has solidified its market leadership.
Pricing Power: Increased market share allows businesses to influence prices, giving them a competitive edge.
Example
* Coca-Cola's global presence enables it to set prices that smaller competitors struggle to match.
3. Enhancing Competitiveness
Innovation: Growth often funds research and development, leading to innovative products and services.
Example
* Tesla's growth has fueled advancements in electric vehicles and renewable energy.
Brand Recognition: Expanding into new markets increases brand visibility and customer loyalty.
Example
* Nike's global expansion has made it a household name in sportswear.
4. Achieving Economies of Scale
Lower Costs: As businesses grow, they benefit from reduced costs per unit, improving efficiency.
Example
* A factory producing 10,000 units monthly can spread fixed costs (e.g., rent, salaries) over more products, reducing the cost per unit.
Competitive Pricing: Lower costs allow businesses to offer competitive prices or increase profit margins.
Example
* Toyota's efficient production processes enable it to offer high-quality vehicles at competitive prices.
Note
Economies of scale are covered in detail in section 1.5.1.
5. Diversification and Risk Reduction
Spreading Risk: Growth allows businesses to enter new markets or industries, reducing dependency on a single revenue source.
Example
Disney's expansion into streaming services (Disney+) diversifies its income beyond theme parks and movies.
Adapting to Change: Diversification helps businesses remain resilient in changing market conditions.
Example
Samsung's involvement in electronics, construction, and shipbuilding shields it from downturns in any one sector.
Example
Businesses Achieving Growth
1. Amazon
- Motivation: Increase market share and diversify revenue streams.
- Strategy: Acquired Whole Foods to enter the grocery market and expanded Amazon Web Services (AWS) to dominate cloud computing.
2. Tesla
- Motivation: Enhance competitiveness and achieve economies of scale.
- Strategy: Invested in Gigafactories to reduce production costs and increase output, enabling competitive pricing.
3. Disney
- Motivation: Diversify and reduce risk.
- Strategy: Launched Disney+ to capitalize on the growing demand for streaming services, reducing reliance on traditional media.
Note
External growth can be faster but may involve challenges like cultural clashes or integration difficulties.
Challenges of Growth
- Diseconomies of Scale: Larger businesses may face inefficiencies, such as communication breakdowns or increased bureaucracy.
- Cultural Clashes: Mergers and acquisitions can lead to conflicts between differing corporate cultures.
- Loss of Control: Rapid growth may dilute the original vision or values of the business.
Common Mistake
- Many students assume that growth always leads to higher profits.
- However, growth can also increase costs and complexity, potentially reducing profitability if not managed carefully.
Reflection
Theory of Knowledge
- How does a business's decision to grow reflect its values and priorities?
- For example, is growth driven by a desire to innovate, a focus on sustainability, or a pursuit of profit?
