Meaning of Business Growth
Business growth is a natural process of adaptation and development that occurs under favorable conditions. The growth of a business firm is similar to that of a human being who passes through the stages of infancy, childhood, adulthood and maturity. Many business firms started small and have become big through continuous growth. However, business growth is not a homogeneous process. The rate and pattern of growth varies from firm to firm. Some firms grow at a fast rate while others grow slowly. Also, not all enterprises survive to grow big. This may be due either to the nature of the firm or the entrepreneur. Some entrepreneurs do not want to grow their ventures, choosing instead to pursue other interest, spend more time with family or develop other business activities.
Generally, the term ‘business growth’ is used to refer to various things such as increase in the total sales volume per annum, an increase in the production capacity, increase in employment, an increase in production volume , an increase in the use of raw material and power. These factors indicate growth but do not provide a specific meaning of growth. Simply stated, business growth means an increase in the size or scale of operations of a firm usually accompanied by increase in its resources and output.
Need for Business Growth
As we have already said that business enterprise is like a human being, growth is a necessary stimulant to most of the business firms. As a matter of fact, growth is precondition for the survival of a business firm. An enterprise that does not grow may, in course of time have to be closed down because of its obsolete products. The market is full of examples of very popular products disappearing from the scene for lack of growth plans. For example, pagers vanished from the market because better technology product i.e. cell phones were introduced. The reasons which drive business enterprises toward growth are described below:
- Survival: In a competitive market no single enterprise can have monopoly. The competition can be direct or indirect. Direct competition comes from other firms manufacturing the same product. Indirect competition may come from availability of cheaper substitutes. Severe competition forces a firm to grow and gain competitive strength. Any business firm that fails to grow can’t survive for long. A growing concern will be an innovator and can easily face the risk of competition. Thus growth is means of survival in a competitive and challenging environment.
- Economies of Scale: Growth of a firm may provide several economies in production, purchasing, marketing, finance, management etc. A growing firm enjoys the advantages of bulk purchase of materials, increased bargaining power, spreading of overheads, expert management etc. This leads to low cost of production and higher margin of profit. This also ensures full utilization of plant capacity.
- Owners Mandate: The owners of a company get the ultimate benefit of growth in the form of higher profits. They may direct the management to reinvest a substantial portion of the earnings in the business rather than paying them out. Capable management may on its own like to take carefully calculated risk and expand the size of the company.
- Expansion of the Market: Increase in demand for goods and services leads business firms to increase the supply also. Population explosion and transportation led to increase in the size of markets which in turn resulted in mass production. Business firms grow to meet the increasing demand. Expanding markets provide opportunity for business growth.
- Latest Technology: Some business firms invest in research and development activities to create new products and new techniques, while others try to acquire latest technology from the market. Rationalization and automation results in more efficient use of resources and a firm may grow to obtain them.
- Prestige and Power: The more the size of the business firm increase the more is the prestige and power of the firm. Businessmen satisfy their urge for power by increasing the size of their business firm.
- Government Policies: A big firm is in a better position to carry out the various legal formalities required to obtain licenses and quotas. Business firms may plan for growth to make use of the incentives provided by the government. The government provides certain subsidies and tax concessions to the new industrial units in the backward areas and those producing goods for export only.
- Self-sufficiency: Some firms grow to become self sufficient in terms of marketing of raw material or marketing of products. Growth in either or both of these forms reduces the dependency of the firm over other firms.
Advantages and Limitations of Business Growth
Business firms try to achieve growth in order to obtain the following advantages:
- For obtaining the economies of scale.
- For exploitation of business opportunities.
- For facing competition in the market by diversifying the product line.
- For providing protection against adverse business conditions eg. Depression.
- For gaining economic and market power.
- For raising profits and creating resources for further reinvestment into business.
- For making optimum utilization of resources.
- For securing subsidies, tax concessions and other incentives offered by the government.
Business firms cannot grow indefinitely. Business growth has its own limitations which are:
- Finance: Growth, especially external growth, requires additional capital investment which is sometimes difficult for a small firm to arrange.
- Market: Growth can be achieved to the extent that the size of market permits. If a firm grows faster than increase in the size of the market, it is likely to face failure.
- Human Relations Problems: In a big firm, management loses personal touch with employees and customers. Motivation and morale tend to be low resulting in inefficiency.
- Management: Growth increases the functions and complexities of operations. As the number of functions and departments increase, coordination and control become very difficult. If the organization and management structure is not capable of accommodating them, growth may be harmful.
- Lack of knowledge: Under conglomerate growth, a firm enters new industries and new markets about which the managers know little. Managers find it difficult to find and develop managers who can quickly handle new units and improve their earning potential against heavy odds. Many growing firms could not succeed because their managers felt that they could manage anything anywhere.
- Social problems: From social point of view also big firms may be undesirable as they may lead to concentration of economic power and creation of monopolies which may exploit consumers. In their desire for growth firms indulge in combative advertising. The quickening growth creates a cultural gap when society finds it difficult to cope with technological change.
Forms of Business Growth
Once an entrepreneur understands some of the factors that influence growth and development, he can choose a suitable way for achieving it. Business growth can take place in many ways. Broadly, various types of growth can be divided into two broad categories — organic and inorganic growth.
- Organic Growth — It can also be termed as internal growth. It is growth from within. It is planned and slow increase in the size and resources of the firm. A firm can grow internally by ploughing back of its profits into the business every year. This leads to the growth of production and sales turnover of the business. Internal growth may take place either through increase in the sales of existing products or by adding new products. Internal growth is slow and involves comparatively little change in the existing organization structure. It can be planned and managed easily as it is slow. The ways used by the management for internal growth include: (I) intensification; (ii) diversification and (iii) modernization.
- Inorganic Growth — it can also be termed as external growth. It involves a merger of two or more business firms. A firm may acquire another firm or firms may combine together to improve their competitive strength. External growth has been attempted by the business houses through the two strategies (a) mergers and acquisitions and (b) joint ventures. Merger again can be of two types: (i) a firm merges with other firm in the same industry having similar or related products. This type of merger leads to coordination problem between the two firms (ii) a firm merges with another firm in altogether different lines of business and have little common in their products or processes such a merger is known as conglomerate merger.
Inorganic growth is fast and allows immediate utilization of acquired assets. There is no risk of overproduction as the capacity of the industry as whole remains unchanged. Merger leads to combination of independent units to control competition, to gain economics of scale and also sometimes, to modernize production facilities. But merger also leads to social problem of monopoly, problem of coordination, strain on capital structure, etc. Thus, external growth involves problem of reorganization.