Organisational growth - Business Environment

The reasons for organisational growth
Firms grow in size for many reasons; growth could be an explicit objective of management or could be necessary for the successful operation of the firm:

  • Growth could be a managerial objective if it brings benefits to management such as greater security and higher remuneration.
  • It could be that the market in which the business operates is expanding and growth is necessary to maintain market share. This is especially the case as markets become more international.
  • Growth enables the organisation to reap the benefits of economies of scale .
  • Growth enables firms to diversify into other markets, which means that risk can be spread further.
  • Industries which are capital intensive will of necessity be comprised of large firms.
  • In the area of product development it is possible that the necessary research and development could only be carried out by large companies.
  • Growth could be pursued as a defensive strategy, as a reaction to the activities of competitors.

Table provides an illustration of how the stated objectives of EU firms for engaging in merger activity can change over time and gives some indication of the reasons for growth. Much of this shift can be explained by changing market conditions which have resulted from the creation of the Single European Market in 1992. The relaxation of trade restrictions in the run-up to 1992 encouraged much greater competition, and hence expansion and strengthening of market position have assumed much greater importance since 1985, together accounting for nearly 75 per cent of mergers. It was expected that the increased competition would force companies to concentrate more upon their core activities and as a result diversification as a motive for merger fell from 17.6 per cent in 1985 to 2.1 per cent of cases in 1992.

In industrial economics firm size is seen as a function of growth. It is suggested that although there is no limit on the size of a firm there are limits on the rate of expansion. Growth rates are seen to depend on different things by different theorists, including the availability of finance, the level of consumer demand and the limitations of management. These theories, however, are primarily concerned with large firms and their development. Small firms are seen as potentially large firms that failed to grow for some reason or other. One interesting theory of growth is the stages model, where the firm is seen as passing through various stages in its development from small sole proprietor/partnership through the decision to expand into a large organisation. This again is a ‘grow or fail’ theory which does not apply well to industries which are dominated by successful small firms, as will be seen later sections.

main-motives for mergers

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