To obtain Scale Economics:
Growth is tempting because of innumerable benefits offered by large scale operations. Fixed costs could be spread over a large volume of units and the resultant savings could be recycled into the product and offer the same at economical rates ensuring continued organizational success. Great penetration into the market is ensured thereby.
To simulate Talent:
Managers and entrepreneurs with a high degree of achievements and recognition would prefer to work in companies always on the move rather than companies where there are limited opportunities to exploit their talents fully. The stupendous rate of growth achieved by hero Honda, Infosys, Wipro in recent years bears ample testimony to this fact.
To reach commanding heights:
Growth ensures market control: It means prestige and power. It means securing investor confidence. Companies such as Nestle, Britannia, ITC, HLL etc. have a high level of reputation in the corporate world owing to this reason. They are held high and rated as winners in the corporate world owing to this relentless effort to grow in various profitable directions. Growth obviously brings satisfaction to employees, investors in particular and innumerable benefits to society in the form of increased employment, low price high quality goods and so on. Growth allows the organizations to reach commanding heights in the economy, it can increase its markets share, secure a high degree of control over the market and influence market behaviour in a significant way.
Problems created by growth
Growth, however, is not an unmixed blessing. In some firms, as pointed out previously growth beyond an optimum limit creates many problems. According to PF Drucker a business that grows at an exponential rate, would soon gobble up the world and all its resources. Growth at a high rate and for an extended period makes a business exceedingly vulnerable. It makes it all but impossible to manage it properly. Even from the financial point of view, a growing company does not offer sound investment opportunities. Sooner or later the firm runs into tremendous loses, has to write off vast sums and become in effect unmanageable. It takes years for such a firm to recover and establish itself in the market.
The Essar Group headed by Ravi Ruia and Shashi Ruia had great ambitions of building a massive empire that rivals the Ambanis in 90s. The initial successes achieved in shipping and hot rolled steel coil business prompted the group to try its luck in several core sector industries, construction, power, oil, gas, telecom etc. To realize their dreams the group tried every trick in the book (raised crores from the public siphoned out over Rs 4,000 crore for speculation on stock markets, got loans of over Rs 13,500 crore from FIs did hectic lobbying to obtain favours from various governments) but failed. The group did set a scorching growth pace with nineties. However, the diversification into too many related and unrelated long gestation period projects affected its cash flows, the mounting debt burden impacted its bottom line and the resultant cash crunch led to a virtual chaos in finance. The falling commodity prices, burgeoning costs, project overruns (Essar oil’s estimated cost over Rs 2,000 crore plus a debt exposure of Rs 5000 crore) as things stand now many ease the groups, name from the industrial map of India into years ahead ( Business Today, Feb 16, 2003).
It is true that a firm has to grow in order to survive in a competitive environment. Without this strategy it would be impossible for the firm to attract, motivate and hold men of talent and competence on a permanent basis.
Source: Strategic Management
To obtain Scale Economics: