Why Do Firms Grow.

928 WordsDec 6, 20114 Pages
The traditional profit maximizing theories of the firm have been criticised for being unrealistic. As a result, alternative theories of the firm were introduced (Sloman & Sutcliffe, 2001). One of the alternative theories of the firm is Growth maximization. Following are the main motives for the firms to grow:  The cost motive: A growth maximising firm can lower its long run average costs by exploiting economies of scale and economies of scope. Economies of scale come into effect when increasing the scale of production leads to a lower cost per unit of output (Fig. 1). By increasing the range of products produced, a firm reduces the cost of producing each one due to economies of scope (Sloman & Sutcliffe, 2001). When a firm expands…show more content…
Also, growth affects profitability. In the short run, growth above a certain rate may reduce profitability. Some of the finance required for the investment to achieve growth will come from firm’s sales revenue. A firm opting to expand in the existing market will have to spend on advertising and marketing whereas a firm looking to diversify will have to spend on market research and hiring specialists .Firms will have to sacrifice some of its short run profits for the long run gains which growth might yield (Sloman & Sutcliffe,2001). However, In the long run, a rapidly growing firm may have increasing profits by achieving economies of scale and increased market power. These profits can then be used to finance further growth. (Sloman & Wride, 2009).  Managerial motives: Managers may take longer term perspective and aim for growth maximization in the size of the firm. By doing so, they will benefit directly by being a part of expanding firm. Promotion prospects, increased salaries and increased power are the main driving force for managers to select for growth. (Hooper, 2011). Means for achieving growth are internal expansion and external expansion. The table shows various types of growth strategy which can be used by any growth maximising firm. (Sloman & Sutcliffe, 2001, pp. 271) The dynamic competitive nature of the market drives the firms to expand in order to survive. If a firm does not grow, the rivals can benefit from this by securing
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