Expanding the business has many benefits for the owners. Let’s take a look at the most important reasons why the owners may want to grow their businesses.
1. Survival
Start-up companies must grow by finding the first few customers and developing the first few products. As other new competitors are also likely to strive for growth, new businesses need to be better and more competitive in securing the first few orders to compete with their growing rivals.
2. Increase in sales
Businesses grow by selling more products, either by selling more to existing customers, or finding new customers. Company A grew in size after it has increased its value of annual sales by 30% between 2021 and 2021 from USD$10,000 to USD$13,000. However, the growth in the value of a business’s sales does not automatically increase its market share.
3. Increase in market share
An increase in market share results from business growth. With the increase in market share, the company will gain higher profile and more market power. First, this will allow the firm to charge higher prices, therefore will increase sales revenue and gain more profits at the same time as costs remain unchanged. Second, the business will have greater bargaining power with suppliers to negotiate lower prices for raw materials which will lower the cost of production, and retailers to grab best display positions in the shops. And third, this will make it easier and less risky for the business to continue to growing by launching new products onto the market as its brand becomes more widely known.
If the value of Company A’s annual sales increased by 30% between 2020 and 2021 from USD$10,000 to USD$13,000, and the value of total market remained the same at USD$100,000, then the company’s market share increased from 10% to 13%. It means that some of the customers on that market switched from other companies to Company A. On the contrary, if the growth of the total market is faster than the growth in sales of Company A, then the market share of Company A will decrease.
To outcompete its competitors, the business should grow faster than the growth of the total market.
4. Greater power to control the market
Industry leaders have much greater power to control and influence market activities than smaller businesses. For example, this includes having greater control over setting prices. Large business may afford to set the prices very low for a period of time in order to get rid of the competition, or may even be able to set the price quite high for all other businesses in the industry to follow.
5. Increase in profits
Expanding businesses and achieving higher sales is one of the ways of becoming more profitable.
As we know, business growth results from an increase in output which is goods produced and services provided. If this output is sold, then sales increase. Increased sales, when prices remain unchanged, will consequently increase sales revenue.
In order to also increase profits while expanding (increasing sales revenue), the business should keep its costs under control. Keeping the costs at the same level as before expansion, or keeping the growth of costs less than the growth in sales revenue, should also increase profits.
So, when businesses grow, their profits may increase as well.
6. Economies of scale
As a business grows in size, it usually benefits from reduced Average Cost (AC) of production as a result of economies of scale, e.g. lowering the cost of purchasing raw materials by buying in large quantities. By lowering the cost of producing its products, the company will increase its profits. Also, with reduced Average Cost (AC) of producing one product, the business will be able to lower the price of its products for final customers making the business more competitive. This should then result in higher sales.
7. Protection from the risk of takeover
Public limited companies are often at risk of hostile takeovers – buying a majority stake in the business, because they have growth potential, have a widely recognized corporate name or due to a decrease in profits and subsequent fall in their share price.
But, large businesses are very, very expensive to be taken over – just look at the market capitalization of Apple (USD$2.29 trillion) or Microsoft (USD$2.05 trillion). Therefore, there is less risk of being a takeover target because simply there are not that many investors who can afford to buy such a large company. So, the larger the company, the more difficult it is for others to take it over because at least 51% of the company’s shares must be bought. Buying more than 50% of shares of Apple or Microsoft will cost around 1 trillion dollars each. Currently, the richest man in the world Elon Musk, the CEO and co-founder of Tesla, has an estimated net worth of USD$177 billion.
Sometimes though, the takeover is welcomed by the company’s directors and shareholders as they may want to sell their shares for cash and retire.
8. Increased status and recognition
Controlling a large and well-known business gives the owners and directors higher status and wider recognition in the society. Look at Bill Gates, Warren Buffet or Tim Cook. Status and fame may bring new opportunities to gain publicity or influence government policy. Powerful multi-national business organizations may even be able to take advantage and influence government policies in many countries regarding favorable TAX rates or subsidies.
9. Spreading risk
Diversifying into new markets rather than focusing only on one specific market, as well as creating new products rather than just focusing only on one product, will help the business to grow.
Also, if there are any dramatic negative changes in that particular market, then having business operations in other markets will help not only to maintain growth, but also safeguard the firm’s survival.
All in all, the reasons for seeking business growth by the owners in the private sector can be summarized as the desire to gain more sales and profit in the long-term.
