The potential threat of corporate growth

Table of contents

Introduction

Literature review
Macroenvironmenal analysis
Reasons for corporate growth
Growth strategies
The potential threats of corporate growth
Age, size and corporate growth

Case studies
Case study 1: Starbucks
Case study 2: Boeing
Case study 3: Bombardier
Discussion

Conclusion

References

Introduction

This paper discusses the potential threat caused by corporate growth. By investigating why companies grow, the author will complete a detailed determination of different reasons why the process of growth can result in serious damage to a company. In addition to this, the purpose is to show ways to minimise risks and establish sustainability within the growth process.

The author starts with a comprehensive literature review which begins with an overview of the changes on global business conditions as caused by technical improvements. A description of active and reactive reasons for corporate growth will follow. After that an outline of different growth strategies and a comparison of different types of enterprises with their specific risks will be given. In connection to that, the author will answer the question “What makes growth dangerous for a company; and how can a firm become prepared to deal with it?” To answer this question the author investigates different growth strategies, especially diversification at the example of implementing services.

Referring to the literature review the author will show three different case studies of growing firms in the second part of this report. In connection to that a discussion about how the theory can be adopted to these realistic cases will follow.

Literature review

Macro environmental analysis

The worldwide business environment has changed rapidly, especially within the last two decades. Technical advances caused for example decreasing costs for communication and transportation of goods (Morrison, 2006). Because of this there has been a constant growth of the international trade. Between 2000 and 2005 the worldwide export of merchandise and commercial services rose in average by an annual amount of 10% (WTO, 2006) (Figure 1).

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Fig.1: Worlds exports of merchandise and commercial services (World Trade Developments in 2005, 2006, p. 3)

One requirement for this development is the computer and information technology which has made international trade safer and more reliable. As a consequence of that the international business environment is today much more competitive because it is a lot easier for a company to access foreign markets and to promote products internationally (Morrison, 2006).

This development implicates the growth of companies which were successful to profit from these changing frameworks. Aside from track records of different firms, many companies fail to deal with their success when growing. As we will see later on even some of the world’s best managed companies like the aircraft manufacturer Boeing faced troubles handling their corporate growth.

Besides the global business environment there are a lot of other influences which can be a reason for a company to grow. In the next paragraph these reasons will be further determined.

Reasons for corporate growth

In the following paragraph the author investigates different reasons for corporate growth and how these are categorised in the literature.

Mackey and Välikangas (2004) suggest that markets expect growth and that a company is not viable unless it is able to grow. Bennett (1989) argues that most businesses are capable of some growth whereas the growth process is different for every single business. Every company undergoes a certain development process. The several steps in the developing cycle of a company are shown in figure 2.

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Fig. 2: Developing cycle of a company (Bennett, 1989)

The figure shows that with increasing age every company enters different levels of growth. Depending on which section of the process the company is in there are different reasons why growth can be necessary. For that reason it is generally accepted (Bennett, 1989; Canals, 2000; Recklies, 2000) that growth has to fit into the company’s development and is ideally planned as part of the strategic management.

Canals (2000) states that growth takes place when companies and individuals discover and implement new and better ways of doing things. Different authors (Bennett, 1989; Recklies, 2000) differentiate the reasons for corporate growth a little further. It is Recklies (2000) belief that reasons that cause companies to grow can be defined into two categories - active and reactive growth.

In the case of active growth; a company’s growth is being planned. Reasons for this type of growth can be the potential of improving efficiency by achieving economies of scale, eliminating duplicative facilities or optimising the use of capacities (Robinson, 1996). Carpenter and Sanders (2007) further state that in most companies growth is an objective which is clearly stated in the company’s mission statement. Phrases like: “Our purpose is to become the leader in XYZ” are a clear indication for planned growth. Moreover, it is the aim of many companies to ensure sustainability in order to add value to stakeholders. To do so the active development of new products can be vital to the company´s growth (Heffes & Sinnett, 2006).

In contrast to that, reactive growth can be caused for example, to meet the demand of the market or to adapt to changing business conditions set up by competitors (Watts, Cope & Hulme, 1998, Recklies, 2000). Bennett (1989) further suggests that legislation, increased demand of the primary customer or the emergence of a competitor can require growth. In addition to that, Canals (2000) state that the lack of growth over a long period of time could be evaluated as a signal of an inability to innovate. From that fact we can conclude that keeping up the shareholder value can be another reason which makes corporate growth necessary. Porter’s five forces model helps to identify other possible influences like bargaining power of buyers and suppliers that might make growth necessary (Porter, 1998) (figure 3).

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Fig.3: The Five Competitive Forces that Determine Industry Profitability (Porter, 1998)

Depending on whether a company grows actively or reactively from the result of different growth strategies will be discussed in the next abstract.

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