Firm’s Decision & Strategies
Growth
Business growth is the process of improving some measure of an enterprise's success. It can be achieved in a variety of ways, such as increasing the firm's total sales or revenue, hiring more employees, or opening new stores or branches.
Why do firms pursue growth?
Firms seek growth to reap the benefits of economies of scale and to increase their market share.
Economies of Scale: Definition and Explanation
Economies of scale occur when a firm's average costs decrease as its production output increases. This concept is critical to a firm's growth strategy. For instance, Amazon has successfully achieved economies of scale. As the company expanded, it invested in logistics infrastructure, lowering its average cost per item delivered. This allowed Amazon to offer competitive prices while maintaining high profit margins.
Increased Market Share: Definition and Explanation
Market share refers to the portion of a market controlled by a particular company or product. A higher market share usually equates to greater sales dominance. Coca-Cola, for instance, has aggressively grown its market share by expanding its product line and entering new markets. This has not only increased its dominance in the soft drink industry but also led to significant economies of scale.
Strategies to Pursue Growth
To achieve growth, firms can expand their product or service offerings, enter new markets, or acquire or merge with other firms.
Expanding product or service offerings with examples
One strategy for growth is to broaden the range of products or services a firm offers. Apple, for example, has successfully transitioned from selling personal computers to offering a diverse range of products, such as smartphones, tablets, and wearable devices.
Entering new markets with examples
Firms can also grow by entering new markets, either geographically or by targeting new customer segments. Starbucks, for instance, has successfully entered new markets worldwide by adapting to local preferences, attracting new customers, and increasing its global market share.
Acquisition or merger with examples
Insert handshake icon indicating partnershipAnother growth strategy involves acquiring or merging with other companies. Facebook's acquisitions of Instagram and WhatsApp expanded its product offerings, increased its user base, and kept it competitive in the social media landscape.
Risks of Aggressive Growth
However, aggressive growth also carries risks such as over-expansion, which could strain resources and dilute focus. Firms must, therefore, balance growth objectives with sustainable practices to ensure long-term success.
Critical Thinking Exercises
Can you think of a company that has experienced growth? What strategies did it use, and what were the results?
Discuss the potential advantages and disadvantages of a firm growing too quickly.
How might a firm's growth strategy differ depending on its industry or market?
Growth is a critical aspect of a firm's strategy, and it can be achieved through economies of scale, increased market share, product expansion, market entry, and acquisitions or mergers. However, firms should be cautious of the potential risks associated with aggressive growth.
Diversification
Diversification is a strategic approach involving the broadening of a firm's range of products or services, or its entry into new markets. This strategy reduces risk, protects firms from market volatility, uncovers new revenue streams, and expands their customer base.
Why do firms diversify?
Firms diversify to hedge against risks associated with dependence on a single product or market. They may also seek out new business opportunities or strive for economies of scale by leveraging their core competencies.
How do firms carry out diversification?
Firms diversify by developing related products or services, acquiring or merging with other firms, or creating joint ventures or collaborations.
Developing related products or services with examples
One approach to diversification is to develop new products or services related to the firm's existing portfolio. This approach allows the firm to utilise its existing knowledge and capabilities while reaching new markets.
For instance, Amazon began as an online bookseller but has since diversified into a plethora of products and services. The company leveraged its existing e-commerce platform and customer base to offer items ranging from electronics to clothing, and later further diversified into digital services like streaming media and cloud computing. Amazon even ventured into healthcare, offering online pharmacy services.
Acquisitions or mergers with examples
Another approach to diversification involves acquiring or merging with other firms. This strategy allows firms to access new technologies, markets, or products, while maintaining their core competencies.
Take Alphabet Inc., the parent company of Google, for example. Alphabet has pursued diversification through a series of acquisitions, including Nest, a smart home device company, and Waymo, a self-driving car company. These acquisitions have expanded Alphabet's product offerings, allowing it to explore new business opportunities beyond its core internet services.
Joint ventures or collaborations with examples
A third approach to diversification involves creating joint ventures or collaborations. This strategy allows firms to share resources and knowledge with other companies while maintaining independence.
Consider Toyota and Mazda's joint venture to build a factory in the United States. This partnership allowed Toyota to utilise its existing manufacturing capabilities while expanding into new markets and industries. By sharing resources, both firms could mitigate the investment risk associated with building a new manufacturing facility.
Critical Thinking Exercises
Can you think of a company that has diversified its product offerings or markets? What strategies did it use, and what were the results?
Discuss the potential advantages and disadvantages of a firm diversifying too quickly.
How might a firm's diversification strategy differ depending on its industry or market?
Diversification is a key strategic approach that firms employ to mitigate risk and seek out new growth opportunities. It can be achieved through developing related products or services, making acquisitions or mergers, or forming joint ventures or collaborations.
Shut-down Decision
The shut-down condition refers to the point at which a firm chooses to cease production due to economic conditions. This decision typically occurs when a firm's average revenue (AR) is less than its average variable cost (AVC), meaning it can no longer cover its operational expenses.
Understanding Key Terminologies: Total Cost, Variable Cost, and Fixed Cost
Total Cost (TC) is the sum of a firm's Variable Cost (VC) and Fixed Cost (FC). VC refers to the costs that change directly with the level of output, such as raw materials and labour. FC are costs that remain constant regardless of the output level, like rental and interest expenses.
When do firms decide to shut down?
Firms typically decide to shut down production in the short term when their AR falls below AVC, implying they can't even recover the costs of production.
When Average Revenue (AR) < Average Variable Cost (AVC) with examples
Imagine a local bakery in Singapore experiencing a decline in sales due to a low-carb diet trend. Despite reducing production, its AR falls below AVC. The bakery is incurring losses as it cannot cover its variable costs, such as the cost of flour, sugar, and labour. In this case, the bakery might decide to shut down temporarily until the diet trend passes or permanently if it deems the trend long-lasting.
When Average Revenue (AR) > Average Variable Cost (AVC) with examples
On the flip side, imagine a tech start-up offering an online service. Its VC includes server costs, which vary with the number of users. As long as the subscription fee (AR) it charges users exceeds these server costs (AVC), it will continue operations, even if it's not covering all its FC, such as office rent or salaried staff, expecting that growth will eventually cover these.
Implications of the Shut-Down Decision: Discuss the long-term impacts of the shut-down on the firm and the economy.
A firm's shut-down decision can have various long-term impacts. For the firm, it may lead to a loss of market share or reputational damage. It might also affect employees, suppliers, and customers, leading to job losses, reduced sales for suppliers, and less choice for consumers.
For the economy, if many firms in an industry shut down, this could lead to increased unemployment and lower economic output. However, it could also encourage resources to shift to more profitable industries, promoting economic restructuring.
Critical Thinking Exercises
Can you think of a real-world example where a firm decided to shut down due to its AR falling below its AVC?
Discuss the potential long-term impacts of a firm's shut-down decision on various stakeholders (employees, suppliers, customers) and the overall economy.
How might government policies influence a firm's shut-down decision?
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