An assignment submitted in fulfilment and requirement for the module of

STRATEGIC MARKETING & ADVERTISING

Prepared By: Jolene Chen

BAMA Year 3 Group 3
For: Jeremy Woods
Assignment 1: Essay – Topic 2
Date: 24-November-2006
Word Count: 1801 Words
 Is Growth Orientation Necessarily Good?

While there are many obvious benefits to a growth oriented strategy, there are also
some less visible drawbacks to such an approach of doing business. When deciding on
a company’s future strategy one must be careful to be fully informed about the possible
positive and negative impacts a certain approach can have, or in other words,
understanding both sides of the equation is crucial to a successful performance in
today’s markets. This essay will lay out some of the most common advantages of doing
business using a growth oriented strategy, and balance these with some of the less
obvious disadvantages of such an approach.

One of the major benefits of a growing company, and one of the main reasons why a
business typically strives to grow, is that by increasing in size it creates economies of
scale. This means the business attains an increase in efficiency of production as the
total number of goods produced increases. Typically, a company that achieves
economies of scale lowers its average cost per unit through increased production since
fixed costs are shared over an increased number of goods (Financial Dictionary n.d.). As
a result of this a growth oriented strategy can produce a continuous year-over-year
reduction in average costs and a constant increase in revenues and profits, hence
creating a substantial increase in value for its shareholders and employees. A fast
growing business such as this is able to attract a lot of external investment capital, which
makes financing of future research, developments and expansions that much easier.

A growth strategy that might be employed by a fast growing entity typically aims at
annually increasing that company’s existing market share by a fixed amount each year.
In an attempt to quickly grasp a large share of a certain market, a fast growing company
might execute various take-overs and/or mergers. In this way a business can grow very
large within a short period of time, thereby evading the usually long-winded and tedious
route of organic growth. The desire of businesses to grow in this way as quickly as
possible stems from the general consensus that a large business with a significant
chunk of market share is regarded as a safer, stronger and more stable business, as can
be illustrated by using “Porter’s Five Forces” Model. (Wikipedia, Porters Five Forces
Analysis 2006) In this model a company’s strategic position is analysed by looking at the
five external forces that act upon it. The five forces are Customers, Suppliers, New

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Entrants, Substitute Products and Competition. In the real world these five forces are
constantly acting upon a company, essentially determining the way the business can
function effectively within its environment. By looking at this particular framework one
can analyse the relationship between the business and any of the five forces and hence
determine the strength of the business’ strategic position. For example, when looking at
the suppliers force, one finds that a business of significant size is generally in a better
position to negotiate prices for its own purposes, than say, a small start-up company. Or
when analysing the new entrants force, it becomes evident that a large company in a
dominant position in the market can exploit its ability to produce at low average costs
and put pressure on prices in order to make it more costly and difficult for small
competitors to enter the market. Generally, when looking at all five forces as a whole
business environment one can observe that “Porter’s Five Forces” suggest that large
businesses have a significant competitive advantage and have a lot of power over their
external business environment. This makes the status of being the dominant entity in
one’s market a strong desirable for many businesses.

An additional advantage of a growth oriented strategy is that by increasing in size, a

business automatically creates new jobs and opportunities to keep up with its expansion.
Therefore one could argue that a business focused on growth contributes towards
improving the job market, and if successful over a long period of time, can have a
significant positive impact on the overall economy. Wal-Mart is a good example of this:
As Wal-Mart has grown steadily over the past few decades it has opened many new
stores in various countries, especially in the United States. Its continuous growth has led
Wal-Mart to being the employer of approximately 1.2 million people in the United States
and hiring upwards of 50,000 Americans per year. (Bernhardt et al. 2005) By estimating
the population of the United States at 300,000,000 people, this effectively creates a
situation in which approximately every 250th American is an employee of Wal-Mart.
Taking into account that not every one of those 300,000,000 Americans is of working
age, these numbers mean that if Wal-Mart were to close its doors tomorrow, and release
all its workers in one day, the unemployment rate in the United States would rise by
more than half a percent in one day. Therefore, it is evident that the continuous growth
of Wal-Mart over the past 20 years has positively supported both the American economy
and its labour market to a significant extent which cannot be ignored.

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While the above benefits to a growth oriented strategy are fairly obvious, there are also
some cases in which such a strategy can lead to substantial disadvantages for a
business. When considering the implementation of a growth oriented strategy, these
must be taken into account.

In John Abrams’s book entitled ‘The Company We Keep: Reinventing Small Business for
People, Community, and Place’, he mentions Charles Handy’s, an Irish author
specialising in organisational behaviour and management belief that growth should not
always mean “more of the same”, but “leaner or deeper”, supporting a focus on
improvement rather than expansion. Bigness, he maintains, can lead to reduced focus,
excessive complexity, and less effective control. (Abrams 2005) He goes on to say:
"Once big enough [businesses] can grow better, not bigger. It is a formula which
Germany's small family firms have tried and tested to great advantage, content to corner
and dominate one small niche market, through constant improvement and innovation.
Rich enough and big enough, they concentrate on the pursuit of excellence, for its own
sake as much as anything." (Abrams 2005).

Similarly, a company that grows very large very quickly experiences a slowdown in
response times from their consumers. This slowdown in response times creates an
increasing separation between decision makers and customers, which can very quickly
lead to poor decision making. To illustrate this, one might imagine a single person who
makes and sells donuts on the street. One day this person decides to try a new flavour,
for example jalapeño flavouring. They would likely find out very quickly whether their
decision was good or not, based on the reaction of customers, whom they have constant
contact with. In contrast to this, a manager at a large company that produces donuts on
a large scale may not know for many months if such a decision worked out or not. By
that time, they may very well have moved on to another division or company, and thus
see no consequences from their decision. This lack of consequences can lead to poor
decision making and a general deterioration of operational performance. (Wikipedia,
Diseconomies of Scale 2006)

Additionally, a purely growth oriented company may focus too much on achieving its
financial goals, and as a result of this neglect its customers, employees and/or product
quality. For example, a company could be pressured by its stakeholders to achieve a

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specific annual rate of growth and expand quickly into new markets without considering
the needs of their current customer base, the desires of their current employees or the
need of improvement of their cost structure. In an article by Kelly K. Spors (2005), staff
reporter of the Wall Street Journal, it reads that “As many businesses discover too late,
rapid expansion doesn't always mean success when building a franchise. When growing
quickly trumps other goals, such as grooming competent leaders, controlling costs,
picking prime locations or building a customer base, the company's operations can turn
sloppy.”

Also, overly ambitious growth targets might lead a company to mismanage its growth
due to severe external and internal pressures, overstretching and operational
inefficiencies. Good examples of businesses who have mismanaged overly ambitious
growth targets in the past are the dot-com companies that went bankrupt around the turn
of the century. The “growth over profits" mentality and the aura of "new economy"
invincibility led some companies to engage in lavish internal spending, such as elaborate
business facilities and luxury vacations for employees. According to dot-com theory, an
internet company's survival depended on expanding its customer base as rapidly as
possible, even if it produced large annual losses. The phrase "Get large or get lost" was
the wisdom of the day. At the height of the boom, it was possible for a promising dot-
com to make an initial public offering of its stock and raise a substantial amount of
money even though it had never made a profit - or in some cases - even any revenues
(Wikipedia, Dot-com Bubble 2006). Jim Costello, senior economist at Boston-based
Torto Wheaton Research states that “Moderate […] gains are preferable to the kind of
overly ambitious growth of the dot-com boom.”

Another disadvantage of a growth oriented strategy is the fact that substantial job losses
can occur if a company is excessively focused on profit growth targets and begins to
prioritise these targets over the well-being of its employees. Labour unions and the
general public see this behaviour as morally and ethically incorrect, yet many large
corporations nowadays cut jobs in the thousands while at the same time reporting record
profits. An example of such behaviour is Adobe Systems Inc. In December of 2005,
Adobe declared record fourth quarter revenues and profits, yet announced that they still
intend to cut around six hundred-and-fifty or seven-hundred jobs in order to achieve the
2006 financial targets and to help the company evolve in certain areas. Decisions like

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these are often made when a manager chooses corporate growth targets over job
security of his employees, creating an ethical issue that is often accompanied with an
outcry from the press, general public and/or unions.

In conclusion, we see that growth orientation is not necessarily a good thing. There are
indeed many benefits to a growth oriented strategy, including economies of scale, profit
generation, increased shareholder value, a stronger strategic position, and the creation
of new jobs that support an overall economy. But we cannot simply ignore the various
drawbacks of solely focusing on a growth oriented approach of doing business. These
drawbacks include the possibility of reduced focus, increased complexity and less
effective control, operational inefficiencies, the neglect of customers, employees and/or
quality, and substantial job losses due to financial target pressures.

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Reference List

Financial Dictionary n.d., The Free Dictionary: Economies of Scale. Retrieved November 6, 2006,
from http://financial-dictionary.thefreedictionary.com/Economies+of+Scale

Abrams, J 2005, The Company We Keep: Reinventing Small Business for People, Community,
and Place, Chelsea Green Publishing Company, Vermont.

Bernhardt, A, Chadda, A, McGrath, S 2005, ‘Economic Policy Brief: What do we know about Wal-
Mart. Retrieved November 6, 2006, from
http://www.brennancenter.org/dynamic/subpages/download_file_8414.pdf

Spors, K 2005, ‘For Franchises, Growing Rapidly Isn’t Always Best’, The Wall Street Journal
Online. Retrieved November 7, 2006, from
http://startup.wsj.com/franchising/franchising/20050930-spors.html

Wikipedia 2006, ‘Dot-com Bubble’, Wikipedia: The Free Encyclopedia. Retrieved November 7,
2006, from http://en.wikipedia.org/wiki/Dot-com_bubble#Free_spending

Wikipedia 2006, Diseconomies of Scale, Wikipedia: The Free Encyclopedia. Retrieved November
21, 2006, from http://en.wikipedia.org/wiki/Diseconomies_of_scale

Wikipedia 2006, Porter 5 forces analysis, Wikipedia: The Free Encyclopedia: Retrieved
November 10, 2006, from http://en.wikipedia.org/wiki/Porter%27s_five_forces

Hudgins, M 2006, ‘Downsizing increased in 2005’, National Real Estate Investor. Retrieved
November 7, 2006, from http://nreionline.com/news/jobs_corporate_downsizing/

Veselin, A 2005, ‘Adobe’s New Strategy’, Softpedia News: Business. Retrieved November 7,
2006, from http://news.softpedia.com/news/Adobe-s-New-Strategy-15004.shtml