Page 3: Growth
Most companies seek to grow. They want to increase profits for their shareholders. They also want to increase the overall volume of business because this can lead to significant reductions in costs. These are known as economies of scale. For example, as asos.com grows, it will require a larger warehouse and distribution operation. As it handles more sales transactions, it will find it easier to make these operations more efficient. It will also be able to get better deals from its suppliers through ordering goods and services in larger quantities.
A company can grow in several ways. It can grow by simply selling more of its products. This is known as internal or organic growth. It can also grow by taking over or merging with other businesses. This is known as external growth. It is quicker to expand a business through external growth. However, a company would need finance to fund any acquisitions.
A company that seeks to grow through acquisition can adopt two main strategies.
A company that seeks to grow through acquisition can adopt two main strategies. It can pursue a strategy of horizontal integration. This occurs when a company takes over, or merges with, a direct competitor. For example, when the supermarket chain Morrisons acquired the rival Safeway chain in 2004, it simply created a larger supermarket chain. This was a classic example of horizontal integration.
Companies can also seek to grow through a strategy of vertical integration. This is when it acquires a business at a different stage in the chain of production. It may acquire businesses that were previously its suppliers or its customers. For example, a furniture manufacturer might purchase a chain of furniture stores so that it can sell its products direct to consumers. It would previously have looked to sell its products to this retail furniture business. Acquiring or merging with customer businesses is called forward vertical integration.
The manufacturer could also choose to merge with one of its suppliers, such as a timber merchant. This would give it more control over one of its key inputs. Merging with suppliers is called backward vertical integration.
asos.com has achieved rapid growth organically. It has not grown by acquiring other businesses. Instead, it has grown by increasing its customer base, number of brands and products available to buy at any one time. Moreover, it has grown rapidly without incurring the problems that this can cause for some businesses.
Impacts of rapid growth
At first glance, rapid growth might seem to be a positive occurrence. However, it can cause problems and a firm that grows too quickly can run into difficulties. A surge in demand generates additional costs. It costs money to fulfil orders. For example, a business may require extra staff to process orders or it may need to buy in more stock or supplies. A business may have to meet these expenses before it receives the proceeds from the additional sales, and this can lead to cash flow difficulties.
Even if the company has enough capital to finance a surge in demand, it may still face problems. It may run into logistical difficulties and simply lack the short-term capacity to fulfil orders. It may not be able to make products sufficiently quickly to meet demand. This sometimes happens in the run-up to Christmas, when a manufacturer cannot produce enough of that year”s “must-have” toy or gadget. A business that fails to meet demand risks losing customers. It can take a long time to repair a damaged reputation.