Page 2: Growth
Not all organisations benefit from being big, but many certainly do. All organisations will aim for the size of business that suits them best.
Every organisation needs to decide just how big it needs to be to best meet the needs and expectations of its major stakeholders. It knows that, as organisations become larger, they often benefit from economies of scale that reduce unit costs and increase profitability.
For each business, there will be a level of operation at which unit costs of production are at their lowest possible level. Reaching this point provides the organisation with the opportunity to maximise its profitability. Being profitable is the surest way of managing to stay in business. Growing bigger may offer the best long term hope of profitability.
Economies of scale include internal economies and external economies. Internal economies are gains made within the organisation as a result of becoming bigger. These include benefiting from large discounts through buying in bulk or being able to afford to use techniques and equipment unavailable to smaller firms. External economies are gains that come from outside the organisation. These may include easy access to a skilled labour force, the bonus of a high reputation for the industry in that area, specialist trade associations and being close to specialist suppliers.
Travis Perkins' business strategy is built around growth. Having merged horizontally in 1988 the company now has a 16% market share of building materials distribution. It intends to increase this to 20% through further acquisitions. The Group's strong record of growth has created economies of scale.
These economies have provided Travis Perkins with an operating margin of 12%; this figure is unusually high for this industry. The economies have contributed to the company's increased profitability. This has produced a strong cash flow. The healthy cash flow is reassuring to all stakeholders, investors, staff and the financial institutions from whom Travis Perkins is looking to borrow funds to finance its growth.
As part of its growth strategy, Travis Perkins aims to increase its number of branches from 740 to over 1,200 during the next six years. It aims to do this by buying up small independent merchants in towns of at least 8,000 people that are not less than 5 miles from another Travis Perkins branch. It then intends to re-brand these businesses and integrate them into its company network.