How Firms and Corporates Grow in any Economy
The rules of economics and business are such that in any economy, old or new, recession or boom, the basic rules governing growth are the same. Indeed, ever since the modern day capitalist model of business emerged, growth at any cost and in any economy has been the driving force behind all the decisions that firms and the managers took. Further, the obsession with growth can be seen in the way firms did everything possible to ensure that their profits were bigger than last year's and their costs lower than the previous years.
Thus, as the discussion that follows explains, firms pursue a variety of strategies in the quest for growth and as capitalism continued to evolve, so did the growth strategy paradigm wherein finance replaced operations as the pivot and the emergence of the digital economy meant that scale and network power were the sole determinant of growth.
Organic and Inorganic Growth
For instance, firms grow organically which means that they can clock higher revenues and higher profits and profitability through increased sales and better bottom line and cost management.
On the other hand, they can also grow inorganically which means that they can acquire smaller firms, merge with bigger firms, or be subject to takeovers by even bigger and cash-rich firms.
Thus, the two terms organic and inorganic growth denote growth through expansion and higher sales and growth through consolidation and combining and merging businesses.
Technology and Human Capital
In addition, firms can always invest in technology or in human resources meaning that they can increase the output through machines or increase the output through better productivity. Let us take a moment to understand what these terms mean.
For instance, investing in an assembly line for a manufacturer would increase the output, since the human machine interface or the worker assembly line interaction means that output increases through the division of labour.
In other words, now that each worker can focus on making one part or one component and the assembly lines rotate continuously, the output increases through better productivity.
Apart from this, the manufacturer can also invest in better trained and skilled workers thus ensuring specialization and division of labour at the same time and hence, reap the double whammy benefits of technology and skilled workforce.
Financialization and the Arrival of the Bean Counters
Having said that, starting in the 1970s, a new trend emerged in the business world which favoured growth through cutting costs, trimming the workforce, and above all, a focus on managing the financial side of the equation rather than the operational or the marketing arms of the business.
In this new paradigm, firms were advised by Management Consultants to focus on growth through a combination of financial and operational measures wherein the emphasis was now on cutting costs by eliminating waste, downsizing or laying off the workers who were not that productive, and above everything, a tendency to look for the financial impact of everything that a firm did.
Thus, this phenomenon which was vastly described as financialization or the arrival of the Bean Counters (by the iconic automobile legend, Lee Iaccoca), meant that the growth strategies of the firms were dictated as much by operations and marketing and research and development as they were by the financial analysts.
Of course, let us not forget that finance was always the driving factor for capitalistic firms since the basic reason why businesses existed was business or the need to earn more profits than their competitors. However, what was different is that finance became the pivot around which all the growth- spurring strategies were to be taken. For instance, firms wishing to grow during recessions were advised to lay off workers as a means of cutting costs. Similarly, firms were advised to shift their plants and manufacturing facilities to China to benefit from outsourcing and lowest costs of doing business.
Outsourcing and Core Competencies
As the 70s gave way to the 80s, firms began to combine outsourcing with more service-oriented strategies meaning that they now manufactured their products in faraway countries and focused on excelling in customer service and higher value adding core competencies back home thus helping them cut costs due to the former and increase their profits due to the latter. Like any balance sheet shows, topline growth is made up of the revenues and hence, through superior quality products and superlative customer service, they were able to increase the top line substantially.
What added more zing was that as they saved on costs and wages, their bottom lines looked even better as increased topline and reduced costs meant that they could reap the double benefit of more revenues and lesser costs thus letting them post stellar growth figures.
The Dawn of the Digital Era and the Emergence of Scale and Network Power
As the 1990s dawned and began to progress, the emergence of the internet and the Digital Economy meant that firms in the New Economy had to devise different strategies to maintain their growth momentum. In the Digital Economy, the more users one has or the more eyeballs one has or the more number of unique visitors one has to the website or the portal makes the difference between winning and losing in the marketplace.
This is due to the advertisers and sponsors looking for scale and network power as the drivers for their strategies and hence, New Economy firms were constantly on the lookout for ways and means to increase their geographical and virtual reach. It is interesting to note that geographical expansion or the strategy of entering new markets worldwide was always the norm for successful firms. However, what is different for the New Economy firms is that one need not specifically set up shop in each country and instead, could conquer the world virtually.
Thus, as can be seen from the discussion so far, the growth mantra means that in any economy, some fundamental rules have to be followed. In addition, depending on the sector and space, country, and region, as well as time and distance, these strategies can be adapted and tailored to the specific circumstances to drive growth.
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