Student question: business size

QUESTION:

Hello Luke

When they ask “what aims can a manager have in the size of the business?” should I know all the reasons or not? If so what are the most important reasons?  

Thank you

ANSWER:

Thanks for the question!
Please let me know where you found the question about the aims a manager might have in the size of a business so that I can have a bit more background/context.
Overall, the aims can be diverse, but classified into one of two broad “categories”, i.e. the management will seek growth or prefer to remain small/current size.
Four main reasons are provided in favour of business growth. Let’s briefly take a look at each:
1. Possibility of higher profits for the owners.
This is probably the most obvious reason in favour of growth because it is rooted in what just about all entrepreneurs were motivated by when they started their businesses: profit. The profit motive drives the creation and growth of businesses.
If, for instance, a cafe opens a new branch in an up-and-coming, growing area, it has done so because it is motivated by the potential to earn greater profit. The owner(s) of the cafes could earn more revenue from the sales of the new cafe and, as a result, more profit. To put it simply: they might become wealthier.
NB: This reason (1) might not be an applicable answer to your question. Can you see why? It is because the question asks about “managers”, not owners. Remember, managers are paid salaries by the owners of the business.
2. More status and prestige for the owners and managers
This can be interpreted and applied in a few ways. For example, the owners might believe that they have a greater status in their community due to the growth of their business. Using the cafe example referred to earlier, the growing presence and visibility of the business through the opening of new branches could offer a sense of personal achievement for the owners. After all, it should be remembered that they took a risk (personal, financial – also think of opportunity cost here) in opening the intial cafe in the first place.
For managers – and even other employees – the above can also apply to a certain extent. Not only might there be a sense of pride in the growing status of the cafes, but managers will most likely have greater responsibilities (think of an area manager who would now have more cafes to oversee in his/her region). This growth in the business and resulting tasks for managers might well lead to higher salaries.
As you can tell, this reason (2) applies directly to your question.
3. Lower average costs
I will not explain this now as it is too much information to cover right away at the start of your studies. However, please briefly read through the section in your textbook on Economies of scale. You will have an even better idea of how this applies once you have worked through Business Studies.
4. Greater market share
The growth of a business can, potentially, lead to a growth in market share. Continuing with the cafe example: the new branch is an opportunity for more sales to be made under the name of the business. The growth in sales is likely to lead to a growth in market share. In other words, the proportion of sales by the cafe grows in terms of the broader market which includes all cafes.
If the growth in market share is especially significant, it can allow the business to make certain claims – for example, “South Africa’s favourite coffee shop”. This can be seen as a very useful benefit in advertising.
A business that controls much of the market for a product is, moreover, one that suppliers should be keen to assist. If a supplier understands the popularity of the growing business, it is probably going to want to ensure that the business stocks its products and would be willing to offer certain incentives, such as discounts, branding etc.
Also, “market share” – like economies of scale – is a concept that you will become more familiar with and comfortable using as your progress through Business Studies.
To sum up: the above are 4 reasons in favour of growth. Please note, though, that growth is not necessarily the aim of owners or mangers. Some businesses prefer to remain small or their current size. The reasons for this are also found in your textbook (they can also be understood as reasons against growth). Your task now is to read and understand these to the point that you are comfortable in explaining them – if you have any questions after doing so or need some confirmation, please feel free to reply!
Business-growth-and-success