A common business objective of many organizations is growth. McDonald's, for example, is the world's largest fast-food restaurant as measured by sales revenue and strives to grow in order to maintain or increase its market share, sales revenues, profits, and shareholder value.

 Case Study 2 - McDonald's

McDonald’s is the world’s largest fast food chain, as measured by sales revenue. The American company was founded in 1940 by brothers Richard and Maurice McDonald, in California, USA.

According to its website, the US company serves more than 69 million customers each day (the equivalent of nearly 48,000 customers per minute) in over 100 countries and employs more than 210,000 workers (1.7 million workers if franchised restaurants are included). This makes McDonald's the world's second largest private sector employer (after Walmart's 2.3 million employees).

Reasons for the pursuit of business growth include:

• Economies of scale - Large organizations benefit from economies of scale (cost-saving benefits of operating on a larger scale). This reduces their unit costs of production, so the large firm is in a position to charge lower prices to their customers, yet be able to offer more choice for their customers. This makes larger firms more competitive and attractive to customers. For example, the Volkswagen group gains economies of scales in the production of components for the various divisions it owns brands, including Audi, Bentley, Bugatti, Lamborghini, and Porsche.

• Sources of finance - Large organizations have greater access to a wider range of sources of finance, such as share issues and the ability to borrow funds at a cheaper rate due to their reputation and size. Having more sources of finance can enable these organizations to become even larger as they pursue their growth objectives.

• Recruitment and retention of employees - Larger organizations tend to be able to pay their workers higher wages and salaries. This will help to attract and retain better skilled workers, thereby improving the larger firm’s productivity and profitability in the long-term.

Large firms can remunerate their workers better

• Brand awareness and brand loyalty - Customers are generally attracted to well-known brands of larger companies, due to brand recognition and brand loyalty. The power of branding suggests that customers trust well-established brand names and are prepared to pay a premium price for them. In many cases, larger firms have the resources to provide better customer services, such as after-sales care.

• Spreading risks - Large organizations tend to be less of a risk for the owners, investors and creditors (such as banks and suppliers). By contrast, smaller firms are far more likely to fail, so are a higher risk for owners, investors and creditors. For example, small organizations are more at risk of failing during a recession.

 Watch this short video clip to see the changes in the top 10 largest companies between 1996 and 2020, as measured by sales revenue. Back the, six Japanese multinational companies were in the top 10, whilst only one of these companies remained in the list in 2020...

 Watch this video clip about how Starbucks managed to succeed in China, where tea drinking was the cultural norms for thousands of years. Consider the strategies used by Starbucks to expand in China (opening a new store every 9 hours), making it the second largest market for the coffee company after the USA.

There are reasons for businesses to choose to stay small organizations, i.e., benefits of not growing. Not all organizations want to grow or evolve. Many organizations prefer to remain small as the owners do not want the additional costs, challenges, and pressures associated with growing their business or operating on a larger scale. Many businesses actually prefer to serve a smaller number of familiar or loyal customers. For example, some law firms or accounting firms specialise in serving the needs of local businesses.

Many small businesses can thrive alongside larger rivals

Despite the benefits of  economies of scale for larger firms, there are many advantages of operating on a smaller scale too. Merits of small organizations include the following interrelated reasons:

• Privacy - The owners of small businesses can enjoy greater privacy as their financial accounts do not have to be made public. By contrast, the rivals of a large company have access to their balance sheet and profit and loss account.

• Ownership and control - Many small business owners may not want to expand so that they can retain ownership and control of their own business. Becoming a much larger organization often involves selling shares on a stock exchange, and whilst this can raise a significant amount of finance, it dilutes ownership and control of the company. There might even be a threat of a hostile takeover bid if the company is publicly listed on the stock exchange.

• Autonomy - The owners of small organizations enjoy autonomy (independence in decision making). They have complete control and ownership of the business, so can make their own, independent decisions. Unlike large companies, the owners of small organization do not face pressures from a board of directors and shareholders.

• Individuality - Small businesses tend to be able to provide a more personalised service for their customers. Hence, they generally have a closer relationship with their clients, which can provide smaller firms with competitive advantages over their larger rivals.

• Maintenance - Small organizations are easier and cheaper to set up and maintain. They also tend to have lower running costs. Furthermore, the business owner may not want the risks, responsibilities, and burdens that come with managing a larger organization. This also includes wanting to avoid the increased workload associated with business growth.

• Specialization - Smaller firms can specialise in providing goods and services that larger organization find unprofitable to supply. Small firms that specialise in niche markets, such as sporting equipment for paddle boarding or fencing, can be highly profitable and earn extremely high profit margins. Operating in niche markets also means the firm benefits from very limited competition.

Fencing equipment is sold in a niche market

Developments in Internet technologies has enabled small businesses to access resources and markets previously only available for large organizations. For example, the Internet allows businesses of all sizes to reach customers across the globe without the expenses of having a physical outlet or retail store.