Focus

Whether it’s a family-run bakery wanting to open a second location or a massive fast-food company aiming for total market domination, it seems that the one thing common to all businesses is their desire to grow.

But have you ever questioned why companies are so fixated on growth?

One reason is that growing will give them cost advantages.

Certain company costs are fixed – they don’t change if the company increases its production – so the costs per unit decrease as the amount of units produced increases.

For example, a bakery has variable costs for flour, yeast and other ingredients, and they vary according to the amount of bread it produces. It also has fixed costs, like the money it spent on its oven.

Let’s say the oven cost $500 and the ingredients for one loaf of bread cost $1. If the bakery produces 100 loaves of bread, the fixed costs per loaf of bread are $500/100 = $5. So with the variable costs of $1, one loaf of bread would cost the bakery $6 if the total amount of loaves produced was 100. If the amount of loaves produced was 500, the costs for one loaf would sink to $2.

Obviously, such cost advantages give companies a competitive edge. With lower costs, their products can be sold at more attractive prices, thus more customers are likely to buy them.

Another reason that companies seek growth is that managers want to exploit the benefits that size brings (e.g., cost advantages). Naturally, managers want their company to make big profits, so it’s only logical they’d aim to increase revenues and decrease costs.

This is why managers make growth the primary objective of companies. Take, for example, Wayne Calloway, who said during his time as CEO of PepsiCo that they’re fully committed to high (15 percent) long-term growth. To this end, PepsiCo focused on growth, and Calloway and his predecessors worked towards this goal by buying a number of companies.