How Big: A Plan or Accident

1. How Big: A Planor Accident By R. Henry Migliore

2. Abstract • How big? • Four considerations • Optimum size • Five-year horizon • Update and revise

3. Optimum Size • Expected return • Market share • Competition • Resources

4. Introduction • Should firm grow and expand • Chase market or control growth • Size of the firm in the long run • Strategy of General Patton in World War II • “Big is better” • Growth doesn’t always mean expansion • Understand why firms should grow in the first place

5. X = f(a,b,c,d,e…?) • X = the dependent variable • X is the function of various combinations of independent variable a,b,c,d,e…. on to infinity

6. Why Should Firms Grow? • Understand how organizations grow as systems • Any organization is a system • May self-destruct in a process called entropy

7. First Law of Organizations • An organization at rest tends to stay at rest • Organizations don’t like change • Inactivity breeds inactivity • Complacency

8. Second Law of Organizations • Organizations at rest tend to decay • “If you snooze, you lose!” • Business world is not stable • Complacency means firms fall behind • Example: IBM and Compaq didn’t maintain technological edge • In slow-moving industries complacency can breed trouble • AT&T’s effort to transform back into a competitive organization

9. Third Law of Organizations • Organizations in trouble tend to get worse • “flailing about” • American Motors death spiral

10. How to Combat the 3 Laws • Growth • Growth in different directions such as Mother’s March of Dimes • Growth can be achieved by getting smaller • Consolidation of Northeastern Railroads • How big the firm should be for the long run?

11. Determine the firm’s share in the total market • Three categories of organizational resources – land, labor, and capital • Just having resources is not sufficient • Downfall of Dakota Software

12. Key part of managing growth is figuring out what resources are needed, in what amounts and when those elements are needed

13. Figure 1 – Market Share

14. Roles of three tangible resources: Information, Time, and Legitimacy • “Information Age” • “Network” Organizations like Nike and Dell • Innovation will leave firms behind that cannot process changes

15. Management of growth requires sufficient time • Two types of legitimacy • Market legitimacy • Social legitimacy • Examples of firms facing market and social legitimacy • Sony and Betamax • Tylenol • Intangible resources help or impede growth

16. Guidelines to help managers decide how much of each tangible resource is necessary: • Recognition importance • Realization that intangible resources have costs • Acquiring and maintaining intangible resources may outweigh it’s benefit • Learning to tolerate ambiguity

17. Figure 2 – Long Run Average Cost Curve • Every of business must respond if the firm chooses to grow • The closer the firm operates at the bottom of the Long Run Average Curve, the better opportunity to use pricing as the competitive strategy

18. Average Cost per Car

19. Resources and Growth • Each area of business needs resources • Both tangible and intangible resources are needed

20. Conclusion • Emphasis is proactive planning • Long-term size based on revenue/return, competition, market share and resources • Short-term targets control and coordinate growth • Conditions change, alter plan