How Big: A PlanHow Big: A Planor Accident or Accident By R. Henry MiglioreBy R. Henry Migliore

AbstractAbstract How big?How big? Four considerationsFour considerations Optimum sizeOptimum size Five-year horizonFive-year horizon Update and reviseUpdate and revise

Optimum SizeOptimum Size Expected returnExpected return Market shareMarket share Competition Competition Resources Resources

IntroductionIntroduction Should firm grow and expandShould firm grow and expand Chase market or control growthChase market or control growth Size of the firm in the long runSize of the firm in the long run Strategy of General Patton in Strategy of General Patton in

World War IIWorld War II ““Big is better”Big is better” Growth doesn’t always mean Growth doesn’t always mean

expansionexpansion Understand why firms should Understand why firms should

grow in the first placegrow in the first place

X = f(a,b,c,d,e…?)X = f(a,b,c,d,e…?) X = the dependent variableX = the dependent variable X is the function of various X is the function of various

combinations of independent combinations of independent variable a,b,c,d,e…. on to variable a,b,c,d,e…. on to infinityinfinity

Why Should Firms Grow?Why Should Firms Grow? Understand how organizations Understand how organizations

grow as systemsgrow as systems Any organization is a systemAny organization is a system May self-destruct in a process May self-destruct in a process

called entropycalled entropy

First Law of OrganizationsFirst Law of Organizations An organization at rest tends to An organization at rest tends to

stay at reststay at rest Organizations don’t like changeOrganizations don’t like change Inactivity breeds inactivityInactivity breeds inactivity Complacency Complacency

Second Law of OrganizationsSecond Law of Organizations Organizations at rest tend to decayOrganizations at rest tend to decay

““If you snooze, you lose!”If you snooze, you lose!” Business world is not stableBusiness world is not stable Complacency means firms fall behindComplacency means firms fall behind Example: IBM and Compaq didn’t Example: IBM and Compaq didn’t

maintain technological edgemaintain technological edge In slow-moving industries complacency In slow-moving industries complacency

can breed troublecan breed trouble AT&T’s effort to transform back into a AT&T’s effort to transform back into a

competitive organizationcompetitive organization

Third Law of OrganizationsThird Law of Organizations Organizations in trouble tend to Organizations in trouble tend to

get worseget worse ““flailing about”flailing about” American Motors death spiralAmerican Motors death spiral

How to Combat the 3 LawsHow to Combat the 3 Laws GrowthGrowth Growth in different directions Growth in different directions

such as Mother’s March of such as Mother’s March of DimesDimes

Growth can be achieved by Growth can be achieved by getting smallergetting smaller

Consolidation of Northeastern Consolidation of Northeastern RailroadsRailroads

How big the firm should be for How big the firm should be for the long run?the long run?

Determine the firm’s share in Determine the firm’s share in the total marketthe total market

Three categories of Three categories of organizational resources – land, organizational resources – land, labor, and capitallabor, and capital

Just having resources is not Just having resources is not sufficientsufficient

Downfall of Dakota SoftwareDownfall of Dakota Software

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

Figure 1 – Market ShareFigure 1 – Market Share

Firm AFirm BDesign/ BuildFirm D

Roles of three tangible Roles of three tangible resources: Information, Time, resources: Information, Time, and Legitimacyand Legitimacy

““Information Age”Information Age” ““Network” Organizations like Network” Organizations like

Nike and DellNike and Dell Innovation will leave firms Innovation will leave firms

behind that cannot process behind that cannot process changeschanges

Management of growth requires Management of growth requires sufficient timesufficient time

Two types of legitimacy Two types of legitimacy Market legitimacyMarket legitimacy Social legitimacySocial legitimacy

Examples of firms facing market and Examples of firms facing market and social legitimacysocial legitimacy Sony and BetamaxSony and Betamax TylenolTylenol

Intangible resources help or impede Intangible resources help or impede growthgrowth

Guidelines to help managers Guidelines to help managers decide how much of each decide how much of each tangible resource is necessary:tangible resource is necessary:

1.1. Recognition importanceRecognition importance2.2. Realization that intangible Realization that intangible

resources have costsresources have costs3.3. Acquiring and maintaining Acquiring and maintaining

intangible resources may intangible resources may outweigh it’s benefitoutweigh it’s benefit

4.4. Learning to tolerate ambiguityLearning to tolerate ambiguity

Figure 2 – Long Run Average Cost CurveFigure 2 – Long Run Average Cost Curve

Every of business Every of business must respond if the must respond if the firm chooses to firm chooses to growgrow

The closer the firm The closer the firm operates at the operates at the bottom of the Long bottom of the Long Run Average Run Average Curve, the better Curve, the better opportunity to use opportunity to use pricing as the pricing as the competitive competitive strategystrategy

Average Cost per CarAverage Cost per Car

Resources and GrowthResources and Growth Each area of business needs Each area of business needs

resourcesresources Both tangible and intangible Both tangible and intangible

resources are neededresources are needed

ConclusionConclusion Emphasis is proactive planningEmphasis is proactive planning Long-term size based on Long-term size based on

revenue/return, competition, revenue/return, competition, market share and resourcesmarket share and resources

Short-term targets control and Short-term targets control and coordinate growthcoordinate growth

Conditions change, alter planConditions change, alter plan