Question

Business expansion is not always a good thing and it is especially true when a company invests money and other resources to grow, this will tie up capital available for other business transactions. Good businesses will run a thorough cost benefit analysis before undertaking major investments to make sure they will have cashflow to operate as well as take advantage of other opportunities. This risk is further made bigger if the investment results in a loss. Companies can suffer from spreading themselves thin. The common misconception in business is that size is always an indicator of success which is not true. Most leaders rank each other on the size of their companies. The larger the companies, is usually the slower they become less agile. This creates a problem if they need to shift in accordance to the industry changes.

When a company grows too quickly, it usually suffers from an overcrowding effect. The mistake is to think that it can achieve economies of scale in perpetuity. For example, if a company can reduce the per unit cost of its product when it adds a machine to its warehouse, it might be tempted to increase the machines to reduce costs. However, if it takes one person to operate a machine, and 20 machines are added to the warehouse, there is a good chance that these 20 more employees will get in each other's way reducing the output per hour from the previous level. This increases costs and decreases output.

Please respond in over 100 words

Answer 1