‘Demand’

We have seen that, in order to sustain growth, a firm must either create new products, enter existing markets it has previously ignored, or merge. The first two methods are called ‘growth by diversification’, and the third, ‘growth by merger’. These, as we have seen, are related, ‘growth by merger’ often representing no more than a means of overcoming dynamic organizational restraints on growth by diversification. In this chapter we are concerned with the dynamics of growth by diversification. We are concerned, that is, with the relationship between the rate of growth of the productive capacity required if there is to be no trend (in either direction) in the level of capacity utilization. In essence, the problem is one of policy; we are asking how certain variables within the control of the firm, such as price policy, diversification policy, research and development expenditure, and selling expenditure, react on the endogenous variables that feature in the conditions for sustainable growth. How do the policy variables affect the growth rate of the quantum of demand for the firm’ s products; and how do they react on such factors as rate of return, which govern the growth rate of the firm’s supply of capital?