‘Demand’

Abstract

We have seen that in order to sustain growth a firm must either create new products, enter existing markets which it has previously ignored, or merge. The first two methods are called ‘growth by diversification’, the second ‘growth by merger’. These, as we have seen, are related, ‘growth by merger’ often representing no more than a means of overcoming dynamic organisational 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 utilisation. 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 which feature in the conditions for maximum (sustainable) growth. How do the policy variables affect the growth rate of the quantum of demand for the firm’s products; how do they react on such factors as rate of return, which govern the growth rate of the firm’s supply of capital?

Note: the reader is reminded that the notation in this chapter stands apart from the rest. It is summarised on pp. 202–3 below.