>If a company is sustainably making a profit (i.e. makes more money than it needs to spend to keep running) and will continue to for the foreseeable future, why do they need to grow their revenue even higher? [...], but there's no reason that a company already making a profit can't just start paying dividends regularly without needing to ever grow any larger.
Your comment is common but it implicitly assumes a stable steady-state in the business landscape. (E.g. phrases such as "profit _will_ continue to for the foreseeable future,")
That type of thinking can work for local businesses (isolated from global competition) such as a small family restaurant. The owner opens a new restaurant with 10 tables and then maybe the business modestly grows to 15 tables a few years later and then stops growing. The owner is able to maintain a steady-state business of repeat patrons at the restaurant for decades with predictable profits. Another example of somewhat predictable profits on a larger scale are legacy oligopoly/monopoly businesses such as railroad companies.
But unlike local restaurants, many businesses have to aggressively compete in national and global markets and if it stops growing, it starts dying. Predictable profits are not guaranteed for the foreseeable future. That's why giants like Motorola and Nokia got their mobile phone business killed by a (growing) hobbyist computer company named Apple. (Motorola and Nokia are still big but not as big as they once were.) The businesses in hyper-competitive spaces like technology etc are a basically in a Red Queen race: https://en.wikipedia.org/wiki/Red_Queen_hypothesis
E.g. Why can't Blockbluster Video stop worrying about growth and just pay dividends from profits? Because an upstart like Netflix competed away Blockbuster's rental profits. Using hindsight, we can see that assuming Blockbuster could just pay "dividends regularly and for the foreseeable future" is flawed. The same broken assumption is happening to Netflix today: Why can't Netflix stop worrying about growth and just pay dividends? Because Disney+ and HBO MAX are competing away Netflix's profits.
Growing revenue and profits allows adaption to new competitive threats.
It isn't just the investors who want growing businesses. The prospective employees find them desirable too. Many talented graduates of engineering would rather get a job with a growing Apple than a declining Motorola/Nokia.
I don’t understand your argument. Netflix, Blockbuster, Motorola and Nokia all pursued growth strategies, yet the latter three (at least) ultimately failed to maintain their lead in consumer facing markets. So how does that explain the need for perpetual growth? It doesn’t seem connected to your points.
And, in the case of Nokia specifically, maybe they would still be a significant player in the handset market if they had pursued profit by investing R&D into a smaller number of good handsets, rather than their growth strategy that, if memory serves, resulted in the release of one janky new handset every week.
It’s not like what Apple did was magic; it was mostly just hard work and vision. Motorola and Nokia lost their business by being unfocussed and stupid, not because they didn’t pursue growth.
>Netflix, Blockbuster, Motorola and Nokia all pursued growth strategies, yet the latter three (at least) ultimately failed to maintain their lead in consumer facing markets. So how does that explain the need for perpetual growth?
You're laying out a cause & effect I didn't claim. I'm not saying "pursue growth guarantees success" -- which is unrealistic. A variation of your scenario is like asking, "Most novelists pursued growth of their audience but most failed so how do those failures explain why novelists want to grow their audiences?"
The # of failures is a different subject from the _motivation_ for growth.
My reply to gp was to dissect the flawed premise that profits are predictable and stable. It's that flawed assumption that makes it seem like growth is unnecessary.
In other words, even if you want to deliberately create a new company with a "no growth" policy, the outside world has its own freewill and doesn't have to cooperate with your goal. New competitors or changing consumer preferences can sabotage your "no growth" idea and erase the steady-state profits.
> A variation of your scenario is like asking, "Most novelists pursued growth of their audience but most failed so how do those failures explain why novelists want to grow their audiences?"
Not at all. You said,
> Why can't Blockbluster Video stop worrying about growth and just pay dividends from profits? Because an upstart like Netflix competed away Blockbuster's rental profits
And I simply don’t see the connection.
Blockbuster could have done any number of things to prevent their demise but pursuing a growth strategy in the face of an obvious threat to their business was not one of them. And their size - perhaps achieved from a growth strategy - did not protect them. It’s possible that their size, and the blandness that was necessary to get there - actually made them more vulnerable. (We used to call it “Lacklustre Video”)
The same for Nokia and Motorola. It’s a strategy of crap products built en masse to drive growth into every segment which makes a company vulnerable.
So I think novelists make for a poor analogy. And I think there are plenty of companies that pursue a sustainable profit strategy rather than a growth strategy.
It’s just that you don’t hear about them because they aren’t screaming for your business.
>Blockbuster [...] their size - perhaps achieved from a growth strategy - did not protect them. It’s possible that their size, and the blandness that was necessary to get there - actually made them more vulnerable.
Again, you misunderstand my point and asserting claims I didn't make. To restate:
- growth by itself does not guarantee protection from competitors.
- a large company that became large from growth does not prevent them from stumbling over their own bureaucracy and losing to more smaller more nimble competitors who haven't grown into giants yet
Yes, it's obvious pursuing growth doesn't guarantee success. Blockbuster did try growing their streaming business to compete with Netflix but still failed. Lots of stories like that.
>pursue a sustainable profit strategy rather than a growth strategy.
The issue is that you're inserting the adjective "sustainable" as a presupposed condition which conveniently proves its own point. Thus in your mind, if it's "sustainable profits", it makes pursuing growth unnecessary. You've made the same exact assumption as the gp I replied to when he stated, "If a company is sustainably making a profit ..."
- your mental model: sustainable profits are the premise; therefore there is no connection to growth strategy
- others mental model: sustained profits are NOT assumed; therefore there is a strong connection to pursing growth opportunities
In the mind of many businesspeople, profits are not assumed to be sustainable. That's the key point. (E.g. Andy Grove's famous "only the paranoid survive"). Yes, you may have booked some profits for this quarter and try to make conservative assumptions for the next few but you don't know what competitors (many unknown to you) will do. Profits can suddenly flip from seemingly sustainable to unsustainable. What seemed like a "defensible moat" in Warren Buffet's can change and new competitors can just bypass the castle.
>And I think there are plenty of companies that pursue a sustainable profit strategy rather than a growth strategy.
Flip that around: A company can pursue growth strategy as one way to pursue sustainable profit strategy. Finding adjacent/complementary products. Finding adjacent markets.
The "sustainable profit" can be the outcome of pursuing growth. Growth is one strategy to offset the shrinking of sales from previous products and/or loss of customers. Or put another way, "pursuing sustainable profits" is partially achieved by pursuing growth because the components of last quarter's profit number is declining. Netflix started the streaming business in 2007 and grew it before profits declined from the DVD-by-mail business. Streaming revenue didn't surpass DVD revenue until 2016. If Netflix didn't grow the new product (streaming) and let it cannibalize its older product (DVD), other competitors would do it anyway. Growth is adaptation to a changing world.
If one is running a local Italian restaurant or a custom woodworking shop making custom furniture, competition isn't as cutthroat so finding ways to grow is less of a concern.
However, if one is starting a software SASS company with an initial successful product, the idea of growth will be on the radar because the premise of "sustainable profits" in the software business can't be assumed. That's because the SASS company can't control others such as Microsoft or AWS or some other unknown competitor offering a similar service for less (or even bundled for free). Jeff Bezos threatened other businesses with "your (profit) margin is my opportunity".
Nokia/Motorola/etc tried to compete and research but ultimately failed. This is not a counterargument, but rather underlines the cutthroat nature of international competition.
> And, in the case of Nokia specifically, maybe they would still be a significant player in the handset market if they had pursued profit by investing R&D into a smaller number of good handsets,
They picked the wrong horse, as the saying goes. At the time it was not so obvious which thing was going to win.
It’s not the pursuit of growth that matters, but the achievement of growth.
Companies need to grow in places because they will inevitably be shrinking in some places (as customers age or churn out, as competitors come in to compete in segments, as new substitutive goods compete for wallet share).
Even if you want to stay the same size, you will have some amount of growth in your strategy (or you’ll fail).
Apple's iPhone launch included the vertical monopoly that was their magic. It addressed consumer needs like no other and everyone else was left playing catch-up.
> How is a company dying if it continues to make profit in a changing market?
Because, for example. their market is being steadily taken away by their competitors, and the company doesn't have a way to stop it.
Death takes time, and may not be apparent if you're only looking at profits. The company could be profitable, but less so every year. Or, the company could be growing its profits year by year, but by a smaller factor. In more general terms: your profit may be positive, but if any of its derivatives (first, second, N-th) is negative and you have no way to address it, then you're dying.
>> Growing revenue and profits allows adaption to new competitive threats.
> Adaption to "new competitive threats" is done by humans.
Yes, but having more resources lets those humans invent and execute such adaptations better - in the same way it's easier for individuals and households to adapt to changing life circumstances when they have savings and a stable income source, and the more of these they have, the easier it gets.
“Because, for example. their market is being steadily taken away by their competitors, and the company doesn't have a way to stop it.”
This is circular reasoning: companies must grow because because otherwise they will have their lunch eaten by other companies who are growing because they must grow.
I realize that this is an absolute basic tenet of capitalism that you’re talking about, but this response only explains where we are, not why we’re there.
> I realize that this is an absolute basic tenet of capitalism that you’re talking about, but this response only explains where we are, not why we’re there.
It does both: we are here because it's a self-sustaining negative feedback loop. How exactly we got here has been long lost to history, and the specifics don't matter anyway: what matters is, how hard would it be to break out of this state, whether it's worth doing in the first place, and, if we somehow break the cycle, what's there to stop us from immediately falling back into it.
The driving motivator is just greed, nothing else. Growth is not per se required to run a successful company for a long time, that is just plain myth. Nor is growth a guarantee to survive for a long period of time. It may increase the chances to stay afloat, but that highly depends on the circumstances. Also, as soon as you make growth the main motivator to run a company you are opening yourself up to go bust, inherently so.
> The driving motivator is just greed, nothing else.
In some cases, sure. But I feel it's also a cop-out - it's easier to assume those business men are just driven by greed, than to look at the messy interplay of motivations and incentives that are the actual driver.
Perhaps that's too cynical a take, but I think it's quite common for small companies to focus on growth because... that's How Business Is Done. Many entrepreneurs are not experts in market economy, nor do they have everything figured out - they follow their intuition, what other entrepreneurs and business press says, etc.
> Growth is not per se required to run a successful company for a long time, that is just plain myth.
Define "long time". I believe that with competition and sufficiently long time, it's not a myth, but an inevitability.
> Also, as soon as you make growth the main motivator to run a company you are opening yourself up to go bust, inherently so.
You can always go bust. If you build a non-expanding, sustainable business, it's only a matter of time before change in the market, or competitors, or just plain increase of costs of living / inflation in general will force you to either grow or give up, as some nonzero amount of growth will be required to just maintain your status quo.
Turning this around, and giving another answer to the "driving motivator" question, you can view it through perspective of observer selection: pretty much all companies pursue growth, because those that didn't are no longer operating.
You have to mentally split the "rules" defined by what I call the financial "economy" (which is rooted purely in belief), and the real economy, which is vastly more complex. Something related would be what a company focuses on: Profit/money and using what they are doing as a means to accomplish that, or having a company to actually accomplish a goal and that goal, the idea comes first. Latter opens up the possibility, given that the financial means are there, to even make losses now and then, because you want to invest (more heavily) in change for one reason or another.
Thing is, this "growth before everything else" mantra comes from the financial "economy". If you apply this to real economy, you are in for a surprise, because there are limits everywhere. Such limits don't really exist in the financial "economy". But in return it also means you can operate in the real economy for long periods without growth.
Why "economy"? Economy exists because humans split their time to do all the things to fulfill their needs, you know, survival (food, shelter, ...) etc. Without that you wouldn't have any economy (as in trading goods) to write home about. Note that I wrote "humans split their time"; if you automate all that the need to split their time is rendered pointless, which also drives this economy into the ground, i.e. it is not needed to that extent anymore.
That is different with the financial "economy". The main goal there is money, and the value of that is rooted in belief. Which renders everything else on top of that also belief/speculation. But because of that it can also grow endlessly. The problem with it: It doesn't put food on the table (nor does it provide a new table should it need replacement). This also means all the rules in that space are only valid in there, and may very well not work at all outside of it.
> You have to mentally split the "rules" defined by what I call the financial "economy" (which is rooted purely in belief), and the real economy, which is vastly more complex.
I used to do that in the past, but the more I thought, the harder it got - today, what you call the "financial 'economy'" sounds to me like a natural outgrowth of increasing specialization in the "real economy".
> Something related would be what a company focuses on: Profit/money and using what they are doing as a means to accomplish that, or having a company to actually accomplish a goal and that goal, the idea comes first.
The former are what I used to call "toilet paper companies", as in "this company is doing computers or drugs now, but if it was cheaper to retool, it would be selling toilet paper or whatever else yields better profits this moment". The latter... mostly don't exist, I think. SpaceX is about the only example I can think of.
As much as it pains me, I came to understand that most companies exist primarily to make money for their owners, secondarily to pay salaries to employees, and thirdly (at best) to do something useful - and it can hardly be the other way. Not just because companies focusing on profit beat those focusing on the product/services - but also because that's what the owners and employees want. And it's not driven by greed.
I realized that when I stopped looking at the big corporations and startup unicorns, and instead looked at the local businesses I interact with daily: bakeries, convenience stores, pharmacies, barber shops, dry cleaning, ISPs, etc. None of them are in it for the idea, for the product. All of them are in it for the profit - because that profit is what gets them and their families some semblance of security and stability in this world.
Yes, it's not ideal, it's big part of the reason why every good and service seems to get worse with time, particularly as specific niches get hit by "financialization" trends. But it won't go away as long as everyone has bills to pay, food costs money, healthcare isn't simultaneously free and easily available, etc.
> Latter opens up the possibility, given that the financial means are there, to even make losses now and then, because you want to invest (more heavily) in change for one reason or another.
The "financial 'economy'" has this covered, too. In fact, they have terms and math and virtual products that cover it. That's the reason it exists: because as the "real 'economy'" gets larger, more complex, and more thought is put into it, people want to do more complicated things, and - perhaps most importantly - everyone wants to reduce their personal risks.
Want to build a factory making much-needed goods? You need more money than everyone in your village has put together. Are you a farmer who almost went into deep poverty last year, after most of your crops fell to a disease? You want some kind of safety net. Financial sector provides all that: loans, options, futures, etc.
> The main goal there is money, and the value of that is rooted in belief. Which renders everything else on top of that also belief/speculation. But because of that it can also grow endlessly. The problem with it: It doesn't put food on the table (nor does it provide a new table should it need replacement). This also means all the rules in that space are only valid in there, and may very well not work at all outside of it.
This stars with money itself - as you say, its value is rooted in belief. This by itself is pretty natural to humans - things like "company", "tribe", "government", "society", "money" - but also "family" - are all rooted in belief. Establishing such intersubjective beliefs is arguably humanity's superpower.
As for the rules in the financial space, yes, they're all abstract and virtual. That's the point. Much like money itself is the answer to barter not scaling to support growing population and increasing specialization, a lot of those financial industry inventions are ways to optimize trade by resolving some complexities in this abstract, virtual concept space. Your grain can be traded back and forth, changing its owners 20 times in a quarter, while never physically leaving your silo. Would it be better if it had to be trucked back and forth, just for it to look like "real 'economy'"?
All this is to say: yes, there's plenty of problems and pathology in the financial space, and it does a lot of bad things. But it also does a lot of good things, and it exists not just because of greed, but also because there's real need for it, and without it, the "real 'economy'" wouldn't support its own weight anymore.
There are several counterexamples to this idea, including companies 300+ years old, where a company does just fine without "competitive" expansion of its business, and where no competitors show up to eat their lunch.
The poster child for this model, I think, is Zildjian: the biggest global maker of cymbals. They have been doing it for hundreds of years, never expanded outside of cymbals, and continue to do well.
Companies run on this expansionist idea must keep expanding to avoid death, however, because they operate at unsustainable levels of expenses otherwise, and they hire managers on the premise of making bold moves to get promotions.
This "grow or die" mentality is entirely a cultural phenomenon of modern western companies, and they can absolutely opt out of it.
>There are several counterexamples to this idea, [...] where no competitors show up to eat their lunch.
Yes, I understand that and already provided several counterexamples. (Local restaurants and legacy railroads.)
>The poster child for this model, I think, is Zildjian: the biggest global maker of cymbals. They have been doing it for hundreds of years, never expanded outside of cymbals,
I actually own a bunch of Zildjian cymbals and saw several documentaries about the brothers' split into Zildjian and Sabian. In any case, Zildjian did expand into other products outside of cymbals. From wikipedia:
- In 2010, Zildjian acquired the Vic Firth Company and in 2018 acquired the Mike Balter Mallet company expanding the company's product offerings to include a full range of drumsticks and percussion mallets.
Zildjian also sells electronics like earphones[1]. The daughters that inherited Zildjian wants the company to grow. The growth has not been as fast as a tech startup but they do want it to grow.
But even without expanding product categories, the company can also expand markets to sell to. That was one of the motivations of Zildjian expanding their manufacturing into Canada as that export location allowed them to sell cheaper cymbals to Europe.
>This "grow or die" mentality is entirely a cultural phenomenon of modern western companies, and they can absolutely opt out of it.
Not just Western companies. Also East Asia companies in Japan like Canon, Sony, Toyota wanted growth. Korea companies like Samsung and LG. And Africa companies in Ethiopia and Nigeria want to grow too.
But I do agree with the point you were trying to make: if you happen to pick a business domain that doesn't have cutthroat competition, there's less pressure to grow to avoid dying.
RIM Blackberry didn't get into the drums cymbals business (slower moving competition of hammering round sheets of metal) but the phones business (fast iteration competition of electronics). They grew until the 2007 Apple iPhone made their keyboard phones and 2-way pagers mostly obsolete.
If you're an entrepreneur who believes the "growth treadmill" is insane and stupid, you need to pick the type of business that aligns with that philosophy!
I think you have a valid point about not being complacent but all of your examples highlight how hard it is to pick a growth strategy which actually works long-term. Those companies all did what Wall Street analysts wanted but chasing that growth lead to their downfall: Nokia and Motorola cut things like R&D, which is expensive and uncertain, and focused on marketing & expansion. They cut deals with the cell carriers which produced big numbers but turned creative control of their product over to the phone companies. Remember all of the calls for Apple to give Verizon what they wanted to gain access to their customers?
Blockbuster is a different industry but again they were focused on financial growth at the expense of the company. Trying to hit those targets meant they opened marginal locations and it also meant things like reducing “costs” like staffing (but not strategic investments like C-level compensation, of course) which had given them something Netflix couldn’t easily match.
Your comment is common but it implicitly assumes a stable steady-state in the business landscape. (E.g. phrases such as "profit _will_ continue to for the foreseeable future,")
That type of thinking can work for local businesses (isolated from global competition) such as a small family restaurant. The owner opens a new restaurant with 10 tables and then maybe the business modestly grows to 15 tables a few years later and then stops growing. The owner is able to maintain a steady-state business of repeat patrons at the restaurant for decades with predictable profits. Another example of somewhat predictable profits on a larger scale are legacy oligopoly/monopoly businesses such as railroad companies.
But unlike local restaurants, many businesses have to aggressively compete in national and global markets and if it stops growing, it starts dying. Predictable profits are not guaranteed for the foreseeable future. That's why giants like Motorola and Nokia got their mobile phone business killed by a (growing) hobbyist computer company named Apple. (Motorola and Nokia are still big but not as big as they once were.) The businesses in hyper-competitive spaces like technology etc are a basically in a Red Queen race: https://en.wikipedia.org/wiki/Red_Queen_hypothesis
E.g. Why can't Blockbluster Video stop worrying about growth and just pay dividends from profits? Because an upstart like Netflix competed away Blockbuster's rental profits. Using hindsight, we can see that assuming Blockbuster could just pay "dividends regularly and for the foreseeable future" is flawed. The same broken assumption is happening to Netflix today: Why can't Netflix stop worrying about growth and just pay dividends? Because Disney+ and HBO MAX are competing away Netflix's profits.
Growing revenue and profits allows adaption to new competitive threats.
It isn't just the investors who want growing businesses. The prospective employees find them desirable too. Many talented graduates of engineering would rather get a job with a growing Apple than a declining Motorola/Nokia.