10 ms·

I've always found it pretty weird how common the idea is that companies _need_ to keep growing indefinitely, regardless of the size they've reach. If a company

by saghm 4y ago

I've always found it pretty weird how common the idea is that companies _need_ to keep growing indefinitely, regardless of the size they've reach. 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? It seems like the expectation is they need to do this so that the stock price can go up, but if people only buy the stock to sell it when it's worth more due to being larger, what's the actual connection between the stock price and the amount of money the company makes other than everyone just agreeing to pretend there's one? Ostensibly the reason stock is worth anything at all is that it could eventually yield dividends, 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.

evo 4y ago
I suspect in reality the increasing compensation of the executive suite in stock, while intended to alleviate the principal agent problem, means that it's substantially more remunerative for leadership to try to goose their stock price by whatever means possible within their tenure than to steer the ship in a growth-agnostic fashion. Doubly so with modern big tech companies where RSU growth can fuel a big chunk of your salary costs for your tech department when your company is on the rise, but scare everyone off when the reverse is true.
magic_hamster 4y ago
Some people will say that companies need to grow to increase the bottom line, but my experience is that growth is actually a byproduct that indicates the health of your business rather than the actual goal. Growth is a result of competition, when new markets emerge, when competitors come up with better products, there is an opportunity to increase your market share and take in more revenue. Assuming you don't leave money on the table, it's understandable that you will compete and if you're doing well you will grow.
Radim 4y ago
The standard response is evolutionary: If you leave profit (growth, resources) on the table, someone else will pick them up and beat you with it. The supposed analogy is biological. You may choose to check out of the always-do-more-with-less rat race, or even out of existence completely. But that choice will help populate the world with "not your successors". Similar with companies: your "sustainably making profit" premise is incompatible with "willingly foregoes growth / change" – at least in the long term, due to competition.
- wizzwizz4 4y ago
  > at least in the long term, due to competition. Assuming there's always some proportion of people who choose to do otherwise. Humans are powerful enough now that, if we wanted to, we could stop this. It'd require collaboratively punishing defectors, of course – because some humans are greedy – but until (and if) we meet aliens, we don't need to live like this, provided we can learn to work together. It's fortunate, then, that motivated collaboration can produce better results than competition. The collaborators might be able to win the Last Competition.
mijamo 4y ago
Yo be clear not all companies are expected to grow. But growth is the main characteristic of a certain kind of companies, and the reason why their stock can have very high PE ratio, because shareholders expect to get return in the stock going up instead of dividends. You have plenty of vale companies that pay dividends and do not grow very much, sustaining a healthy business on their market. But the transition between growth and value is a bit tough. You need to stop hiring like crazy, intern promotions suddenly go more stale as a result, stock compensation is hurt a lot so your employees might not be super happy with it, the story is also appealing to a completely different kind of people, and your stock goes down a lot at first, all your financing suddenly gets a lot more expensive etc. It is possible that we are witnessing that transition in some of the tech companies right now, as the symptoms match, but it really is too early to tell.
jasode 4y ago
>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 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.
- pixelfarmer 4y ago
  > But unlike local restaurants, many businesses have to aggressively compete in national and global markets and if it stops growing, it starts dying. How is a company dying if it continues to make profit in a changing market? > Growing revenue and profits allows adaption to new competitive threats. Adaption to "new competitive threats" is done by humans.
OtomotO 4y ago
It's a dogma, the dogma of neocapitalism... Endless growth. Sort of like a malign tumor, which in the end kills the host and itself. It's just propaganda. Nothing grows endlessly, apart maybe from human greed and idiocy. Also some growth is "mandatory" because of inflation. If you don't grow your profits but there is inflation, your profits in reality shrink.
- deleted 4y ago
  [deleted]
ekianjo 4y ago
growth means constant investment. The day you stop growing, your investment is capped or much more constrained, and it's only a matter of time until your company is over.
kwhitefoot 4y ago
It seems to me that they need to keep growing because they are in reality pyramid schemes with the people (and investment institutions) at the top wanting ever larger profits. The company gets bigger but the number of people at the apex of the pyramid does not.
roenxi 4y ago
Due to inflation, basically. There is an effect like inflation which as far as I know is unnamed, where the credit growth & money creation in the economy hits asset prices and drives them up at a fast rate (eg, gold has been pretending to make real annual returns for the last few decades when we all know it isn't changing in value). A company that is treading water will still be growing in percentage terms year-on-year due to this, so a company that isn't growing is actually failing to position correctly vs the credit in an economy. If that inflation wasn't part of the picture, companies holding steady would be more acceptable. Although you wouldn't hear about it in the press; the hot companies are always the ones that are growing. There isn't much to say about companies that just sit there.
- fragmede 4y ago
  Would you mind explaining a bit more than "basically"? The money they take in also inflates, so if everyone who bought one last year buys another one, sales in dollars should increase by the same amount as inflation.
  - arka2147483647 4y ago
    A company may not be able to increase prices as much as inflation eats. Eg, in 6 percent inflation, if you raise prices by 6%, it may result in customers shrinking their purchases by equivalent, or even larger amount. So after the price hike you could be worse off. That is the reason most companies often raise prices slowly in small increments over the months or years.
  - roenxi 4y ago
    If we're talking about sales, then sure that should go up by CPI inflation. I thought we were talking about stock prices. Same difference either way, steady state is for economic losers if the money supply is growing exponentially. Historically "growth" has just been a word for increased energy availability. If it is supposed to measure something else it is a bit meaningless (if some dude plays a game for 2 hours a day, then next year spends 2 hours a day playing a "much better" game on a faster XBox, what does growth as a % even mean? If he spends more hours on a game is that growth? These are profoundly silly questions to spend time on). The rough thinking is we should keep pushing for energy growth until we physically can't any more, because that helps poor people not starve which is actually important.
perryizgr8 4y ago
Population is growing. Your company's target market is a subset of population. Unless your target is a niche that nobody new is joining, then your company must grow just to maintain status quo. If you sell phones and you're not growing, it means you are actually contracting. That's why everyone is crazy behind growth. It means your business is not dying.
- ViViDboarder 4y ago
  Theres that kind of growth, and then the expectation that you grow into every conceivable vertical to expand more rapidly or support stock prices for an otherwise stagnant business.
refurb 4y ago
No industry is stagnant. Consumer demand changes, technology changes, competitors changes. The car industry is a great example. If you're not growing (in the most basic sense - new products, new markets), you're dying. That's even more true in tech.
marcosdumay 4y ago
As those things usually go, this is caused by government policy (and do not happen on the entire world). The US in particular greatly disincentive dividends, putting larger taxes over them than over any other form of profit accumulation.
deleted 4y ago
[deleted]

by saghm 4y ago

evo 4y ago

I suspect in reality the increasing compensation of the executive suite in stock, while intended to alleviate the principal agent problem, means that it's substantially more remunerative for leadership to try to goose their stock price by whatever means possible within their tenure than to steer the ship in a growth-agnostic fashion. Doubly so with modern big tech companies where RSU growth can fuel a big chunk of your salary costs for your tech department when your company is on the rise, but scare everyone off when the reverse is true.

magic_hamster 4y ago

Some people will say that companies need to grow to increase the bottom line, but my experience is that growth is actually a byproduct that indicates the health of your business rather than the actual goal. Growth is a result of competition, when new markets emerge, when competitors come up with better products, there is an opportunity to increase your market share and take in more revenue. Assuming you don't leave money on the table, it's understandable that you will compete and if you're doing well you will grow.

Radim 4y ago

The standard response is evolutionary: If you leave profit (growth, resources) on the table, someone else will pick them up and beat you with it. The supposed analogy is biological. You may choose to check out of the always-do-more-with-less rat race, or even out of existence completely. But that choice will help populate the world with "not your successors". Similar with companies: your "sustainably making profit" premise is incompatible with "willingly foregoes growth / change" – at least in the long term, due to competition.

wizzwizz4 4y ago
> at least in the long term, due to competition. Assuming there's always some proportion of people who choose to do otherwise. Humans are powerful enough now that, if we wanted to, we could stop this. It'd require collaboratively punishing defectors, of course – because some humans are greedy – but until (and if) we meet aliens, we don't need to live like this, provided we can learn to work together. It's fortunate, then, that motivated collaboration can produce better results than competition. The collaborators might be able to win the Last Competition.

mijamo 4y ago

Yo be clear not all companies are expected to grow. But growth is the main characteristic of a certain kind of companies, and the reason why their stock can have very high PE ratio, because shareholders expect to get return in the stock going up instead of dividends. You have plenty of vale companies that pay dividends and do not grow very much, sustaining a healthy business on their market. But the transition between growth and value is a bit tough. You need to stop hiring like crazy, intern promotions suddenly go more stale as a result, stock compensation is hurt a lot so your employees might not be super happy with it, the story is also appealing to a completely different kind of people, and your stock goes down a lot at first, all your financing suddenly gets a lot more expensive etc. It is possible that we are witnessing that transition in some of the tech companies right now, as the symptoms match, but it really is too early to tell.

jasode 4y ago

>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 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.

pixelfarmer 4y ago
> But unlike local restaurants, many businesses have to aggressively compete in national and global markets and if it stops growing, it starts dying. How is a company dying if it continues to make profit in a changing market? > Growing revenue and profits allows adaption to new competitive threats. Adaption to "new competitive threats" is done by humans.

OtomotO 4y ago

It's a dogma, the dogma of neocapitalism... Endless growth. Sort of like a malign tumor, which in the end kills the host and itself. It's just propaganda. Nothing grows endlessly, apart maybe from human greed and idiocy. Also some growth is "mandatory" because of inflation. If you don't grow your profits but there is inflation, your profits in reality shrink.

deleted 4y ago
[deleted]

ekianjo 4y ago

growth means constant investment. The day you stop growing, your investment is capped or much more constrained, and it's only a matter of time until your company is over.

kwhitefoot 4y ago

It seems to me that they need to keep growing because they are in reality pyramid schemes with the people (and investment institutions) at the top wanting ever larger profits. The company gets bigger but the number of people at the apex of the pyramid does not.

roenxi 4y ago

Due to inflation, basically. There is an effect like inflation which as far as I know is unnamed, where the credit growth & money creation in the economy hits asset prices and drives them up at a fast rate (eg, gold has been pretending to make real annual returns for the last few decades when we all know it isn't changing in value). A company that is treading water will still be growing in percentage terms year-on-year due to this, so a company that isn't growing is actually failing to position correctly vs the credit in an economy. If that inflation wasn't part of the picture, companies holding steady would be more acceptable. Although you wouldn't hear about it in the press; the hot companies are always the ones that are growing. There isn't much to say about companies that just sit there.

fragmede 4y ago
Would you mind explaining a bit more than "basically"? The money they take in also inflates, so if everyone who bought one last year buys another one, sales in dollars should increase by the same amount as inflation.
- arka2147483647 4y ago
  A company may not be able to increase prices as much as inflation eats. Eg, in 6 percent inflation, if you raise prices by 6%, it may result in customers shrinking their purchases by equivalent, or even larger amount. So after the price hike you could be worse off. That is the reason most companies often raise prices slowly in small increments over the months or years.
- roenxi 4y ago
  If we're talking about sales, then sure that should go up by CPI inflation. I thought we were talking about stock prices. Same difference either way, steady state is for economic losers if the money supply is growing exponentially. Historically "growth" has just been a word for increased energy availability. If it is supposed to measure something else it is a bit meaningless (if some dude plays a game for 2 hours a day, then next year spends 2 hours a day playing a "much better" game on a faster XBox, what does growth as a % even mean? If he spends more hours on a game is that growth? These are profoundly silly questions to spend time on). The rough thinking is we should keep pushing for energy growth until we physically can't any more, because that helps poor people not starve which is actually important.

perryizgr8 4y ago

Population is growing. Your company's target market is a subset of population. Unless your target is a niche that nobody new is joining, then your company must grow just to maintain status quo. If you sell phones and you're not growing, it means you are actually contracting. That's why everyone is crazy behind growth. It means your business is not dying.

ViViDboarder 4y ago
Theres that kind of growth, and then the expectation that you grow into every conceivable vertical to expand more rapidly or support stock prices for an otherwise stagnant business.

refurb 4y ago

No industry is stagnant. Consumer demand changes, technology changes, competitors changes. The car industry is a great example. If you're not growing (in the most basic sense - new products, new markets), you're dying. That's even more true in tech.

marcosdumay 4y ago

As those things usually go, this is caused by government policy (and do not happen on the entire world). The US in particular greatly disincentive dividends, putting larger taxes over them than over any other form of profit accumulation.

deleted 4y ago

[deleted]