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>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

by 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.
- TeMPOraL 4y ago
  > 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.
  - jnovek 4y ago
    “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.
    - TeMPOraL 4y ago
      > This is circular reasoning Yes. Or, in other words, a feedback loop. > 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.
doctor_eval 4y ago
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.
- fragmede 4y ago
  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.
- arka2147483647 4y ago
  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.
- sokoloff 4y ago
  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).
- jasode 4y ago
  >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.
pclmulqdq 4y ago
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.
- jasode 4y ago
  >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! [1] https://www.google.com/search?q=zildjian+in+ear+monitors https://www.google.com/search?q=zildjian+in+ear+monitors
acdha 4y ago
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.
deleted 4y ago
[deleted]

by jasode 4y ago

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.

TeMPOraL 4y ago
> 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.
- jnovek 4y ago
  “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.
  - TeMPOraL 4y ago
    > This is circular reasoning Yes. Or, in other words, a feedback loop. > 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.

doctor_eval 4y ago

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.

fragmede 4y ago
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.
arka2147483647 4y ago
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.
sokoloff 4y ago
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).
jasode 4y ago
>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.

pclmulqdq 4y ago

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.

jasode 4y ago
>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! [1] https://www.google.com/search?q=zildjian+in+ear+monitors https://www.google.com/search?q=zildjian+in+ear+monitors

acdha 4y ago

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.

deleted 4y ago

[deleted]