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Is Company Growth A Bad Thing?

Company growth is an unquestioned positive, but is that actually the case?

2Jun

In September every year, Inc. release their ‘Inc. 5000’, a celebration of the quickest growing companies in the US over the past year. Growth figures in the tens of thousands of percent are common, with the average growth of the top 10 companies in the list being 25,326%. Growth is celebrated across the business world, it represents progress, increased earnings, more jobs in society etc. However, is growth always a good thing?

In 2013 and 2014 one company dominated the Inc. 5000 list, Fuhu, who are a manufacturer of children friendly tablets. After their blistering success, with a 158,957% growth in three years, the company went bankrupt in 2015. Ideeli topped the Inc. growth chart in 2011, but were sold off to Groupon in 2014 for $43 million, almost half of the company’s 2011 annual revenue of $77.6m. Even the winner of the 2015 Inc. 5000, Ultra Mobile, have mixed reports already, with frequent management changes and strategic pivots reported from former staff, which is hardly the hallmark of a company comfortable in its position.

The issue that many of these companies have is that they grew too quickly, predicted vastly optimistic future demand, and often grew in totally non-organic ways. Fuhu, for instance, borrowed extensively and had huge outstanding bills to their main contractor Foxconn before their bankruptcy, and released a huge number of products that flopped having done little market research beforehand. With this kind of growth and investment, it is almost impossible to keep on top of everything effectively. Even the simplest elements, like paying suppliers on time, becomes an unending cause of concern with huge and diverse forces pulling the company is various directions.

One of the big issues that companies have is that rather than becoming the best at what they do, they focus instead on their speed of growth, which often hinders the long-term success of the company. Consider the world’s largest company, Apple, who’s yearly growth has never come close to the kind of growth seen in many of the startups in the Inc. 5000, since 2004 their largest revenue jump has been well under 100%. They do not require funding for any growth and indeed have over $250 billion in liquid assets available to them. The only borrowing they’ve done in the past decade has been to pay dividends without moving money back to the US, where it is likely to be heavily taxed. They haven’t even excessively increased their workforce, with the largest jump since 2005 being between 2007 and 2008 when there was a 48.1% increase in headcount. It is no coincidence that this growth occurred alongside the increasing success of the iPhone. This restrained growth has given them the freedom to work independent of the pressures of investors or creditors, after all, how many would have supported some of their ideas before they came to market, such as the iPhone or iPad?

It is similar with companies like Patagonia, who in their 44 year history have never attempted to grow beyond their means, allowing them to stay private, not needing to sell stock in the company, and ultimately do more than simply make clothes and make money. This is ultimately what many companies aspire to today - the for-profit-for-good company is growing in popularity, which necessitates freedom from outside influence. Most investments are not done to help the world, but for returns, so having the burden of needing to provide a specific return or to repay loans that were used to promote growth simply gets in the way of the ultimate aims of the company. This kind approach has allowed Patagonia to make decisions that have been good for what the company has aimed to achieve, for instance, in 2016 it gave all of its revenue from Black Friday to environmental causes, something that simply would not be possible if share holders or creditors had a certain financial sway in business decisions.

Ultimately the growth of a company should come from success, with the success of a product being the celebration rather than the growth itself. The basis of capitalism is that money rewards success, which can then fund growth. Celebrating growth alone prompts the kinds of failures that we’ve seen with companies like Fuhu, Ideeli, and Groupon (who after becoming famous for being the ‘fastest growing company ever’ went public to a an initial share price of $26.11 in 2012, with each share worth $2.76 only 12 months later). Forced growth also restricts innovation, putting repayment of loans or investor returns above long-term success. This kind of rapid growth also makes it impossible to manage the foundations of the company, with elements like supply chains becoming dangerously unchecked as demand rockets and additional suppliers need to be found with little time to effectively vet them, often leading to either poor quality products or ethical and environmental issues further down the chain.

Growth is not a bad thing if it is a deserved growth that has been done effectively. Genuine growth comes from creating a product that works better than whatever is currently out there and gaining a following for it. Growing for perceived future demand is a dangerous game and one that has led many companies into the abyss. 

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