Growth is often bad for business.
Growth is the battle cry of many marketers, but what most marketers don't realize is that growth isn't
always a good thing.
So how on earth could growth be bad?
First, let me explain what I mean, I don't mean that growth is bad because it hurts the environment
or society.
What I mean is that growth can be bad for the actual owners of the business.
This is because growth isn't free, it requires an investment or what people in finance call capital,
if the cost of capital exceeds the return on that capital, then growth is bad.
In this situation, growth will actually destroy shareholder value.
Let me give an example where growth would be a poor decision, even if it leads to more profits.
Imagine that your business is profitable and now has 10000.
What are you going to do with that money?
One option is to give all that cash back to the shareholders.
They could then invest it and get an eight percent return, buying stocks, real estate or something
else that has nothing to do with your company.
That's one option.
A second option is to take that ten thousand dollars and reinvest back into the company for growth.
It could be used to expand into a new market such as the nearest town.
That new market could be profitable and on paper it would look as though your business is doing better
because revenues and profits have grown.
But the return on that ten thousand dollars might only be five percent.
Investing in the growth of the business was a bad decision.
That money would have been better spent somewhere outside of the business where it could have grown
at eight percent.
In this example, growth is a poor investment, the business itself would have been better off staying
small.
Another example where growth is bad is if it achieves diseconomies of scale.
You may be familiar with the term economies of scale whereby a company gets more and more profitable
the larger it becomes.
However, beyond a certain point, scale can actually hurt profits.
Let's say you have 100 people working in a factory and they're very efficient.
If you add another 50 people, you might think the factory will become even more efficient.
But problems might arise.
People might start bumping into each other, machinery might start breaking down more, and employees
might get lazy because they believe they can hide in the crowd.
Scale can be bad for efficiency.
Often companies focus on getting bigger and bigger, even when it hurts shareholders.
One of the reasons this happens is because managers benefit when companies grow, even if the shareholders
don't, managers are incentivized to control a lot of resources and expand their fiefdoms.
In many cases, people just aren't aware of the detrimental effects of growth.
If a company simply isn't profitable or has poor margins, then growth will most likely just amplify
the problem and accelerate the course towards bankruptcy.
There are a lot of forces that push companies towards growth heedlessly resist this pressure.
I will show you where to focus so that growth helps the business.