If your employees expect raises greater than inflation (like say 3%), or you're giving out any kind of healthcare benefits (that cost grows 10% annually on avg), or your rent goes up, etc etc, then you need to be growing in order to be steady-state.
Costs always increase -- staying the same size costs more next year.
In many businesses, employees become more valuable over time through experience such as skills acquisition and improvement, taking on more responsibility, training new staff, etc.
Even so, due to older staff retiring or leaving and newer staff joining at lower salaries, even if all staff have steadily increasing pay rates above inflation the overall payroll budget may still be in a steady state.
Most businesses look for ways to increase their margins over time, which will balance out increases in costs. If that fails, then they will increase their prices. Attrition should result in relatively flat total salary expenses (adjusted for inflation). As people leave, you promote (and give raises) from within the company, and hire new, lower paid staff.
No. For example, if one could reduce the cost of making widgets, and sell them at the same price, margins are increased without growth. This is a very common way that companies increase profitability.
Costs for supplies should decrease, and why would employees expect raises greater than inflation if the company is not growing or doing anything new?
Look at a McDonalds franchise, for a good example of steady state.
I don't see why costs for supplies should decrease, necessarily, even in real terms. I guess you can have consistent churn at a brick & mortar business to keep paying minimum wage by replacing people with younger people as they leave.
But that setup only applies if you're paying at the bottom of the scale and not giving out benefits. Bennies have been increasing by much more than inflation, and the type of jobs giving bennies typically expect a 4% raise, minimum, if you're doing acceptably at it.
A McDonald's franchise looks a steady state because that's the entire point. McDonalds is basically a holding company with a portfolio of some of the most valuable real estate in the world that uses the burger flipping as a way to constantly grow. However, no McDonalds franchise is a steady state unless its in a tiny town immune to inflation where no one wants to open a competitor (and there's very few of those). If a restaurant's profit falls behind inflation it's no longer as valuable a holding in their portfolio.
This delusion is why there are periodic economic crashes. It sticks around because if you are powerful you can take advantage of the thinking when times are good and skip the consequences when times are bad. When too many believe it's true, they allow it to be true.
The cost? An ever increasing chasm between powerful and powerless, a chasm which itself goes through periodic crashes which tend to be significantly more violent... e.g. the fall of Rome, the French Revolution, and WWII.
Growth isn't just exclusive to startups. It's a health indicator for a majority of businesses. Just the same, a tech company does not equate to a startup. There is a priced in expectation for growth in nearly all capital seeking companies. Yes, there are sectors and utilities where full saturation prevents growth, however population as a constraint is hardly common.
You can have a healthy company that's shrinking because it's in a cyclical industry or removing less profitable / overly risky part's of the business. Case in point during the run up to the banking collapse several banks where shrinking during the boom because they avoided 'overly' risky loans but they where ideally situated to take advantage of the bust.
Is the source of growth an important metric to measure for success? The source of groupon growth is through excessive sales push. Compared to that, Google growth in early days is because of viral effect without too much sales & marketing spend.
I thought the most important characteristic of a successful business was that it was profitable.
If growth is so important and defines success then eventually is will plateau due to limited resources and no longer be successful which is obviously not true.
To place both of those ideas into one, the most important characteristic of a successful business is a positive return on investment. Profits and growth can account for a positive return on investment.
> If growth is so important and defines success then eventually is will plateau due to limited resources and no longer be successful which is obviously not true.
That is actually untrue.
One theory says that a business should grow with GDP.
There are limited resources so defining success on growth will eventually lead to a point of no more growth and no longer be successful by a growth definition.
Comparing to GDP gets tricky. Is GDP growing due to actual output growth and wealth generation or due to inflation?
I suppose we need to first agree on what were looking at defining what a successful business based on a non moving target or defining success based on comparing it to other businesses.
Do I think a businesses revenue should grow with GDP? Yes. Does the profit margin need to? Not necessarily. To be more successful at investing you definitely want businesses that have higher ROIs. However, are we discussing successful investing or successful businesses?
Is GDP growing due to actual output growth and wealth generation or due to inflation?
"True" GDP should be inflation-adjusted, hence you'll see real GDP growth in adjusted statistics.
Measuring inflation is its own kettle of worms.
The more relevant challenge IMO is that GDP is a highly flawed measure. NNP (net national product) corrects for some of this via accounting for externalities, but both are still cash flow measures, when what would be more appropriate as a net measure of wealth would be a capital growth account -- equivalent to a businesses balance sheet.
Sadly, this is one area in which macroeconomics has been stubbornly and persistently lacking.
> There are limited resources so defining success on growth will eventually lead to a point of no more growth and no longer be successful by a growth definition.
Growth depends on resources AND technology. Its quite possible to have growth without any change in resourcing.
> Comparing to GDP gets tricky. Is GDP growing due to actual output growth and wealth generation or due to inflation?
It doesn't make a difference. In this case we are definitely talking nominal growth.
My bottom line would be that a business would generally(!) not be classed as successful if it is not growing.
Of course there are other factors that might make a stationary business considered a success.
For public companies, growth is important, because people who buy a share of stock for $X do so because they think that share of stock will someday be worth an amount more than $X. And growth is seemingly a very clear indicator of such an outcome. So the markets put pressure on public companies to always be growing.
Not always; many people buy stocks so they can earn a dividend. Even if the stock sells for the exact same price that you bought it for, it could still be a success if it was paying a healthy dividend.
That's a misunderstanding. When a company spends money to buy back shares, it decreases its value by the amount of money it spends. Therefore even though the company is now owned by fewer people, the value of the company has shrunk sinilarly, and the share prices remain constant. That is if the shares were priced correctly to begin with.
That is why stock buy-backs only make sense if the shares are priced too low.
No. The company decreases its current liquid assets, but a company's worth is not just assets, it's (liquid assets + value of ongoing profit). Assuming a fixed profit, a stock purchase would cause the profit-per-share to increase, so (assuming a fixed P/E ratio) the price of an individual share rises. Assuming the company buys the stock at a completely fair price, it's true that the company doesn't experience any change in value, but it has distributed money to shareholders - which just like distributing dividends except with less immediate tax implications.
(That said, I do understand companies usually overpay for their own stock, so the move is not necessarily the best one for any given company or companies in general unless the stock is, in fact, undervalued. But it is still one way to deliver returns into the pockets of shareholders, anyway.)
But the value of the company's future profits is already priced into the stock (provided the stock is priced correctly). Otherwise the value of the company would just be its book value.
If a company buys back stock that is overpriced, it actually destroys shareholder value. If the stock is priced correctly the outcome will be neutral for the shareholders. Only in the case where the stock is cheap relative to its value, is value created for the shareholders.
If this theory of share buybacks were true, it would lead to some fairly simple arbitrage strategies to make free money. (Buy shares in company x, force a share buyback so shares rise in value, profit).
In reality these corporate actions are value neutral if the current share price is at fair market value.
The value of ongoing profit is reduced if a company has fewer liquid assets to invest.
Most older, local, small businesses in small to medium markets in the US will never be growth businesses. They're treading water businesses after the market is saturated (some can be very profitable of course).
Being technical about it, a business may keep up with inflation by raising prices, and show nominal growth.
Look at the revenue of a liquor store, insurance business, or tv / radio station, in a healthy but smaller settled market. No market growth, little to no business growth, but the businesses aren't likely to disappear either. This is a very common scenario, there are millions of US businesses in this situation.
More accurately: they're earning normal economic profits. This assumes that economic activity is normally profitable, which isn't unreasonable in certain circumstances, though it's not guaranteed.
Driver of what? Maybe a dry-cleaner or cafe is happy with the size they are, because expanding would involve turning the business into a chain or something else the owner doesn't want.
Not that economic orthodoxy is a good measure of reality, but there is a theory of the optimum size of a firm that will determine its size.
There are natural monopolies which grow without apparent limit, or rather, whose growth is constrained only by the total size of the market, rather than some lower bound. For these, there's always the capability of adding additional profitable production.
For other businesses, there are natural constraints on scale: a regional market or operation which can only sustain so much business, high scale-related costs, etc.
As two canonical examples, telecommunications scales quite well with scale, and in the history of telecoms we find a long history of monopolies: Western Union in the telegraph age, AT&T in the telephony age, and now Comcast in the broadband era. Once you've got cables strung, your primary limitation is last-mile wiring. But it's the long-distance and total bandwidth capacities which give you maximum value.
Concrete is a counterexample: there's a limited local market (whatever local building activity will support), and your transport costs are very high: concrete is heavy stuff. Concrete tends to be a pretty localized industry, though it might be possible for a single firm to develop out of what are essentially multiple regional markets.
Growth, where possible, profitable, and sustainable for a business, is often pursued, but it's not a necessary condition for success.
An instant counterexample I thought of is a non-profit.
Individuals working there are always excited about personal empire building of course, but if the stated community need is being met, well, that's good enough, in fact if that need is dropping that can sometimes be awesome.
Stereotypical orphanage or red cross or homeless shelter.
Churches are another business that often is fairly steady state plus or minus population changes and inflation.
Of course non profits can experience explosive growth, my credit union is a non-profit coop and since the nationwide banks have gone into decline with exploding fees and imploding services, the CU has recently had exploding growth rates. Which admittedly has a lot more to do with external societal factors than internal goals.
When a tech company demonstrates declining growth, there are usually negative murmurs that seem to get amplified in the news. It's still positive growth... but the growth derivative is negative. A flat, zero derivative seems to be as concerning to those in the press as a negative one.
It depends on the business. If the market has priced in growth, and growth starts declining, then the market reacts negatively. However, growth isn't always priced in.
For example, see stocks in utility companies. Particularly before recent deregulation in utilities, there were no prospects for growth in these companies, so their share prices were essentially based upon their bond-like characteristics of yielding a reliable dividend. Their price settles to a place where their dividend yield reflects the underlying "default risk" of the company, relative to the risk free rate.
At the risk of oversimplification, stocks usually fall somewhere on this spectrum. A high growth stock's price can be held afloat via rosy predictions of future growth, and a low or non-growth stock's price can be held afloat by a steady dividend stream. Take away the growth prospects of the former or increase the risk of losing the dividend stream of the latter and you will see the price drop precipitously.
They are steady-state right up until a growth business intrudes on their peace and disrupts their industry.
Like our local taxi company basically has a monopoly on the city, and has no real reason to grow. But here comes UberX, a growth startup, throwing around free rides and cheap rates. If the local company loses market share or profits to UberX, they have nowhere else to pick it up.
I learned the hard way about not having a true competitive advantage and buying market share. I had a pizza shop good food( won awards for the pizza), cheap price because I subsidized it. lot's of customers that loved the food. Ran out a bunch of competitors... great business plan working like a charm... little ceasers comes in...no worries...sales drop..last thing I can do is raise prices to recoup investment...now sales eventually recovered(2 years after I sold it same product crew etc.)... lessons learned... people buy products for lots of reasons quality is just one iddn't loss any customers just a little business from each...in little ceasers case it was about convenience.
I hope this doesn't come across as nitpicking, but the lead sentence of the article is incorrect. It should be:
One of the most important characteristics of a successful STARTUP is that it's growing.
Businesses which successfully serve their owners, employees, customers and larger surrounding community, can easily be steady-state.
I realize HN is startup-focused, but I think in the interest of productive conversation it's important to make the distinction and use precise terms.