Benefits of GrowthThe process of a small firm growing to become a large firm is a fundamental economic process that contributes to the employment levels and efficiency of a nation. In order to grow, a firm may reduce costs, improve quality, invent new markets and employ more people. The following are common benefits of business growth.
Firms invent new markets, products, business models and methods in the pursuit of growth.
Improvements in quality to gain market share.
Growth allows firms to enjoy economies of scale that push down unit costs.
Growing firms employ more people.
All else being equal, a firm that is growing rewards investors more than a firm that is not growing. This gives incentives for investors to take risks by putting capital to work in the economy.
Problems With Business GrowthGrowth is beneficial to investors if it is sustainable and the firm is able to quickly become profitable. In some cases, a firm spends too much to grow and grows a debt that risks the survival of the firm. Growth for the sake of growth is a common type of economic failure. The following are common types of problem associated with poorly managed business growth.
A government that is desperate for business growth may allow businesses to create economic bads such as pollution, dangerous work environments, unhealthy and unsafe products.
A growing firm may have a volatile price as its future value may be highly uncertain. Small firms can grow very quickly such that if you assume this growth rate will last for a few years, they can receive a very high valuation. As such, the management of small firms are often under pressure to improve growth at any cost. This results in irrational strategies that destroy value for investors in the long term such as scaling out a broken business model that can never be profitable. In some cases, a firm becomes heavily indebted to fuel growth to the point that the firm is at risk of failure such that investors may eventually use their entire investment in the company. In this case, employees lose their jobs and communities may be left with the cost of cleaning up industrial sites and other remnants of the business.
Economies and industries tend to follow a boom and bust cycle where undersupply and healthy demand cause prices to increase leading to growth and investment in new capacity. This often goes way too far with every firm investing heavily in new supply and hundreds of startups entering the market. This dramatically increases supply and prices fall. Firms suddenly become unprofitable as prices fall and investment stops. This causes companies to go out of business resulting in wasted resources as capital such as software and machines may simply be discarded.
|Overview: Business Growth
An increase in the gross revenue of a business.