I’m seeing a lot of companies that had tremendous growth over the past 3 years and at the first sign of “unmet targets” they take drastic measures (I.e. letting go of workforce). While their investors might indeed lose their confidence, sell their shares and, therefore, decrease the overall firm value, companies have made and still have lot of money in the bank, why do they need to care about growth, share price and what investors think to such extreme extents? Wouldn’t it be ok to just go with “we did not grow a single point this year and we have made the exact same profits of last year, that’s really good!”
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> Wouldn’t it be ok to just go with “we did not grow a single point this year and we have made the exact same profits of last year, that’s really good!”
Except it’s not okay, because capitalism is irrational. Hell, there’s a famous saying – ‘the market can stay irrational longer than you can stay solvent’.
Capitalism, as an abstract concept, requires and expects eternal growth. It doesn’t even matter if you’re the only company in a market – a literal monopoly – if you’re not growing year over year, you’re in decline.
Why? in a word, inflation.
Inflation means the dollar I earn tomorrow is worth just that much less than today. So in your example, if I made the exact dollar amount this year that I did last year, *not accounting for inflation*, then my revenue has gone down when I *do* account for it.
But when you start getting really big, you start to pick up really interesting efficiencies, which we call economies of scale. Things like ‘oh I can just combine all my distribution into one place and serve all of my locations from there, reducing how many places I need to keep up’ suddenly make a lot of sense, so you can reduce costs there and still charge the same, increasing revenue.
Eventually, though, you’ll have maxed out these, and you’re left with finding more customers. Maybe if you reduce your cost *just a little* you can tempt in 1 more customer – in all likelihood, the cost reduction was less than the value you got from one more sale, so its a net increase.
But even then, you’ll start to hit peak saturation. There are only so many people who want a widget, who need a widget, who can phsyically buy a widget. You’ve hit economies of scale, you’ve optimized your price to consumers, and you’ve saturated your market. And yet you still have to combat inflation somehow…
But the stock market sees your stagnation, and looks at the *cheapness* of this little up and coming competitor – someone you hadn’t even deigned to *recognize* as competition, they’re so small – and go ‘well OP’s company makes all this money year over year, maybe this one will to. And look! I can get in on the ground floor for CHEAP!’. So tehy sell your stock and go all in on your competitor. No, it’s better to give them a reason to stick with you every year.
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