In wrestling with the concept of constant growth (Fundamental Principle 11: The Bonsai Effect) in nature, a potential conundrum in looking at the business world through the same lens came to mind.
The Small Business Administration reports that in the US there are about 27.5 million “businesses,” of which 6 million actually employ people. Of these 6 million, 99.7% are considered small businesses with fewer than 500 employees. The remaining 0.3% typically make up the Fortune 500, the Russell 3000, and the Wilshire 5000 indices. These small businesses employ about 50% of the 120 million non-farm workforce in the US (2007), whether they issue stock or not (are privately held).
By the way they are legally defined, small businesses (a sole proprietorship or a partnership) cease to exist (or are dissolved) when the owners (sole proprietor or one of the partners) die. But an incorporated business is legally considered to be a person, and as long as there are shareholders it can continue to exist in perpetuity.
The conundrum appears when one looks at the expectations. A small business, for instance a family owned bodega (a corner grocery store), would be considered a successful example of capitalism in a free market system if it continued to deliver added value to its customers in exchange for a fair return (i.e., make a living) for its owners, even though it most likely grew and leveled off at an optimum revenue size that the owners could successfully manage and were happy with.
A corporation, however, is expected to continue to grow in revenue size in order to maintain a current stock price. But as it grows larger a particular growth rate becomes near unachievable due to the company’s greater size. For a simple analogy, blow up a balloon. If we ignore pressure, the first breath causes greater visible growth in balloon size than does the same breath much later. When a corporation begins to show diminishing percentage revenue growth rates, its stock price will be punished in the market place (e.g., Apple in the six months since September, 2012).
Looking at this in another way, the bodega is expected to behave like a bonsai or a person. It can grow to its optimum revenue size and slow or stop growing but still continue to exhibit healthy “turn-over,” delivering ongoing added value and experiencing positive cash flow. But the corporation, legally defined to be a person, isn’t expected to behave like one. It shifts to being called “mature” when its revenue growth levels off (even though its “turn-over,” cash flow and added value, continue), and it becomes of investment interest perhaps only for people who are ready to live on fixed incomes.
Non-Rhetorical Question: Why must a corporation continuously grow in revenue (fiscal size)? Is this inherent in its DNA, or is this artificially imposed from the outside by investors, which then forces internal managers to “maximize shareholder value”?
The focus should be more on the life force of the organism. For a bonsai, it needs to actively produce (“turn-over”) new roots, leaves, and fruit, which it manages quite well due to the “innovation” or renewal process in its DNA. For a bodega, the owners must actively choose to keep up to date on (probably slowly) changing customer needs and “innovatively” and fairly meet them to maintain its cash flow (“turn-over”). For a corporation, it must actively do the same thing but on a larger scale, within a shorter time frame, in an arena with greater competition, and with an increased need for innovation (idea “turn-over”). Its hope for success should not depend upon its ever-increasing fiscal revenue size, but upon its people being able to respond with idea “turn-over” (innovation). And to be able to respond, its people need to be constantly learning and growing (personal innovation), which brings us back full circle to humans, designed by DNA to be learning beings.
Two recent commentaries which also allude to these issues can be found in a post by Woody Zuill (reflecting on continuous personal improvement) at Shawn Murphy’s Switch and Shift and at Dr. Marla Gottschalk’s The Office Blend (reflecting on conditions that affect corporate innovation).
Do you personally recognize and embrace the need for continuous learning and knowledge growth?
Is your continuous learning (“innovation”) internally driven, or externally driven?
How does personal growth connect with the right corporate growth? Coming up in the next post.