Being small is good. It has many advantages for the firm and many benefits for society. But I always hear talk about ways to grow. Let's make a step back and consider why do you want growth? Is it good for everybody?
The stockholders are the owners of the company. The only reason to invest is to make money. The share price will rise if more people want to buy than sell.
Investors are betting on the future. If they think the company can grow fast, they buy. To have a stock appreciation, they need market growth, the potential or the perception of it.
In public companies, most of the shareholders pay attention only to the short-term. They buy with the expectancy that the share will increase its value. Then, they might sell it.
When a company becomes public, founders and early investors make a lot of money. So, private companies have a lot of incentives to grow until they get there.
Executives and workers
The CEO of the public company increases his revenue if the stock price performs well. He gets professional and social recognition too. If the company does not grow, the board will fire him.
General workers usually prefer to work for a big firm. It does not matter if it is public or private. Size has relation with better salaries, more security, stability, and public acceptance.
Economies of scale
All companies have some fixed costs. If they become bigger and sell more, they can share that between more goods. Each unit will be cheaper.
Sometimes that is critical. If you want to compete, you need to have the same size to be able to have similar costs.
In some sectors, it is more relevant than in others. For instance, airlines have massive economies of scale. Carmakers are in a similar situation. That forces acquisitions and mergers. Each time we see less and bigger companies.
At a certain point, size could be a problem. Dis-economies of scale could appear. The communication is complex at all levels. Steps and processes become overwhelming. There is a slow reaction to obstacles and opportunities.
In each industry, the dis-economies appear at a different point. What is clear is that all companies have incentives to grow till they arrive there.
Becoming the dominant firm in a market has many benefits.
- More money. With a dominant position, the company can opt for higher prices and significant margins.
- Dictate the rules. If the competition is not close, it could be a quasi-monopoly. The leader of the segment writes the law. He can make decisions with a lot of freedom and little pressure. He will have no reason to move from the comfort zone.
- Barriers to entry. The leader has the power to put difficulties to other companies that want to enter the market.
- Too big to swallow. Aggressive takeovers will have difficulties.
- Only three survive. In some markets, there is just space for the leader and the first competitor. Others will admit a third player. Only a few will have more. We can see that in many supermarkets. There are some segments where only two brands have all the attention. Sometimes the reason is simple: there is no more space on the shelves. Some supermarkets have a lot of space but still, want to concentrate their efforts. For them, it is cheaper to deal with a few providers. Marketing is easy. Transactions are fast.
We could apply most of the things I have commented before on here. But family businesses have some values that distinguish them. History, heritage, traditions have a decisive role. Some fight to make their dreams survive through their sons. Others only want to bequeath a comfortable way of life, a system to make a living.
In any case, they also focus on the long term. That makes family firms different from public companies.
Who wins seeking growth?
I have explained that everybody has incentives to grow. Public and private firms. Founders, early investors, shareholders, and even regular workers get money and social recognition. But what about the consumers and society in general? What can we do about it? I will talk about that in the next post.
I have different post related to growth:
Groth is related to the fact many companies copy each other: