Profit growth is an obsession of industry analysts and pundits. Every day there are headlines in the business sections of newspapers and websites along the lines of, "Company X revenue and profit growth disappoints, shares plummet Y%." Another way to state the same thing is, "Firm X had more sales and is more profitable than last year, yet is worth less today than yesterday."
I've never understood the rationale behind why a company must continually grow in order to be considered successful.
Let's assume that a company has revenues of $10 million, and a respectable net profit of $1 million. (Feel free to add or subtract a zero or two to make this company larger or smaller.)
Let's further assume that there is no inflation or, if you prefer, these numbers grow or shrink at the rate of inflation or deflation.
Note that this does not imply a static business model. Our hypothetical company will make investments to reduce its costs and deal with competitive pressures that reduce its margin. It will adjust its product portfolio over time and periodically introduce new services. The net effect of all this change, however, is financially neutral: real revenues remain constant and the firm is consistently but not increasingly profitable.
My question is: What's wrong with making a million dollars of profit on revenues of ten million every year? Why is growth of these numbers deemed a necessary element of success for a corporation?
Such a company would be savaged on the stock market, and I do not understand why.
I asked this question during a class discussion during my MBA studies, and received many responses that made no sense. Only one answer, while still unsatisfactory, was at least coherent. A classmate told me that since this firm's competitors would be striving for growth, it risked being left behind and eventually being swallowed up by its much larger rivals.
There must be something more, though. There must be some justification for an unrelenting focus on growth beyond, "Everyone else is doing it!" But I don't know what it could be, and haven't been able to come up with anything plausible.
Can you help?