In Praise of Growth

Introduction to the Inc. 500 praising the endurance necessary to maintain growth.

Visit the Inc. 500 site, which includes a fully searchable database of winners from 1983 to the present

In Praise of Growth

It happens every year. Each December, Inc. lists the 500 fastest-growing privately held companies in America.

And each December, some hapless writer is assigned the job of finding fresh, new ways of describing these companies' accomplishments.

This year the writer was me.

Like my colleagues before me, I started with visions of thumbing through the thesaurus in search of synonyms for "explosive" (as in growth) and "heroic" (as in achievement). Of dreaming up yet another way to explain the meaning of an 82,168% growth rate. Of piling adjective upon adjective in a desperate attempt to make this year's list of laureates sound even more impressive than last year's (and, of course, to make my prose sound more impressive than my predecessor's).

But discretion, I decided, was the better part of valor.

Who needs adjectives? The facts about the Inc. 500 are startling enough. Besides, there's a pressing issue raised by our annual listing of the 500, and it usually gets lost amidst the hyperbole. If we give up on finding ever-more-clever ways to praise these high-flying companies, we can take a closer look at whether a listing on the Inc. 500 is such a shining symbol of success after all.

For the entrepreneur, this is a matter of some concern. Maybe warp-speed growth of the sort typified by the 500 is not only risky but downright dangerous. Maybe, as more than a few businesspeople have argued over the years, Inc.'s lists glorify growth at the expense of good management, good products, and, most of all, good profits.

Maybe -- let's be blunt -- aiming for a spot on the Inc. 500 is no way to run a business.

To make the list, no doubt about it, a company has to grow fast. Up at the top, where hotshots like American Central Gas Cos. (#1) find their place, the percentages dazzle the imagination (see "Cookin' with Gas," [Article link]). But look way down at the bottom, the cutoff point, occupied this year by Atrium Medical Corp. (#500). Atrium's revenues rose 638% from 1983 through 1987, a 65% compound annual growth rate. Plenty of entrepreneurial companies can hit that figure for one year. A few can do it for two. But to make the Inc. 500 a company has to sustain the pace for a full five years.

But, critics charge, it's just this kind of growth that can be hazardous to a company's health.

For starters, they point to the Inc. 500's always-shaky profitability figures. Each Inc. 500 shows fully half the companies currently reporting return on sales of between 1% and 5% -- less than my kids earn on their passbook savings accounts -- while another 50 or so companies report break-even or loss. When Business Week began its own listing of (public) growth companies a few years ago, it pointedly called its list "the best small growth companies' -- not the fastest-growing -- and included profitability among its criteria for inclusion. By comparison, too many 500-style companies seem to be living out the old saw about selling at a loss and making it up in volume.

Then there's the what-goes-up-is-pretty-damn-likely-to-come-down theory. Your company's on the Inc. 500? Bully for you, says the skeptic. The odds are better than 50-50 that you won't make it again. When Inc. columnist David L. Birch tracked the post-listing performance of the 1982 Inc. 500, he found that nearly half the group was "extremely unstable," with periods of decline regularly following periods of growth. At times explosive growth covers up truly fundamental problems. Even as the #1 company of a few years ago, Herbalife International Inc., was topping the list, it was coming under blistering attack by regulatory agencies for false advertising. At last report it had shriveled to one-third its peak size.

Fast growth is not only evanescent, argues management theorist Peter Drucker, it actually makes a company weaker. "Growth at a high rate and for an extended period is . . . anything but healthy," he writes in his classic text Management. "It makes a business -- or any institution -- exceedingly vulnerable. It makes it all but impossible to manage it properly. It creates stresses, weaknesses, and hidden defects which, at the first slight setback, become major crises.'

Drucker's grave conclusion: "There are few exceptions to the rule that today's growth company is tomorrow's problem.'

Before we climb on this bandwagon of caution, however, let's take a moment to ask if there isn't a reason for listing, writing about -- yes, even celebrating -- growth. Not careful, well-managed growth. Not growth with profits. Just hard-driving, pedal-to-the-metal, Inc. 500-style growth.

From a macroeconomic standpoint, it's an easy case. As Birch and others have shown, it's the fastest-growing companies that create the jobs -- more and more of them every year. "The percentage of job growth attributable to the fastest-growing 5% of companies," says Birch, "is going up, not down." The effects show up in a state such as Georgia, #6 on Inc.'s ranking of the states in October, and home of 22 Inc. 500 companies this year, up from only 10 five years ago. From the economic-development perspective it scarcely matters that a fast-growing company's jobs may be something less than permanent. Any booming business stimulates a local economy, encouraging other companies to start up or expand. The process can continue even if a few of the highest flyers take nosedives.

From a manager's standpoint, the case for unbridled growth may not seem so obvious. But by many measures a rapidly growing company is succeeding better than any other business, big, small, or in-between.

A fast-growing company by definition is satisfying a market that was unsatisfied before. If the purpose of a business is to create and keep customers, as Harvard Business School's Theodore Levitt argues, then companies like those on the 500 are fulfilling that fundamental purpose every day, in spades. What's striking about this year's list is that they're creating customers in all kinds of industries, all over the map. Adept Technology Inc. (#8) may be the most consistently profitable U.S. robotics company, even exporting its robots to Japan (see "The Growth Ethic," [Article link]). Just Fish Inc. (#392), in Winslow, Wash., produces and markets seafood products; SCR Coaches Inc. (#315), in Fargo, N.D., provides tow, travel, and bus services. Forty-four states and the District of Columbia have at least one company on the list; 17 of those have at least 10.