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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.
Frequently, fast growth is the only way a company can establish and protect a market. The heart of entrepreneurship, after all, is innovation: offering a new product, a new service, or a new combination of price and value. But in this age of high-speed travel and instant communication, any innovation that works will soon have a host of imitators, some bigger and better financed than the pioneer.
In such a situation, says Rosabeth Moss Kanter, author of The Change Masters, "rapid growth may be something you have no choice about. You either grow explosively, meeting all the demand, or the competition comes in to meet it." That's an observation sadly ignored by Remington Rand Inc., which introduced computers to the world back in the 1950s only to be overtaken by a much more aggressive IBM Corp. But it's a point well noted by West Coast Video Ltd. (#4), which expanded very quickly in the nascent video-rental industry by learning to franchise its expertise. As it happens, West Coast is already pleasantly profitable, reporting returns in the 11% to 15% range. But even if the economics of the industry had been different -- even if founder Elliot Stone had had to sacrifice profits for a longer period of time -- the investment might have been worthwhile. In a booming market, growth is the only measure of success.
In the end, the argument over growth comes down to cases: some companies may grow too fast, others not fast enough. And granted, it's never an all-or-nothing proposition. Even the fastest-growing companies will reach a point -- Kanter calls it the "entrepreneurial crisis point' -- when they have to pay as much attention to costs and quality as to market share. A business eventually needs profits to survive.
But before we all get out our spreadsheets, let's not forget that business isn't all P&Ls. One of the glories of privately held companies, in fact, is that the bottom line can stay at the bottom, and that the people who run those companies don't have nervous pension-fund managers looking over their shoulders.
In this light, so what if you sacrifice some of your company's profits to growth? Growth is fun. When a company's growing, there's an air of excitement each day, a common sense of opportunity, expanding horizons, and boundless futures. And there's reality behind those feelings. Young people who begin at entry-level jobs find themselves running a division a year or two later. Workers learn new skills; managers take on new responsibilities; employees with entrepreneurial gifts learn how to use them. People pull together rather than pursue their own interests.
The results can only be beneficial. "A firm is never static -- it is either growing, or stagnating," writes Tom Peters in Thriving on Chaos. "Stagnation . . . is enervating, negatively affecting every element of the firm. Excitement (growth) spurs performance; contraction doesn't." Birch, for his part, points out that while growth is often followed by decline, stagnation is often followed by failure.
Maybe growth can't go on forever. And maybe it is risky. Does that mean we shouldn't celebrate it -- and the companies, like this year's Inc. 500, that have proven themselves so adept at it?
Not for my money. I'm not prepared to argue that every company should aim at finding itself, some day, on the Inc. 500. But I am prepared to hand it to those who do.
-- John Case
LESSONS FROM THE LIST
Inc. asked a handful of business and economic experts to cast their educated eyes over the 500s of the past few years. What did the listings tell them about where our economy is headed? What did they find surprising, or worrisome, about the companies that made the lists? Some responses:
ROBERT B. REICH, author, Tales of a New America:
"The decline in the growth of telecommunications -- only 2% of the list this year as opposed to 5% in 1983 -- concerns me. Telecommunications lie at the heart of information technology. If growth here is slowing down, we need to be concerned about growth in the rest of the economy over time.
"On the positive side, growth in the industrial belt -- Michigan, Pennsylvania, New Jersey -- is up. This is part and parcel of a resurgence of American manufacturing, and may be the harbinger of a renaissance in industrial America.'
JAMES O'TOOLE, editor, New Management magazine :
"I'm impressed by the range of goods and services offered by these companies. At the same time, many of them seem to be in construction, retailing, services -- the industries that don't have to compete with foreigners. If there's a worry here, it's that.
"One of the longer-term patterns we're seeing is that fewer employees are now generating larger sales. So productivity is as much an issue in these businesses as it is in the Fortune 500. Since what we really need are increases in productivity, that is good news.'
ROSABETH MOSS KANTER, author, The Change Masters:
"These companies are clearly taking advantage of the opportunities created by social and technological change. But what you see here is the rapid-start phenomenon. Most of them are fairly new and are likely to reach some kind of natural limit to their growth.
"Once a company reaches that limit, it has to ask how do we get new products, how do we hold the market we've got, how do we transmit our values to this larger group of employees. It isn't easy -- Nike, for example, temporarily lost sight of the social and technological changes that gave it its start. Nike invented running, but it missed aerobics and had to catch up.'