Edit: This question attracted way more interest than I hoped for! I will need some time to go through the comments in the next days, thanks for your efforts everyone. One thing I could grasp from the answers already - it seems to be complicated. There is no one fits all answer.
Under capitalism, it seems companies always need to grow bigger. Why can’t they just say, okay, we have 100 employees and produce a nice product for a specific market and that’s fine?
Or is this only a US megacorp thing where they need to grow to satisfy their shareholders?
Let’s ignore that most of the times the small companies get bought by the large ones.
Extremely oversimplified:
-for Public Companies: CEO and executives are obliged to pursue maximum profit (either short-term or long-term) for the shareholders, thus the company must grow. - - For shareholders its Cost of capital (basically shareholders want bigger returns than the investment they made) and Opportunity Cost (lose money because you don’t move your investment to a company that is more profitable or gonna be more profitable)
-for private companies: Competition (grow or die from your competitor), efficiency (reducing cost), exit (sell it big and retire), psychological reasons (better safe than sorry), etc…
There are many family business or small companies that function as you describe, but they get replaced and driven out of business in a matter of years or decades (with exceptions). But being stable in an growing economy is very hard and risky. And Capitalism by definition must grow or it gets in crisis.
Not all companies need to grow. Some do perfectly fine by just maintaining their current output like a owner operated single person plumbing company.
Another example can be Walmart, they don’t need to grow but investors prefer growth so it becomes a focus.
There are some companies that need absolutely to grow to survive. This is seen a lot in tech where in order for the business model to make sense they would need some big quantity of users.
Let’s say you got seeded 10M and managed to get to a minimal product with 10k users that get you $2 in revenue monthly but your cost are around 50k monthly. It means you’re making a loss but with 100k users you’d make a profit. To get to 100k you need more investment but to justify that investment being sound you need show growth.
So in general if being bigger gets you economies of scale then making a loss early is fine as long as you can get the investor money you need to survive. So to survive as a business you need to grow.
Those are two ends of a spectrum and everything in between exists as well. So quick answer would be “Companies don’t always need to grow but some really do because their business model only works at a different scale”.
If you have competitors, they will develop and have better products / service than you
There’s always room for improvement, and improving requires resources
Because the moment they go public the stock market demands they constantly have an improvement basis to keep their stock holders in a state of security to keep invested. So like get this: there’s a company that makes medical machines to keep people alive. A founder retired and the stock market dipped to half the price. Which only lasts less than a month and it recovers. Of course anyone who’s leading teams would then panic and get flustered
…like this is a company that should have its target about human life. And all the stock holders are worried about is the suit. Like it’s not even an improvement of a product. Improvements are all bullshit announcement for Wall Street.
That is…until crypto collapses it all.
Tax the rich and fix this shit.
I highly recommend reading this https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
This, citizens united and credit scores is where it all started to go wrong
Nonprofit companies don’t have this problem. It’s an issue with capitalism.
Mozilla?
Because greed
Because they take investment.
Privately held companies can sit around earning the exact same amount of profit forever.
But if you are publicly traded on the stock market, people are walking up and injecting money into your business. They expect a return for that investment. And that means that the part of your business they’ve bought has to be worth more in the future in order for them to sell it for more than they bought it.
Therefore: growth. Owning 1% of a $100k business isn’t with as much as owning 1% of a $200k business. So if you own 1%, you want it to go from $100k to $200k.
If you aren’t taking outside money, none of this is a problem. Unless the owners just want a raise, which most people generally do over time. If nothing else, inflation is constantly eroding the value of money so you need to grow a little just to stand still. Most people don’t want to make do with less and less over time.
Re: inflation, growth in pure gross/intake has to increase to match the currency devaluation, and that can mostly be done by adjusting your prices in line with inflation. Employee count, market shares etc. can all hold steady, all else being equal.
This is also the issue with private investment companies.
When the EA deal was announced, people said more or less “this is proof that private isn’t any better than public”. Well that’s sort of true - there’s no guarantee that private is any better, but it CAN be, depends on who owns it. In the case of EA games, it was bought as an investment by a bunch of greedy investors, of course it’s going to be as bad as, if not worse than, a public corp.
It’s literally sad that the only hope for EA to become less scummy as a privately held company, than it was as a publicly traded company, is for the Saudi Arabian regime to proactively use them to win over gamers through the digital equivalent of ‘sports-washing’.
It’s depressing to think that we are at a point where EA could be considered the lesser evil in comparison.
What I was taught literally in fifth grade was this: “A company is successful when its profit is zero.” Meaning, everyone has been paid and the company has lost nothing.
The way I was taught it was by the teacher asking the class and all of us getting it wrong with answers like “A company is successful when it makes a million dollars” and such.
I will never forget it.
Because they run out of “create” and they’re slaves to the quarterly report.
A new company that makes/sells a widget that is desirable will grow naturally from the demand for the product. It has to get bigger to manage the demand. They go public to get more money to grow more quickly. Those public investors expect a return on their stock investment purchase.
Now competitors show up. Competition is bad for our big startup (despite being a supposed tenant of the free market that allowed our company to grow quickly in the first place) that is now a major power in the widget industry. You can only make the widget so many ways, can’t really improve it, and the market is becoming saturated. So what happens next? WidgetCo’s stock is flat! Investors are mad! The CEO is in trouble! Now we do acquisitions and enshittification. Buy the competitors and adjacent product makers. Now there’s “growth” again even though nothing new is made, in fact the product gets worse and nobody gets hired as they want attrition to get rid of redundant employees. The hope is that the widget is so engrained in society that it can’t be done without. Now do unbundling. Subscriptions. Sunsetting. Modify the product so that new versions must be bought due to batteries or servers no longer supporting previous versions. If you can’t make new things, make the customer buy new versions of the same old things.
Gotta keep pushing that quarterly report line up to keep the investors happy and the CEO bonuses coming.
One aspect I haven’t read about: competitive pressure and economics of scale.
So, imagine two carpenters: they both produce one chair a day. They sell it and can sustain their families with that. Now the one carpenter works a little overtime and uses sharper tools: he’s able to produce two chairs a day. He still needs only to sustain his family, so he could sell the chairs at 50% discount. But he goes for 75% of its original price. Still cheaper, he has more.
Everybody wants to buy those chairs now: they’re the same, but one is way cheaper. The other carpenter loses business, he can’t sustain his family anymore, because he needs to sell one chair a day at least. To keep up, his business needs to grow now.
If you have a company in a small town and everything is paid for and the size of the town isnt growing or changing, you actually do not need to grow. There is a company in Leadville, Colorado called “Melanzana”. They make technical hoodies - they’re pretty good. They actively shrank their business by closing their online storefront to reduce demand and reduce the burden of keeping up with that demand.
HOWEVER, if you have a business that is plugged into a larger marketplace and you have investors or have growing rents, etc. your investors expect a return on their investment and your growing costs need to be addressed so the only option is to grow to keep up.
Super interesting topic when you contextualize within a closed, limited, physical space. And by “super interesting” I mean dystopian.
It’s not “companies”, it’spublicly traded companies.
And the answer is quite simple really: the moment you become publicly traded your stock becomes your product, and everything else becomes a means to deliver better stock prices to your investors.
Not all companies are publicly traded, I patronise privately held companies wherever possible because as a client I’m still at the core of their business strategy, and I’m wary of the alternative.
At the end of the day, bad strategies result in bad products and services. Vote with your wallet, it’s very possible.
I work for a privately owned company and we’re absolutely expected to grow. Being privately owned doesn’t change that.
Right but you don’t have a basically legal obligation to if you’re private
??? Of course you do. Investors don’t just buy their way into hypothetical future profits, they buy control over the company. The specifics depend, whether it’s voting shares or the looming threat of debt collection, but the courts will 100 % enforce investors’ right to demand things from companies.
Furthermore the idea that publicly traded companies have some kind of obligation to make as much money as quickly as possible is a reddit-born myth. Shareholders will bring in a CEO, who will be tasked to do whatever and can be fired from the shareholders at any time. Grievous mismanagement and intentional damage can expose a CEO to legal action, just like intentionally destroying tools can expose a worker to legal action. But a CEO acting in good faith has no other obligation than to fulfill the tasks asked of them by shareholders. The problem is that goes wrong when large shareholders plan to sell their shares and need the numbers to look a little better to sell a little higher. But this phenomenon absolutely happens with PE as well – in fact it’s arguably way worse because publicly traded companies at least have legal obligations of financial transparency. Private shareholders can do whatever the fuck they want, including secretly selling their shares to Evil Inc. for them to strip the company for parts and not a single employee has the right to even know who the majority shareholder even is, nervermind what their plan is.
Furthermore the idea that publicly traded companies have some kind of obligation to make as much money as quickly as possible is a reddit-born myth.
Shareholder primacy wasn’t born on reddit, it was actually Milton Friedman who theorized of it, the Michigan Supreme Court who wrote it into precedence, and now American citizens who have to live under the consequences of publicly traded corporations having a distinct legal obligation (against the belief of some legal academics who argue otherwise, in bad faith nonetheless) to provide a profit for shareholders. This also applies to PE, who take this notion of a, once again, distinct legal obligation to provide profits for shareholders above all else, as what you would call a “Get out of jail free card,” i.e. fraud and thievery is completely fine if you’ve got shareholders to feed.
But a CEO acting in good faith has no other obligation than to fulfill the tasks asked of them by shareholders.
Shareholders: “We demand more profits, please start acting in bad faith so I may purchase another boat this afternoon”
CEO: “ok”Alternatively:
Shareholders: “Profits, please”
CEO: “no”
Michigan Supreme Court: “The death sentence is on the table”This is how this has played out since 1919, Dodge v. Ford Motor Co. Wax poetic about theory, in reality people are starving over the sheer necessity that the shareholders want another buck.
Growth and constant growth are not the same.
Obviously growing a business is positive in some circumstances, the point is that growth for growth’s sake becomes the name of the game once you go public, whereas when privately held the company can decide whether it makes sense to grow in that moment or focus on other goals in the short term to benefit a long term strategy.
That is a myth. The law is actually far more complicated, at least in the U.S., and presumably elsewhere too.
Please elaborate because everything written above is correct. Companies must maximize value.
The leading statement of the law’s view on corporate social responsibility goes back to Dodge v. Ford Motor Co, a 1919 decision that held that “a business corporation is organized and carried on primarily for the profit of the stockholders.” That case — in which Henry Ford was challenged by shareholders when he tried to reduce car prices at their expense — also established that “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.”
Shareholder demand? Greed? Probably a lot of both.
I see a great deal of economic rationale being thrown around and usually I love a good discussion on economics, but I believe we are overthinking the question. I would argue any group of people getting together with some shared narrative is going to want to procure more resources for themselves. This can be a family, a tribe, a friend group, a company, a nation, etc. It’s just how we are.
