Growing Profitable or Growing from Profits?

In this vignette, Professor Per Davidsson considers some of the dynamics associated with firm growth.

Praise for rapidly growing firms – the ‘gazelles’ as they are sometimes called – abound in the media and sometimes also in political rhetoric. These fast-growing firms, we are told, create the bulk of new jobs and new wealth and are therefore the heroes of the economy. And surely sometimes they are.

Several academic theories also portray firm growth as a good thing. Economies of scale, experience effects and first mover advantages are assumed to accrue to those firms that grow larger than their competitors. More recently phenomena like eBay and Facebook are clear examples of Network externalities; that the value of a product or service can increase with the number of users.

But is growth universally a good thing? We also hear horror stories about firms that grew to their own death by losing financial control and/or growth creating internal, organizational turmoil. And to achieve rapid volume growth all you need to do is buy high and sell low, and for sure customers will love you; grow in numbers, and buy more. Financially it would be sheer disaster. So when we are assessing the value of growth we also need to consider how sustainable it is, and what are its likely effects on profitability.

This is what we tried to do in the research here. We asked the question:

What firms are more likely to be able to combine high growth with high profitability? Do firms become more profitable as a result of their growth? Or is it the small, profitable firms that manage to scale up their businesses without losing their already high profitability?

Download and read the full vignette here