Growth and profitability are issues faced by millions of entrepreneurs around the world.\nBoth are important for long-term success.\nIf a company is highly profitable but not growing, it may be an untapped opportunity for profitable growth.\nIf a company has high growth but is not making a profit, it could mean that they are just accumulating bigger losses than their competitors.\nTherefore, profitable growth<\/i> is undoubtedly what commercial enterprises should aim for. <\/p>\n\n
How, then, do firms achieve the enviable position of having high growth and high profitability at the same time?\nA number of theoretical concepts such as economies of scale, experience effects, first-mover advantages and network effects indicate more or less clearly that growth leads to increased profitability.\nIn today’s entrepreneurial ecosystems, there is often a strong emphasis on rapid growth.\nStart-ups should become scale-ups as if the strong network effects and advertising revenue potential that enabled the success of Facebook, Twitter, Google – and a few others – apply to other companies and industries. <\/p>\n\n
In fact, empirical research has not provided convincing evidence of a general, strong relationship between growth and profitability.\nBut with the above beliefs as the norm, it was seen as quite controversial when I and some fellow researchers published a study a number of years ago that argued the exact opposite: prioritize profitability before investing in growth. <\/p>\n\n
We reached this conclusion by analyzing a large sample of Swedish and Australian companies.\nIn the study, we analyzed how firms’ profitability and growth changed over a number of years.\nIn summary, our analysis shows that companies achieve high growth combined with high profitability mainly if they have achieved high profitability before investing in growth.\nThose that embark on high growth from a low profitability base usually do not become more profitable as a result of growth, nor do they manage to sustain growth for very long.\nIn other words, they risk becoming low performers in terms of both growth and profitability. <\/p>\n\n
The study did not provide a direct answer as to why, but made a reasonable interpretation based on the results.\nIf companies can show high profitability at a smaller size, this is likely to reflect strengths in the company’s products\/services or business model.\nIn short, the company offers something that customers value more than the cost of providing it. And competitors cannot satisfy customers to the same extent at a lower price.\nFrom that favorable starting point, they can expand without sacrificing profitability.\nIf, on the other hand, the company tries to grow from a position of low profitability and no proven superiority, it will have to attract customers with lower prices and more intensive (=costly) marketing.\nMoreover, growth has to be financed externally, which is more expensive than using its own profits.\nThat doesn’t sound like a recipe for improved profit margins, does it? <\/p>\n\n
But while the results were strong and held across subgroups, the study had some limitations.\nThe data came from the 1990s, covered only two countries, and the longest time horizon covered was three years.\nMaybe the payoff comes later?\nFor these reasons, doubters had reason not to be convinced. <\/p>\n\n
Now, those reasons for doubt have been erased by stronger evidence from a study of over 650 000 companies in 28 countries over the period 2011-2019.\nIn Questioning the Growth Dogma: A Replication Study<\/i>, researchers Cyrine Ben-Hafa\u00efedh and Ana\u00efs Hamelin repeat and extend our original study, finding impressively consistent support for the original findings and conclusions: <\/p>\n\n
– Separately in each of the 28 (European) countries studied
Yet one might expect that some doubters would still insist that the results do not apply to, for example, technology-based companies that they believe need to scale up quickly to win the market, often with the help of venture capital investment.\nBut there is in fact an earlier replication study of growth and profitability transitions among biotech firms by Professor Malin Br\u00e4nnback and colleagues where the conclusions remained the same. <\/p>\n\n
This means the case is settled – focus on profits before growth!<\/strong> In fact, few if any conclusions in business research are as strongly supported by data as this one.\nOf course, there are companies that are exceptions, but how many are they?\nGiven the overwhelming evidence we now have from 30 countries, three time periods and different industries, company ages and size classes, it’s time for those who believe in the soundness of the growth-first\/grow-at-any-cost strategy to show us their solid, systematic evidence for that position.\nOr simply reconsider it. <\/p>\n\n Watch the webinar with Per Davidsson and Malin Br\u00e4nnback<\/a> About Per<\/strong> More reading<\/strong> Contact<\/a> the authors for the full article<\/p>\n\n <\/a>Br\u00e4nnback et al Biotech replication (abstract)<\/a><\/p>\n\n <\/a>The original study by Davidsson et al.<\/a><\/p>\n\n <\/a>An 8-minute cartoon video based on the original study<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Growth and profitability are issues faced by millions of entrepreneurs around the world. Both are important for long-term success. If a company is highly profitable but not growing, it may be an untapped opportunity for profitable growth. If a company has high growth but is not making a profit, it could mean that they are […]<\/p>\n","protected":false},"author":5,"featured_media":29882,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[136,163,404],"tags":[],"class_list":["post-31797","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","category-opinion-debate","category-visa-deepl"],"acf":[],"_links":{"self":[{"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/posts\/31797","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/comments?post=31797"}],"version-history":[{"count":1,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/posts\/31797\/revisions"}],"predecessor-version":[{"id":31798,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/posts\/31797\/revisions\/31798"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/media\/29882"}],"wp:attachment":[{"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/media?parent=31797"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/categories?post=31797"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/esbri.se\/en\/wp-json\/wp\/v2\/tags?post=31797"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}