Victims of Our Own Success
In many ways, we have become victims of our own success, raising the bar year in and year out, requiring us to jump even higher the next year. In the world of business, the more you grow, the more you have to grow if you want to keep fueling the delivery of increased earnings.
Consider General Electric, for example. Here's a company that has a history of acquiring 100 or more companies in recent years. Why? Because it takes an ever-increasing amount of new revenue to push General Electric's top line ever upward. As internal businesses mature, an increasing amount of revenue growth at the $140 billion industrial giant must come from acquired businesses, and a $1 billion acquisition today barely impacts General Electric's top line. However, this wasn't always the case.
Throughout the 1970s, General Electric experienced outstanding revenue growth, averaging more than 10 percent a year. The 1980s, however, were far less kind to General Electric's top line with an average rate of growth of just over 3 percent. General Electric nearly tripled its revenue from 1970 to 1979, yet was only able to muster a 25 percent increase in sales from 1980 to 1989. Even more striking is the fact that a much bigger General Electric more than tripled its revenues in the 1990s, topping $100 billion for the first time in 1998. General Electric's revenue grew by nearly $80 billion in the 1990s, from $33 billion in 1990 to $111 billion in 1999.
After disappointing sales in the 1980s, General Electric became an acquisitions machine, gobbling up more than 500 companies over the course of Jack Welch's final five years as chairman. Once hooked on the revenue juice from acquisitions over a period of years, it becomes a difficult habit to kick, and puts immense pressure on any successor to continue the drill: acquire, consolidate, and increase productivity. For Jeffrey Immelt, General Electric's new chairman, it makes it difficult to run the company in any other fashion.
There is little doubt that corporations are finding it more difficult to generate revenue growth by any means, including acquisitions. Since the turn of the 21st century, revenue growth has greatly slowed. So what's the big deal? The big deal is that there is an undeniable connection between revenue and earnings. If revenue stops growing, ultimately so will earnings. For now, most public corporations have been able to put all of their energy into delivering the type of growth that Wall Street expects, and that makes senior management wealthy beyond their wildest dreams. However, the roadmap to earnings delivery has shifted dramatically since 1980 with cost-cuts gaining in importance as the primary earnings driver.
Nonetheless, earnings growth has taken center stage as the Holy Grail for analysts, the business press, shareowners, and management alike. Grow earnings and everybody wins. That is, until you can no longer grow earnings.
Putting Earnings At Risk
This global sales bump in the road won't be fixed by simply firing the vice president of sales or dismissing the advertising agency. This is a new phenomenon for the world's economy. Since the end of World War II, there has always been at least one industry with a rate of growth that is trending up instead of down, until now. Why is this significant? The consistent lack or absence of revenue growth will ultimately put the delivery of earnings growth at risk. In some cases, it already has.
Too many simply brush aside the lack of revenue growth as a short-term problem caused by a number of factors, from September 11 to diminished consumer confidence. The bottom line is this: Management's ability to deliver sustained earnings growth is in jeopardy because of its troubling inability to deliver sustained revenue growth. This puts a tremendous amount of pressure on management to increasingly rely on cost-cutting to deliver earnings.
Wholesale layoffs, dramatic cuts in marketing spending and research and development budgets, and compromising on the fundamental quality of products to save a buck can certainly all contribute to this quarter's earnings target, but at what long-term cost to the health of the corporation and the livelihoods of future generations of workers worldwide?
Ever since the first general store opened near Boston in the 1620s, we have looked forward to a bigger, better year next year. For the most part, we have lived up to that ideal over the last 380 years. We have always believed that growth is unlimited, almost an inalienable certainty, even if it means growing at a slower rate. We believe that the inability to grow is due to someone's inability to deliver. We now know this not to be true in most cases.
We are beginning to understand that growth might not be an economic certainty. If our ability to deliver increased revenues in perpetuity is limited, and our ability to deliver increased productivity in perpetuity is limited, then our ability to deliver increased earnings in perpetuity is also limited.