Business growth generates ownership or shareholder value which ultimately translates into investment growth. In order to find businesses that are growing you have to understand the basics of business growth.
The simplest way to understand this topic is by example. Imagine someone is passionate about the widget business, and wants to start a widget business. The widget business isn’t a new type of product, but rather an existing one, so the saturation of the widget market already exists and is high. If this were a new technology then the saturation of the new technology to potential users or buyers would be low.
Widget Business Growth
For this new widget business owner there will be only a small portion of the pie for him or her to capture without changing something about the product or undercutting competitor’s prices. Once that portion of the pie is captured the growth prospects for this widget business will be limited. If the manufacturer is able to lower the cost of the widget by reducing overhead expenses or production costs then the business will be able to either maintain the same annual sales volume and garner larger margins, or the business can lower the cost of the product and hopefully capture more market share until competitors figure out how to do the same.
Lowering costs is one method of increasing the flow of profits to the bottom line. The other would be if the manufacturer was able to offer a widget that was better that offered more technology or value to the purchaser for the price paid versus the competition. This type of innovation would be an attempt for the business to capture more market share.
Once the above types of product improvements have peaked or reach their technological alpha then the product ultimately may become a commodity, since the only way for it to compete in the future will be on price, so margins will get impacted and profits will slowly retreat over time. This forces the business to constantly focus on cost cutting in order to stay competitive.
If the business reaches full saturation of its product the other alternatives available to it for business growth are finding complementary product lines to enhance its ability to capture a larger portion of the sale. This is a common activity that can be seen worldwide with corporate businesses. There are many businesses trying to expand their reach or capture more margin by adding product lines that can be an easy add on to their consumer. Most large corporations that have endured longer life cycles have to constantly search for new lines to expand their margins due to saturation or low technology of their products.
When investing your investment should have a theme. In other words you should be able to put a story to what you’re investing in and why. This will force you to understand the business and why it’s value will grow in the future. If the business doesn’t have some concept of how it’s growing then eventually its value will fade. To be a successful investor compounding or growth needs to exist in some form.
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