The Motley Fool

Corporate Growth Consists of a Series of Small Steps

Investing involves a lot of patience, and investors need to be disciplined and focused when it comes to allocating capital. Companies need time to execute growth strategies and garner more business — growth cannot be rushed. It’s amazing how some large companies have grown to the size they are now. What’s their secret sauce, and how do we get a better sense of how it happened?

Every large company must have started out small, over time growing larger and more reputable. As investors, our job is to spot such companies and invest in them at an early stage so we can enjoy the compounding effect as these companies multiply their sales and profits. By identifying positive traits in business models and management, we can then better decide how to allocate our capital.

Decisions, decisions

Capital allocation decisions are an important factor in determining if a company is able to grow. If management continually allocates capital efficiently, it should help to build the business slowly but steadily. Examples include optimal ordering of inventory (for trading companies) or proper production control (to prevent wastage due to over-production).

Each decision would have an overall bearing on revenue and profits. Of course, management can’t be right all the time, but if they make a mistake, management should be candid about it and rectify it immediately.

Building blocks of a company

A company expands its business by making decisions that affect the business in many ways, all of which add up to progress and growth. Each corporate move, therefore, acts as a building block and serves to strengthen the foundation of the company. Note that corporate decisions and strategies normally take at least months, if not years, to carry out successfully and for results to shine through. As investors, we need to monitor such developments closely to see if management is on track, or if they are veering away from their core competency.

Small but ultimately powerful steps

In summary, companies grow through a series of small but powerful steps. We may have heard stories about companies undertaking major acquisitions in order to “short-cut” the process of growing, but such decisions usually come with growing pains as the acquirer cannot effectively “digest” the acquisition.

Smaller decisions are easier to track and implement, and they also allows management to tweak the strategy along the way should they encounter problems or obstacles. Thus, investors should be patient and count on such decisions to slowly increase the value of the company in which they have invested.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.