Strategic Management
Exponential Growth Threats (E)
What is an Exponential Growth model? What is the impact of the Exponential Growth for our environment? What is the impact of the Exponential Growth to the Business?
Posted: Dec 2008
Nothing is constant in the universe, since everything changes. Everything changes in our world, regardless does it goes up or down. Every occurrence in our surrounding is changing and interacting between each other.
For example, if the price of the oil goes up, than it is to be expected that people will be less eager to travel. On the other hand, if there is a limited time discount in the nearby grocery, it is likely that the number of shoppers will be increased.
So, we see the examples of growth or decline all around us. The growth is inevitable fact of the modern civilization. As we have the population growth, consumption expands, and demand for new commodities expands. But for how long the population growth can happen. Definitely that grow can assure for some time, but the question is what rate of growth will occur?
Let assume that the growth of population in some market is 8% annually and that the demand for food, electricity etc. is also increasing by 8% annually. This population growth sounds as moderate growth. But for how long population growth can continue. Considering the fact that the rate is 8% this can look as modest population growth rate. But the following calculation shows that things are not that simple. If the starting population is 100k, than the annual change is:
Year 1 100 + 8% = 108
Year 2 108 + 8% = 116,6
Year 3 116,6 + 8% = 126
...............................................................
Year 10 199,9 + 8% = 215,9
This rate of growth is called Exponential Growth. The exponential growth occurs when the growth rate is a mathematical function proportional to the function's current value. This function is called Exponential Function.
Now we see that the population growth was more than double in only 10 years. This means that the growing population will need more than double houses, food, parking space, etc. Is our community ready to withstand exponential population growth rate? Is anybody ready to admit that annual population growth of 8% is moderate growth? What will happen to our city if the population continues to expand with exponential growth rate?
If the current population growth rate on our planet continues at exponential growth rate it means that in less than 2,5 millenniums there will be one person per each square meter of dry land.
Is this going to happen? It cannot happen, due to the carrying capacity of our planet. Simply, the exponential population growth will finally slow down, or even decline much sooner. Simply, the exponential function is too demanding in every aspect. Every value that is subject to exponential growth will soon reach the capacity limitation.
The mathematical graph usually shows exponential function heading almost vertically at the end of the graph. But in the real world, exponential growth graph needs to go somewhere. This usually means that when it approaches to the environment capacity, the curve will change its direction. It can even go down if it comes to the ceiling of the environment capacity.
Lets try to apply the same analogy of exponential growth to the business environment. The goal of every company is the profitable existence in the market. In order to provide profit, the company needs to have a certain amount of units sold. Basically, to stay profitable the company needs to be well above the profitability breakeven point. Since there are competitors all around, the company needs to fights for its place. It needs to capture as bigger part of the market, in order to be on the safe side. So the company needs the growth.
But for how long the company can grow by the exponential growth rate? Actually, for how long the whole market can grow by the exponential growth rate? If the goal of the company is the doubledigit growth, then the question is for how long the exponential growth can happen? If the company plan to grow 10% annually that means that it will double it's sales volume in 7 years. What if the population that consumes the product of this company does not double in 10 years? That can mean that the company will have to make their consumers to make buy and consume more, or company need sto find a way to steal from competition. Ideally, the company should do both.
But what happens if the company hits the ceiling of the market carrying capacity? In this case the exponential growth can be a real threat to any company, since the market will be saturated eventually. If the company invests in the expansion of the capacities, in order to follow up the sales plan with doubledigit growth, than these capacities can stay underutilized at some point, after the exponential growth have saturated the market. Since capacities are very costly, the only solution is termination of many employment contracts and closing down the production facilities.
Every company needs to head for the growth. This or the other way, it turns that this plan is always long term exponential growth. But in reality, too ambition and too aggressive growth plan can bring benefit on the short run, but on the long run it can harm the business of the company. In more drastically examples the chain reaction on saturated market can hit many industries at the same time, as a result of cumulative exponential growth and the market saturation.
So any business planning needs to take into serious consideration the danger that Exponential Growth can bring.
Exponential Growth Video by Dr. Albert A. Bartlett, Professor Emeritus Department of Physics University of Colorado at Boulder

