What is sustainable growth? Definition and meaning
Sustainable growth has two main meanings in the world of business and finance – a traditional and a more recent meaning. 1. Sustainable growth, traditionally, has meant the realistically achievable growth that a company or national economy could maintain without running into problems. 2. Today the term is frequently used by environmentalists, meaning economic growth that can continue over the long term without creating intolerable pollution or using up all the non-renewable resources.
Inflation is a common problem that can undermine an economy’s sustainable growth. At company level, growing too rapidly and finding it hard to fund that growth is a common problem that commercial enterprises run into.
A company’s sustainable growth rate (SGR) is the fastest growth rate it can sustain at its current level of financial leverage. In other words, a commercial enterprise’s SGR is how much it can grow before it has to get further into debt.
During the industrial revolution, there was very little sustainable growth in the cities of the advanced economies. The environmental price that future generations had to pay was considerable. Thousands of Londoners died or became extremely ill every year in the 1950s because of pollution (smog). That urban sprawl is evident today in many cities of the emerging economies, including Mexico City, Shanghai, and Lagos.
Sustainable growth of an economy
GDP growth occurs when real output expands over time. Real output is measured by GDP at constant prices, in other words, after removing the effect of inflation on the value of national production.
Sustainable economic growth refers to a rate of growth which a country can maintain without creating other significant economic problems, especially for generations to come.
Rapid economic growth today is great, but it often comes with a trade-off regarding future economic and financial health. If an economy grows too rapidly today, the process may exhaust resources and cause environmental problems for the next generation, or the following one.
Examples of environmental problems include global warming, oil supplies, and fish stocks.
If the company pays out twenty percent of its earnings in dividends, its retention rate is 80%. The Return on Equity is what the company earns on the shareholders’ investment in the business. You get the firm’s sustainable growth rate when the two are multiplied together. (Data Source: thebalance.com)
If an economy grows too rapidly, it may encounter the following economic problems:
- Goods and services inflation
- Wage inflation
- Labor shortages
- Declining savings
- Too much borrowing
- Trade difficulties
- House price inflation
In an article titled ‘Sustainable Growth’, the publication Economics Online writes:
“Periods of growth are often triggered by increases in aggregate demand, such as a rise in consumer spending, but sustained growth must involve an increase in output. If output does not increase, any extra demand will push up the price level.”
As far as sustainability is concerned, economists argue that growth based on short-term public debt, instead of greater long-term productivity, is not sustainable.
For successful sustainable growth, an economy needs to increase its capacity to grow – this is achieved with greater productivity.
Productivity refers to how much is produced per unit of input. For example, if one worker produced 20 shirts per week in a factory last year, and 25 shirts per week this year, his or her productivity has increased by 25% or one quarter.
Sir Richard Branson is a British business magnate, philanthropist and investor. He founded the Virgin Group, a business enterprise than controls over four-hundred companies. (Image: Twitter)
Sustainable growth for a business
Entrepreneurs all face the huge challenge of creating long-term value with limited resources. Fast Company magazine offers the following fundamentals of sustainable growth for commercial enterprises:
– Clear Purpose: every business should have a clear vision of why it does what it does. That is its North Star which guides every aspect of its activities and commercial behavior, from product development and sales to recruitment.
– Partnership and Collaboration: sustainable growth is never achievable for the micromanaging control freak. During the early days when funds are low, it is tempting to do everything yourself.
A hands-on approach is great, however, you damage your company’s prospects if you take on more than you can handle, especially in areas where you do not excel.
Angela Merkel has been the Chancellor of Germany since 2005. She is the de facto leader of the European Union, the most powerful woman on Earth, and is described by many as the second-most powerful person in the world. (Image: bundeskanzlerin.de)
– Strong Brand: building brand equity and emotional connections with customers is crucial. The stronger the attachments are that link customers to a company’s products, the more likely they are to keep coming back.
– Keeping Existing Customers: customer retention is dramatically cheaper than finding new ones. Did you know that if you increase customer retention by just 2%, it has the same effect as reducing your business costs by 10%?
A report published by the US Chamber of Commerce and the US Small Business Administration – ‘Work, Entrepreneurship, and Opportunity in 21st Century America‘ – pointed out that:
– The likelihood of selling to a new customer is 5-20% compared to 60-70% with an existing customer.
– You are four times more likely to do business with an existing customer than a new one.
– On average, US companies lose approximately half of their customer base every five years.
– Repeatable Sales: it is not enough to simply create a unique product and brand. For effective sustainable growth, it is vital to design and implement sales processes that can be effectively deployed repeatedly, each time at a greater scale.
– Community: companies exist in a business ecosystem where people, organizations and other entities interact in thousands of different ways. Ecosystems are vital for sustainable growth because they provide your company with the structure it needs to support it.
Video – What is Sustainable Growth?
This Interserv Plc video explains what sustainable growth is using simple examples and no jargon.