A Parable of Decline

The following is a parable which shows how a company can go from success to failure over the court of its life. It is a simplification of reality. Despite this, this story is still able to teach us a valuable lesson.

Revenues are inflows of money. If you sell a bar of soap, you get money. That money is revenue. Expenses are outflows of money. The money it cost you to make that bar of soap is an expense. Why would you ever get into the business of selling soap? Well, you probably thought you could sell the soap for more than it cost you to make it, earning you a profit. Of course, maybe you think your bar of soap will change the world, so you sell it for less than it costs to make. That is, of course, until you run of money. Almost all businesses operate with a profit motive - they're in it to make a buck, not spend it. 

Assuming you're a rational human being who wants to support yourself and your family, buy nice things, and take beautiful vacations to countries you've only seen on the June page of the calendar, you'll also start a business with a profit motive. So let's continue with our soap business, which hit it big in the last few months. There's been a nasty virus in your town, so everybody started washing their hands dozens of times a day. And luckily for you, they starting buying boxes and boxes of your soap! Revenues on revenues on revenues, you think in delight, as each customer packs a box of soap into the trunk of their car. Since you're selling so many bars of soap now, you were able to negotiate down the price of materials to make the soap, as you are now buying in bulk. Thus, you are making even more profit on every bar of soap you sell! 

The virus spreads to the neighboring town, and the citizens of this town also start washing their hands dozens of times per day. If somebody loses, somebody also wins. The winner, in this case, is you, since this the citizens of the neighboring town start coming to you for your miraculous bars of soap. This town is so big, however, that you can't make enough bars of soap to meet the demand. So you take your revenues, and you build a soap factory in your backyard. In business terms, you reinvested the revenues you made from selling the bars of soap back into the business in order to build a new soap factory. With this new soap factory, you can make a hundred boxes of soap per day, which is more than enough to meet the demand of both towns. 

After many years, you're a soap magnate. The virus infected the whole world, and your soap company transformed from a factory in your backyard to a global soap enterprise. In the time since, you've become a public company - you gave shares to your grandma, grandpa, and mom, dad, and your brother, since they loaned you money to build your second and third soap factories. Since everybody in the world is infected, the bars of soap you sell every year is almost the same. At this point, your revenues are constant since you haven't changed the price of soap, and your expenses are slightly decreasing each year, as you become better and better at making soap. And since your revenues are higher than your expenses, your soap company is extremely profitable and earns a net income every year, which you deposit in the fattening bag under the mattress. 

Personally, you're extremely happy with your soap business. As a kid, you've always wanted to let the whole world enjoy the best soap it can buy, and you've completed your mission. You've also had dreams to travel all over the world, and finally, you have the means to afford it. Now, your soap business shows no signs of slowing down, but it's not growing either. And since you've been profitable for so long, you start giving some of the profits you made to your grandma, and grandpa, mom and dad, and of course, your beloved brother. They believed in you early on, and now you reward them for their patience. This reward, in business-speak, is called dividends. 

Your grandma and grandpa are very happy with the dividends your pay them every year. They just want a steady flow of cash that they can use every year for their vacation to Florida. And your mom and dad are happy with your dividends too, since they are getting ready to retire and want a cushion of cash to use when they stop working. Your brother though, he isn't happy. Bro thinks that you should make a new line of soap, called shampoo, so that revenues can start growing again. Bro doesn't care that you accomplished your mission of providing the best bars of soap to the world - he wants you to start a new mission of providing the best shampoo to the world. Not because he really cares about the shampoo, but because he wants even higher revenues, and hopefully juicier profits. 

Now your regret ever giving shares of your company to bro. You are happy with the business the way it is, and you don't want to expand it for the sake of making money. Bro, however, is now a shareholder of your soap company, and he has a say in things. When you gave shares to grandma, grandpa, mom, dad, and bro, you decided to give the most to bro because he was your closest friend and supported you most. You were feeling so generous that you gave bro more than half the shares of the company, and now his vote is majority vote. What he says happens. When he says the company is making shampoo, it makes shampoo.

And so, your soap company quickly becomes a shampoo company too, and later a body wash, lotion, creamer, and even lip-balm (bro's wife's sister thought lip-balm was going to be a huge growth market, so bro started making lip-balm too) company. Revenues and profits keep growing, but as the company starts making more and more products, it loses its focus. The quality of the original soap product is no longer the same. The body wash stopped selling as well after a competitor released a new, rock-scented body wash (neutral scents are a huge hit in Washington). The lotion became watered down, ever since bro hired a twelve-sigma-alpha supply chain guru who advised to cut the expenses down. And the lip-balm, which was supposed to be a global phenomenon and sell millions of tubes, actually ended up selling in only one country and was thus a huge flop. Over time, revenues fell, profits turned negative, and the company went bankrupt. 

You sold your stake in the company long ago, but it still hurts to see the soap company you started go out of existence. You changed the world with the best bars of soap, and now that's all gone. You're not one for regrets, but one always gets to you. Had you held a majority share in your company and not diversified into other products, your bars of soap would still be selling today, and your company would be as successful as ever. But growing revenues and profits got to your brother, and the company grew until it couldn't grow no more, at which time it started aging and losing its focus. Focus, you tell your kids, is what makes a great lasting company. Don't let yourself lose focus, you tell them, as the pits of your eyes start swelling with tears, educed by the fervent regrets of your lost company.