We’ve all seen examples of unstoppable companies that suddenly hit
the wall. Growth slows down, stock prices start to decline, shareholders
get nervous, and the press starts to speculate that something is wrong.
In some cases, like P&G and Starbucks, the board brings back a former CEO who can presumably return the firm to its previous glory. In other cases, like with Apple,
GE, or Cisco, the board holds its breath and hopes that things will
change.But the reality behind many of these cases is that periodic
slowdowns are inevitable, even if the company is fundamentally solid.
That doesn’t mean that CEOs (old or new), and other managers, can’t do
anything to slow the decline or reverse it more quickly. Taking action,
however, requires an understanding of the three forces that always drag
high-flying companies back to earth.
The first is the law of large numbers.
As a company gets bigger, each percentage of incremental revenue
suddenly represents a fundamentally larger number. As the base grows,
the amount of new business needed to make a material difference in
earnings also rises, increasing the pressure on sales to find new
markets, new categories, and new geographies. In other words, the larger
a company becomes, the more the entire engine has to work harder.
A company’s growth is also inhibited by market maturity. Over time, markets follow more predictable patterns
as buyers become familiar with and loyal to particular brands.
Eventually, as the market becomes more crowded, prices tend to
stabilize, reducing the ability to grow through price increases.
Finally, some markets reach a saturation point either because of limited
demographic growth or commoditization of products. Taken together,
these product and market life cycle forces all put pressure on the typical sources of growth for marketing and sales.
The third reason that growth slows down is psychological self-protection. As a company gets larger, there is more pressure to preserve the base business and less willingness to cannibalize it
through innovative new offerings. As a result, at the very moment when
the company needs new sources of growth, there is a tendency to play it
safe and focus more on adapting existing products and services, rather
than breakthrough opportunities. This not only opens the door to
potentially disruptive competitors, but constrains moves into whatever
is perceived as “risky” territory.
Taken together, these natural
forces almost always damp down growth, which is why we shouldn’t be
surprised when successful companies hit periodic speed bumps. The
challenge of course is what to do about it. Here are two suggestions
that managers at all levels can consider:
- Regularly re-examine your business model. In
the face of the forces described above, most business models eventually
get stale and need to be either abandoned or refreshed. So periodically
take a look at what you do, and how you do it – and ask yourself if it
still makes sense. Could someone else provide this product or service
differently? Do our customers have other choices or have their needs
changed? In other words don’t limit your innovation and research to the
development of new products and services, but also focus on the
possibility of new business models.
- Think about getting smaller in order to get bigger. A
second way to cope is to periodically do some pruning. Like trees that
get too spindly, organizations also grow unnecessary branches that
reduce the health of the overall enterprise. These need to be cut back
in order to allow new shoots to have the resources to flourish. To do
so, ask yourself whether some of your products or services may not be
producing sufficient returns; or whether you would be better off without
some of your customers. These are tough questions that often provoke
strong emotional responses. But taking action on them can liberate you
and your resources to focus on new opportunities and will lead to more
growth in the long term.
There is no such thing as a company
that grows forever without eventually hitting the wall, or at least
slowing down to go over a speed bump. Through judicious pruning and the
exploration of new business models however, managers can minimize the
slow downs and give their organizations a better chance at long-term
growth.