Friday, May 9, 2008

Corporate Executive Board report on Growth Challenges

If you work in a large company and you want to become humble quickly, check out the Stall Points Initiative, a fascinating stream of research by the Corporate Executive Board. The research shows that almost all companies hit a point where historical growth rates decelerate. Once the corporate growth engine stalls, it is very hard to restart.

The study involved close to 500 companies that have appeared on the Fortune 100 or international equivalents over the past 50 years. Close to 90 percent of those companies experienced a stall, or “secular reversals in company growth fortunes.”

Only 50 percent of companies that stalled were able to grow even moderately over the next decade.

The Corporate Executive Board highlights four primary reasons why companies stall:

- Premium-position captivity, when companies get “stuck” in the high end of their industry
-Innovation management breakdown, a “chronic problem in managing the internal business processes for updating existing products and services and creating new ones”
-Premature core abandonment, when a company falls to capture all of the growth opportunities in and around its core business
-Talent bench shortfall, or a lack of leaders who have the capabilities to execute strategy

One thing that’s not directly on the list, but perhaps should be, is “inappropriate hurdles for innovation efforts.” As a company grows, the hurdle rate for new initiatives becomes so high that many potential game-changing initiatives never see the light of day.

The problem plays out in two ways. First, companies set the bar for the ultimate size of new initiatives so high that it becomes very hard to find attractive opportunities.

Only 250 public U.S. companies have $10 billion in revenues. How many high-flying start-up companies from the last decade reached $10 billion in revenue in 10 years? Well, Google hit $10 billion in its eighth year (2006) and … that’s it.

Unfortunately, massive businesses don’t always look like massive businesses in their early days. Innosight did a quick analysis of revenue by year of close to 20 recent disruptors. The list included Google, eBay,, First Solar, Enernoc, Baidu, and several others.

The average first year revenue of the collection of companies was less than $40 million, with many companies having revenues of less than $1 million. It took until year 3 for the average of the sample to get close to $100 million, and year 7 for the average of the sample to exceed $1 billion.

That is astronomically fast growth, but would be not fast enough for a company seeking a $100-million pop in the first year. The only reliable way to create top-line growth of that magnitude is through relatively large acquisitions, which tend to be at best value-neutral.

So what’s a behemoth to do? One key to success: individual units responsible for growth should be kept small enough so they can prioritize opportunities that start relatively modestly. For a long time Hewlett-Packard had a practice of splitting up any division that reached a certain size, to minimize bureaucracy and leave the smaller unit free to prioritize relatively small opportunities.

For More Information

A summary of the Stall Points research is here:

Blog Acknowledgement Source: Scott Anthony, Innosight.

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