Why Successful Companies Stop Growing

May 30 2014, 2:46pm CDT | by


@font-face/>

{font-family:”MS 明朝”;

mso-font-charset:78;

mso-generic-font-family:auto;

mso-font-pitch:variable;

mso-font-signature:-536870145 1791491579 18 0 131231 0;}

@font-face

{font-family:”Cambria Math”;

panose-1:2 4 5 3 5 4 6 3 2 4;

mso-font-charset:0;

mso-generic-font-family:auto;

mso-font-pitch:variable;

mso-font-signature:-1610611985 1107304683 0 0 415 0;}

@font-face

{font-family:Calibri;

panose-1:2 15 5 2 2 2 4 3 2 4;

mso-font-charset:0;/>/>

mso-generic-font-family:auto;

mso-font-pitch:variable;

mso-font-signature:-520092929 1073786111 9 0 415 0;}

@font-face

{font-family:Cambria;

panose-1:2 4 5 3 5 4 6 3 2 4;

mso-font-charset:0;

mso-generic-font-family:auto;

mso-font-pitch:variable;

mso-font-signature:-1610611985 1073741899 0 0 415 0;}

/* Style Definitions */

p.MsoNormal, li.MsoNormal, div.MsoNormal

{mso-style-unhide:no;

mso-style-qformat:yes;

mso-style-parent:”";

margin:0in;/>/>

margin-bottom:.0001pt;

mso-pagination:widow-orphan;

font-size:12.0pt;

font-family:Cambria;

mso-ascii-font-family:Cambria;

mso-ascii-theme-font:minor-latin;

mso-fareast-font-family:”MS 明朝”;

mso-fareast-theme-font:minor-fareast;

mso-hansi-font-family:Cambria;

mso-hansi-theme-font:minor-latin;

mso-bidi-font-family:”Times New Roman”;

mso-bidi-theme-font:minor-bidi;}

.MsoChpDefault

{mso-style-type:export-only;

mso-default-props:yes;

font-family:Cambria;/>/>

mso-ascii-font-family:Cambria;

mso-ascii-theme-font:minor-latin;

mso-fareast-font-family:”MS 明朝”;

mso-fareast-theme-font:minor-fareast;

mso-hansi-font-family:Cambria;

mso-hansi-theme-font:minor-latin;

mso-bidi-font-family:”Times New Roman”;

mso-bidi-theme-font:minor-bidi;}

@page WordSection1

{size:8.5in 11.0in;

margin:1.0in 1.25in 1.0in 1.25in;

mso-header-margin:.5in;

mso-footer-margin:.5in;

mso-paper-source:0;}

div.WordSection1

{page:WordSection1;}/>/>

/* List Definitions */

@list l0

{mso-list-id:1744061311;

mso-list-template-ids:1180712638;}

@list l0:level1

{mso-level-number-format:bullet;

mso-level-text:;

mso-level-tab-stop:.5in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Symbol;}

@list l0:level2

{mso-level-number-format:bullet;

mso-level-text:o;

mso-level-tab-stop:1.0in;/>/>

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:”Courier New”;

mso-bidi-font-family:”Times New Roman”;}

@list l0:level3

{mso-level-number-format:bullet;

mso-level-text:;

mso-level-tab-stop:1.5in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

@list l0:level4

{mso-level-number-format:bullet;

mso-level-text:;/>/>

mso-level-tab-stop:2.0in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

@list l0:level5

{mso-level-number-format:bullet;

mso-level-text:;

mso-level-tab-stop:2.5in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

@list l0:level6

{mso-level-number-format:bullet;

mso-level-text:;/>/>

mso-level-tab-stop:3.0in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

@list l0:level7

{mso-level-number-format:bullet;

mso-level-text:;

mso-level-tab-stop:3.5in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

@list l0:level8

{mso-level-number-format:bullet;

mso-level-text:;/>/>

mso-level-tab-stop:4.0in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

@list l0:level9

{mso-level-number-format:bullet;

mso-level-text:;

mso-level-tab-stop:4.5in;

mso-level-number-position:left;

text-indent:-.25in;

mso-ansi-font-size:10.0pt;

font-family:Wingdings;}

ol

{margin-bottom:0in;}

ul/>/>

{margin-bottom:0in;}

–>

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.

Editor’s Note:  version of this blog was cross-posted on HBR.org.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

IPad Air Giveaway 2014 is Online
IPad Air Giveaway 2014 is Online
Our sister site I4U News is giving away a brand new iPad Air or if you can wait an iPad Air 2. This is an $499 value.
 
 
Your Parent Or Kid Moved In: Are You Covered?
A record 57 million Americans now live in multigenerational family households — double the number in 1980, according to a new Pew Research Center study. And I bet many of them have the wrong homeowner’s or renters...
 
 
Pandora Looks to Challenge Terrestrial Radio's Dominance in Cars
Pandora Media is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow...
 
 
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
It’s January 2026. New York Yankees owner Hal Steinbrenner gets out of his driverless car and triumphantly marches before the gathered press to introduce his prized new free agent. It’s a record-breaking contract—over...
 
 
 

Latest from the Network

Jewel doing good post split
Los Angeles, Sep 17 (IANS) Singer Jewel, who separated from Ty Murray, her husband of over six years, is not letting the split affect her. "I'm doing good!" the singer was quoted by people.com as saying. The 40-year-...
Read more on Celebrity Balla
 
UN announces Israeli-Palestinian pact on rebuilding Gaza
United Nations, Sep 17 (IANS/EFE) The United Nations Tuesday announced an agreement between Israel and the Palestinian Authority on the rebuilding of the Gaza Strip, devastated in the recent Israeli military offensive...
Read more on Politics Balla
 
Canada announces further sanctions against Russia
Toronto, Sep 17 (IANS) Canada has imposed further economic sanctions and travel bans against Russia in support of Ukraine, Canadia's Foreign Affairs Minister John Baird said Tuesday. Since the start of the Ukraine...
Read more on Politics Balla
 
US hails ratification of Ukraine-EU association agreement
Washington, Sep 17 (IANS) The US Tuesday congratulated the people of Ukraine on the ratification of the country's Association Agreement with the European Union(EU). "By forging ahead with this agreement in the face of...
Read more on Politics Balla
 
One million newborns die within 24 hours of birth: UN
United Nations, Sep 17 (IANS) One million babies each year died within 24 hours of birth from mostly preventable causes, a UN report said Tuesday. The 2014 Committing to Child Survival, a Promise Renewed progress...
Read more on Business Balla
 
UN chief calls for unity at General Assembly session
United Nations, Sep 17 (IANS) UN Secretary-General Ban Ki-moon Tuesday said the 69th session of the UN General Assembly (GA) opened as the world was confronted with an " unprecedented level of crisis" and called for...
Read more on Politics Balla
 
Ebola epidemic spiraling out of control: Obama
Washington, Sep 17 (IANS) The Ebola epidemic in West Africa is "spiraling out of control" and posing a potential threat to global security, US President Barack Obama warned Tuesday. "If the outbreak is not stopped now...
Read more on Business Balla
 
My son has taught me about patience: Hilary Duff
Los Angeles, Sep 17 (IANS) Actress Hilary Duff can't really remember life without her two-year-old son Luca and says he has changed her completely. The "Chasing the sun" singer credits Luca, her son with estranged...
Read more on Celebrity Balla
 
Scottish minister insists of using pound even if gets independence
Edinburg, Sep 17 (IANS) Scottish First Minister Alex Salmond Tuesday insisted that an independent Scotland could not be prevented from using the pound. In an interview with Sky TV news, Salmond reiterated his desire...
Read more on Politics Balla
 
Portman 'honoured' to be face of Dior
Los Angeles, Sep 17 (IANS) Actress Natalie Portman says it is an "honour" to front campaigns for Dior and is constantly excited about working on new projects with the Parisian label. The "Black Swan" star, who has...
Read more on Celebrity Balla