When Growth Stalls

Last Updated Feb 17, 2009 2:23 PM EST

The Idea in Brief

It happens even to exemplary companies: after years of neck-snapping acceleration in revenue, growth suddenly stalls. And no one saw it coming.

Worse, if executives don't diagnose the cause of a stall and turn things around fast, a company stands little chance of ever returning to healthy top-line growth.

It's tempting to blame stalls on external forces (economic meltdowns, government rulings) and conclude that management is helpless. But according to Olson, Van Bever, and Verry, the most common causes of growth stalls are knowable and preventable:

  • A premium market position backfires
  • Innovation management breaks down
  • A core business is abandoned prematurely
  • The company lacks a strong talent bench
  • Understand these causes--along with their telltale clues--and you'll be better equipped to stop your firm from heading into a fatal nosedive.

    The Idea in Practice

    The Four Causes of Growth Stalls

    Cause Explanation Example Key Symptoms

    Premium position backfires A company with long-successful premium brands ignores new, low-cost rivals or major shifts in customer preferences. Levi Strauss ignored the rise of house brands and super-premium designer jeans while its revenues were surging. Its share of the U.S. jeans market dropped by half over the 1990s. ? Market share plummets in narrow customer segments. ? Customer acquisition costs jump. ? Key customers increasingly resist service enhancements.

    Innovation management breaks down A company mismanages the processes for creating new offerings. After 3M pushed its R&D budget out to its units, the product-centric divisions focused on incremental extensions, not major new offerings. 3M's annual growth rate fell from 17% to 1% between 1979 and1982. ? Senior executives can't monitor funding decisions at the business-unit level to check the balance between incremental and next-generation investments.

    Core business is abandoned prematurely Believing its core markets are saturated, a company doesn't fully exploit growth opportunities in its existing business. In the late 1960s, RCA decided the age of breakthroughs in consumer electronics had passed. It invested in mainframe computers and acquired consumer-products firms. Meanwhile, Steve Jobs and Bill Gates were on the verge of starting companies that would revolutionize RCA's former core business. ? The company invests in acquisitions or growth initiatives in areas distant from existing customers, products, and channels. ? Executives refer to a product line, business unit, or division as "mature."

    Company lacks a strong talent bench The firm has few executives and staff with strategy- execution capabilities. At Hitachi, executives consistently came up from the company's energy and industrial side, but Hitachi's growth prospects lay elsewhere. No top executives held an MBA or other business degree. In 1994, Hitachi experienced a devastating downward slide in earnings. ? The executive team comprises company lifers with a narrow experience base. ? Management development programs focus on replicating current leadership's skills.

    Preventing a Stall

    Ossified assumptions about customers, competitors, and technologies are the underlying causes of growth stalls. To prevent a stall, surface these assumptions and test their accuracy. Here's how:

  • Commission a squad of younger, newer employees to ask questions such as "What industry are we in?" "Who are our customers?"
  • Have teams develop visions of your company's future five years hence. Look for issues the scenarios have in common; they reveal core beliefs you should monitor.
  • Ask a venture capitalist to sit in on strategy reviews and probe for weaknesses.
  • Further Reading

    Article

    The Four Principles of Enduring Success

    Harvard Business Review

    July 2007

    by Christian Stadler

    Stadler provides additional advice for sustaining increases in revenue growth: 1) Exploit before you explore. Great companies don't innovate their way to growth--they grow by efficiently exploiting the fullest potential of their existing innovations. 2) Diversify your business portfolio. Good companies, conscious of the dangers of irrational conglomeration, tend to stick to their knitting. But great companies know when to diversify, and they remain resilient by maintaining a wide range of suppliers and a broad base of customers. 3) Remember your mistakes. Good companies tell stories of success, but great companies also tell stories of past failures to avoid repeating them. 4) Be conservative about change. Great companies very seldom make radical changes--and they take great care in their planning and implementation.

    Collection

    Why Bad Decisions Happen to Good Managers

    HBR Article Collection

    April 2005

    by Giovanni Gavetti, Jan W. Rivkin, Ralph L. Keeney, Howard Raiffa, Dan Lovallo, Daniel Kahneman, and John S. Hammond III

    To spot looming growth stalls, you need to challenge assumptions and avoid the cognitive biases that can cause you to stick to a dangerous status quo. This collection provides suggestions. "How Strategists Think: Tapping the Power of Analogy" shows how to draw lessons from one business setting and apply them to another to spark breakthrough strategies. "The Hidden Traps in Decision Making" reveals the cognitive traps that can mar strategic decision making and suggests tactics for sidestepping the traps. "Delusions of Success: How Optimism Undermines Executives' Decisions" presents a four-step process for balancing overly optimistic forecasts of future business performance with more realistic assessments.

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