TOO BIG TO GROW?

According to Stall Points, research conducted by the Corporate Executive Board (see Harvard Business Review Magazine Article), that 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.

There are many reasons why growth becomes increasingly difficult as a company grows. One challenge is that the hurdle for new initiatives becomes so high that many potential game-changing initiatives never see the light of day. To quote one fortune 100 executive from the article: “A billion is nice, but at our size we really need to set the target at $10 billion.”

The problem is there aren’t very many $10 billion businesses sitting around. Worse, a $10 billion business doesn’t always look like a $10 billion business in its early days. The only reliable way to create that top-line growth of that magnitude is through relatively large acquisitions, which tend to be at best value neutral.

So what’s a giant to do? One key to success is keeping individual units responsible for growth 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.

Another key is to set reasonable screens for new growth opportunities. By all means make sure there is a story for why a given opportunity could be a blockbuster success. But leave room for exploration, iteration, and small starts, or it will just be a matter of time before you hit your own stall point.

via Scott Anthony at HBS