We’ve all come across examples of high growth companies that suddenly hit the wall. However the reality behind many of these companies whether large or small is that periodic slowdowns are inevitable, even if the company is fundamentally solid. That doesn’t mean that the leadership team 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 will affect high growth companies.
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 also rises, increasing the pressure on sales to find new markets, new categories, and new geographies.
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 or company’s. Eventually, as the market becomes more crowded, prices tend to stabilise, reducing the ability to grow through price increases. Finally, some markets reach a saturation point either because of limited demographic growth or commoditisation of products. Taken together, these product and market life cycle forces all put pressure on the typical sources of growth for sales.
The third reason that growth slows down is psychological self-protection. As a company gets larger, there is more pressure to protect the underlying business and less willingness to cannibalise it through innovation. 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.
The combination of these natural forces almost always slow down growth, which is why we shouldn’t be surprised when high growth companies hit periodic speed bumps. The challenge of course is what to do about it. Here are two suggestions that should be considered:
- 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.
- 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, organisations also grow unnecessary branches that reduce the health of the overall company. These need to be cut back in order to allow new shoots to have the resources to flourish.
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 pruning and the exploration of new business models however, managers can minimise the slow downs and give their organisations a better chance at long-term growth.