3 Reasons Growth Slows In Good Companies

It caught my attention immediately.Periodic slow-downs in growth are inevitable, even in solid companies

A blog post about why successful companies stop growing. A topic I was tempted, only last week, to call an obsession.

While the examples Ron Ashkenas uses are all large corporations, it really doesn’t matter.

The points he makes apply equally well to business owners and family businesses.

Ashkenas argues that periodic slow-downs in growth are inevitable – even for solid companies. That doesn’t mean that business owners and their management teams can’t do anything to slow the decline or to reverse it quickly.

First, however, they have to understand the 3 forces that Ashkenas says always slow down high-flying companies. Here they are.

1.  The Law of Large Numbers

When revenues are $5 million, targeting annual growth of 20% means adding $1 million to the top line. When they’re $50 million, chasing 20% growth means adding $10 million in sales in 12 months.

It takes significantly more resources to support $10 million in new sales than it does to add $1 million. And some of them, e.g. people with the skills and experience required, can’t always be found quickly and easily.

Then there’s the size and growth rate of the market. If it’s $100 million and growing quickly, adding $1 million in sales means taking, at most, 1% more market share. However, adding $10 million in a mature or declining market means getting 10% more market share – and that probably means taking it away from competitors.

2.  Market Maturity

When a market turns hot, competitors multiply like mosquitos. That limits the potential for price increases, which are a relatively easy way to increase revenues.

Some companies build stronger brand loyalty than others, slowing the ability of the weaker competitors to grow. Some products become commoditized, price becomes king and margins become thin, affecting bottom line growth.

Eventually markets become saturated and the bigger, stronger players either gobble up the weaker ones or force them out.

3.  Psychological Self-Protection

Ashkenas describes this as pressure to maintain the base business and unwillingness to risk it with innovative new products.

In the companies we’ve worked with, it often appears in a different form (and perhaps deserves a different name). As these companies grow, the management team spends more and more time focusing on meeting the increasing demand while maintaining quality. This is often caused by weak processes, lack of discipline and lack of accountability.

In both cases, however, management is the cause of the declining growth.

No company grows forever without hitting some bumps along the way. The challenge for the business owner is to recognize what’s really going on and to deal with it.

Sometimes it takes an external, third party to be able to do that.

You can read Ron Ashkenas’ full post here.

 

If you enjoyed this post you’ll also enjoy Why Would Anyone Hire A Management Consultant? and Why Would Anyone Hire A Management Consultant? – Part 2.

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Tags: brand loyalty, business owners, companies, competitors, consultants, declining growth, Jim Stewart, management, markets, processes, ProfitPATH, resources, revenue, strategy

Comments

  1. Alan Kay says:

    Great points Jim. The other point I’d make is; what do we mean by ‘growth’. The automatic assumption that it’s solely about sales and profit can lead to the wrong questions being answered in strategy sessions. When circumstances change (that’s a law of the universe), we have to re-frame our assumptions about what we want to grow. For example, if we look at the US economy it’s never going to grow again as it did for the last 60+ years. The US now has to share wealth (and power) with other ascending countries – your point #2. So, there’s a need to re-frame growth. Personally, I think this is where leadership and vision have to step in. But, that’s another story.

  2. Jim Stewart says:

    Alan, thanks for sharing your interesting (as usual) thoughts. I like your point about the meaning of “growth”. Particularly in the context of not for profits and social enterprises. I have no expertise in national economic growth models. That said, I’m still going to say that it’s possible for companies based in a country with a mature economy to continue sales and profit growth.

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