The Death of Business Growth

Introduction

The death of business growth can happen to even the most successful companies.?In his revolutionary bestseller,?“The Innovator’s Dilemma ”,?Clayton Christensen demonstrates how successful, outstanding companies can do everything “right” and yet still face from inadequate business growth, more specifically lose their market leadership – or even fail – as new, unexpected competitors rise and take over the market. Through this compelling multi-industry study, Christensen introduces his seminal theory of “disruptive innovation” that has changed the way managers and CEOs around the world think about innovation.

While decades of researchers have struggled to understand why even the best companies almost inevitably fail, Christensen shows how most companies miss out on new waves of innovation. His answer is surprising and almost paradoxical: it is actually the same practices that lead the business to be successful in the first place that eventually can also result in their eventual demise. This breakthrough insight has made The Innovator’s Dilemma a must-read for managers, CEOs, innovators, and entrepreneurs alike.

Good money turns bad in a self-reinforcing downward spiral that makes it very difficult for even the best executives to do anything except preside over the company’s demise as it faces death of business growth. There are five steps in this spiral. Once a company has fallen into it, it becomes almost impossible not to take the subsequent steps.

Companies Succeed And Their Business Growth Is Impressive

After using an emergent?strategy ?process to find a successful formula, a young company hits its stride with a product that helps customers get an important job done better than any competitor. With the winning strategy now clear, the executive team wrestles control of the strategy-making process away from emergent influences and deliberately focuses all investments to exploit this opportunity. Anything that would divert resources from the crucial, deliberate focus on growing the core business is stomped out.?

Such focus is an essential requirement for success at this stage. However, it means that no new-growth businesses are launched while the core business is still thriving. This focus propels the company up its sustaining trajectory ahead of competitors who are less aggressive and less focused. Because margins at the high end are attractive, the company barely notices when it begins losing low-end,?price-sensitive business ?in what comes to be viewed as a?“commodity segment” . Exiting the lowest-margin products and replacing those revenues with higher-margin products at the top of the sustaining trajectory typically feels good because overall gross profit margins improve.

Companies Face A Growth Gap In Their Core Business

Despite the company’s success, its executives soon realize that they are facing a growth gap. This is caused by the pesky tendency of Wall Street investors to incorporate expected growth into the present value of a stock—so that meeting growth expectations results only in a market-average rate of stock price appreciation.?

The only way that managers can cause their companies’ share prices to increase at a faster rate than the market average is to exceed the growth rate that investors have already built into the current price level. Hence, managers who seek to create shareholder value always face a growth gap—the difference between how fast they are expected to grow and how much faster they need to grow to achieve above-average returns for shareholders.?

As a rule, executives meet investor expectations through?sustaining and disruptive innovations . Investors understand the businesses in which companies presently compete and the growth potential that lies along the sustaining trajectory in those businesses—which they discount into the present value of the stock price. Sustaining innovation is therefore critical to maintaining a company’s share price. It is the creation of new?disruptive businesses ?that allows companies to exceed investor expectations, and therefore to create unusual shareholder value. For precisely the reasons why established companies are prone to underestimate the growth potential in disruptive businesses, investors likewise have consistently underestimated (and therefore have been pleasantly surprised by) the growth potential of disruptions.?Creating new disruptive businesses is the only way in the long term to continue creating shareholder value.?

When a company’s revenues are denominated in millions of dollars, the amount of new business that managers need to close the growth gap—new revenues and profits from unknown and yet-to be-discounted sources—also is denominated in the millions of dollars. But as a company’s revenues grow into the billions, the size threshold of new business that is required to sustain its growth rate, let alone exceed investors’ expectations, gets bigger and bigger and bigger. At some point the company will report slower growth than investors had discounted, and its stock price will take a hit as investors realize that they had overestimated the company’s growth prospects.?

To get the stock price moving again, senior management announces a targeted growth rate that is significantly higher than the realistic underlying growth rate of the core businesses. This creates a growth gap even larger than the company has ever faced before—a gap that must be filled by new-growth products and businesses that the company has yet to conceive. Announcing an unrealistic growth rate is the only viable course of action.?

Executives who refuse to play this game will be replaced by managers who are willing to try. And companies that do not attempt to grow will see their market capitalization decline until they get acquired by companies that are eager to play.

Good Money Becomes Impatient For Business Growth

When confronted with a large growth gap, the corporation’s values, or the criteria that are used to approve projects in the resource allocation process, will change. Anything that cannot promise to close the growth gap by becoming big very fast cannot get through the?resource allocation ?gate in the strategy process. This is where the process of creating new-growth businesses comes off the rails and death of business growth starts becoming a looming possibility.?

When the corporation’s investment capital becomes impatient for growth, good money becomes bad money because it triggers a subsequent cascade of inevitable incorrect decisions. Innovators who seek funding for the disruptive innovations that could ultimately fuel the company’s growth with a high probability of success now find that their trial balloons get shot down because they can’t get big fast enough.?

Managers of most disruptive businesses can’t credibly project that the business will become big very fast because new-market disruptions need to compete against non-consumption and must follow an emergent strategy process. Compelling them to project big numbers forces them to declare a strategy that confidently crams the innovation into a large, existing, and obvious market whose size can be statistically substantiated.?

This means competing against consumption. After senior executives have approved funding for this inflated growth project, the company’s managers cannot then back down and follow an emergent strategy that seeks to compete against non-consumption. They are on the hook to deliver the growth that they projected. They therefore must ramp expenses according to plan.

Executives Temporarily Tolerate Losses

It becomes clear that competing against consumption in a large and obvious market will be an expensive challenge because if customers are to buy the product, it must perform better than the products that customers are already using. The team warns senior executives that stomaching huge losses is a prerequisite to winning the pot of gold.?

Determined to be visionary with the long-term interests of the company in mind, executives therefore accept the reality that the business will lose significant money for some time. There is no retreat. Executives convince themselves that investing for growth will result in growth, as if there were a linear relationship between the two—as if the more aggressively you invest to build the new business, the faster it will take off. To meet the budgeted timetable for rollout and ramp-up, the project managers put the cost structure in place before there are revenues—and because they must support a steep revenue ramp, these costs are substantial.?

But over-funding is hazardous to a new venture’s health because heavy expense levels in turn define the sorts of customers and market segments that will and will not provide adequate revenues to cover those costs. If this happens, then customers who come from non-consumption in emerging applications and are therefore delighted with simple products—in short, the ideal customers for a disruptive venture—inevitably become unattractive to the business. The ideal channels—those that need something to fuel their own disruptive march up-market against their competition—also become unattractive. Only the largest channels that reach the largest populations appear to be capable of bringing in enough revenue fast enough.?

This completes the character transformation of the corporation’s money. It has become bad money for new-market disruption: Impatient for growth but patient for profit. The death of business growth becomes more real.

Mounting Losses Precipitate Retrenchment

As the venture’s managers try to succeed by competing against consumption, they find all sorts of reasons why customers prefer to continue buying the products they have always used from the vendors they have always trusted. Breakthrough sustaining innovations can rarely be hot-swapped into existing systems of use.?

Typically, many other unanticipated things need to change in order for customers to be able to benefit from using the new product. While revenues fall far short, expenses are on budget. Losses mount. The stock price then gets hammered again, as investors realize anew that their expectations for growth cannot be met. A new management team gets brought in to rescue the stock price.?

To staunch the bleeding, the new team stops all spending except what is required to keep the core business strong. Refocusing on the core is welcome news. It is a tried-and-true formula for performance improvement because the company’s resources, processes, and values have been honed exactly for this task. The stock price bounces in response, but as soon as the new price has fully discounted whatever growth potential exists in the core business, the new executives realize that they must invest to grow.?

But now the company faces an even greater growth gap, and the situation loops back to step 3, where the company needs new-growth businesses that can get huge really fast. That pressure then causes management to repeat the tragic sequence of wrong decisions again and again, and the death of business growth materializes for real. So much value has been destroyed that the company is acquired by another corporation, which itself had been unable to generate its own growth through disruption but saw in the acquisition a synergistic opportunity to wring cost out of the combination.

So, what are you waiting for?

Further Reading

For those looking to delve deeper into the topics discussed in this article, we highly recommend exploring the abundant resources through our website dedicated to these topics . These readings offer invaluable insights and practical tips to enhance your understanding of the subject. They will help you broaden and deepen your knowledge effectively.

We invite you also to visit our Business Lab to discover how our comprehensive range of services can assist you in addressing the challenges discussed in this article. Our team of experts is dedicated to providing tailored solutions to meet your specific needs. By leveraging our innovative approaches and cutting-edge know-how, you can transform these challenges into opportunities for growth and success. Join us at the Business Lab to explore how we can support your business in achieving its goals.

Our Blog and Newsletter

The FutureEdge CFO Blog (“aka” Blog) is our central repository for all meaningful information and content that FutureEdge CFO cares for and supports, which we package and make accessible to anyone who visits our site to facilitate creative thinking and inner reflection. We aspire to cultivate a growing body of knowledge that is uniquely our own, but is acquired externally, and we share it to promote the values we stand for, but also to help make sound decisions and take the most effective action.

We write about various topics including:

#bestadvice #business #businessintelligence #consultants #creativity #economy #entrepreneurship #finance #financialadvice #financialadvisor #financialplanning #future #gettingthingsdone #innovation #leadership #management #money #productivity #productivity #projectmanagement #saas #startups #strategy #sustainability #sustainablefinance #technology #venturecapital #whatinspiresme