The clustering that is at the heart of our findings is clear: Four categories account for more than half the occurrences of root causes we cataloged—premium-position captivity, innovation management breakdown, premature core abandonment, and talent bench shortfall. What the exhibit demonstrates is that the vast majority of stall factors result from a choice about strategy or organizational design. They are, in other words, controllable by management.
Further, even within this broad realm, nearly half of all root causes fall into one of four categories: premium-position captivity, innovation management breakdown, premature core abandonment, and talent bench shortfall. More generally we will explore why management is so often blindsided by these events. As we will show, a large number of global companies may at this moment be perilously close to their own stall points.
Knowing how to avoid growth stalls begins with understanding their causes. By far the largest category of factors responsible for serious revenue stalls is what we have labeled premium-position captivity: the inability of a firm to respond effectively to new, low-cost competitive challenges or to a significant shift in customer valuation of product features. A company that solidly occupies a premium market position remains insulated longer than its competitors against evolution in the external environment.
It has less reason to doubt its business model, which has historically provided a competitive advantage, and once it perceives the crisis, it changes too little too late.
Readers will recognize the intellectual kinship between our notion of premium-position captivity and the patterns of technology disruption described by Clayton M.
In documenting premium-position captivity in leading enterprises, we saw a cycle of disdain, denial, and rationalization that kept many management teams from responding meaningfully to market changes. Price and quality leaders such as Eastman Kodak and Caterpillar, for example, have found themselves unable or unwilling to formulate a timely, effective response to the threat posed by foreign entrants.
Both Compaq and Philip Morris now part of Altria failed to respond to signs of trouble in the early s because they relied on performance metrics designed around generous margins. We saw premium-position captivity at work in the Levi Strauss stall when the company failed to spot a strategic inflection in customer demand. They continue to place their bets on product or service attributes that are in decline, while disruptive entrants emphasizing different, underrecognized features gain ground.
In the early s Levi Strauss enjoyed surging revenues even as its relationships with the Gap and other distributors faltered and as designers and retailers introduced jeans products at the high and low ends of the market. The rise of house brands and superpremium designer jeans looked manageable—or ignorable—as long as healthy revenue growth continued. By the time the growth stall had become evident, the company found itself with an expensive retailing strategy and a product line that was out of step with both ends of the denim jeans market.
The market data relating to this growth stall were not hidden from Levi Strauss executives; the challenge was to separate the signal from the noise. Its story illustrates how difficult it is to respond to a threat in the absence of a burning platform: If your sales are continuing to rise, how do you focus concern? Or we were in denial. Although the onset of premium-position captivity is gradual, there are often clues that trouble is afoot, both in the external market and in executive attitudes and behaviors.
It can also be revealing to focus on metrics different from those you ordinarily emphasize. If you normally track profit per customer, for example, you are content when it rises. But would you notice if customer acquisition costs increased even more rapidly? When it comes to management attitudes, your ears may pick up the strongest clues: Listen closely to the tone in the executive suite when conversation turns to upstart competitors or to successful rivals that are viewed as less capable.
Is it acceptable, or routine, to dismiss them as unworthy? Do your processes for gathering intelligence about your competitors ignore some of these market participants because of their size or perceived lack of quality? At the top of every industry are companies that have built premium positions for themselves, dominating the market among the most demanding customer segments and providing products or services that lead the field in performance, thus commanding higher prices.
The organizational strengths in product development, brand management, and marketing that created these top positions are sources of great pride to the firms that cultivated them. But attack from new competitors with significantly lower cost structures, or changes in customer preferences that start slowly and then reach tipping points, can actually transform these dependable sources of competitive advantage into weaknesses. Product innovation loses its ability to protect pricing premiums, and presumed brand and marketing strengths no longer dependably protect market share.
It is possible to spot the onset of premium-position captivity. The goal should be to map premium features and low-end competitor performance. The second most frequent cause of growth stalls is what we call innovation management breakdown: some chronic problem in managing the internal business processes for updating existing products and services and creating new ones.
We saw manifestations of this at every major stage along the activity chain of product innovation, from basic research and development to product commercialization.
By contrast, the secular growth stalls we identified were attributable to systemic inefficiencies or dysfunctions. But problems seem to arise when decentralization is combined with an explicit or implicit metric that demands a high share of revenue growth from new-product introductions.
A stark example of this occurred at 3M in the s, when the company experienced a revenue stall after decades of robust top-line growth. Since its founding, in , 3M had followed a clear formula for success, developing innovative products with industrial applications that supported a premium position and then leapfrogging to the next opportunity as the market matured.
Total growth slowed as divisions focused on ever narrower niche-segment opportunities. As a result, we never fully developed our manufacturing competencies.
And when competitors followed us, we would refuse to confront them—it was always easier to innovate our way into a new niche. As we looked at the variety of ways in which problems in the innovation management process can eventually produce major revenue stalls, we were struck by the fragility of this chain of activities, and by how vulnerable the whole process is to management decisions made to achieve perfectly valid corporate goals. There are some powerful clues, however, when a company is at serious risk.
Is the senior team able to look into funding decisions at the business unit level to monitor the balance between incremental and next-generation investments? Is some portion of innovation funding allocated to creating lower-cost versions of existing products and services? Given the long lead times characteristic of the innovation process, flaws are slow to surface—and time-consuming to remedy. The third major cause of revenue stalls is premature core abandonment: the failure to fully exploit growth opportunities in the existing core business.
Its telltale markers are acquisitions or growth initiatives in areas relatively distant from existing customers, products, and channels.
This category has received significant attention in the recent business literature. Perhaps as a result, stalls attributed to premature core abandonment cluster in the period before We are tempted to credit the management consulting industry for having hammered home the need for attention to core businesses. That is not to say that Fortune —size firms have mastered the art of generating continuous growth in their core businesses. Quite the contrary: The recent wave of private equity takeovers suggests that many public companies still struggle in their efforts to grow established businesses.
Almost without exception, these take-overs are based on strategies for growing the core—strategies that public-company executive teams are either unable or unwilling to pursue. Either situation invariably ended badly, with some competitor moving in to displace the incumbent. One can hardly blame Sarnoff when even the physicists were advocating moving on—and move on he did.
He pursued initiatives in three new, presumably higher-growth directions. Second, he decided that marketing was the future and deployed huge resources to acquire companies in the consumer products sector. Third, the company redirected internal resources from consumer electronics research into marketing and brand management projects. Just as interesting as getting it wrong on core business growth prospects is the tendency of executive teams to simply give up on apparently intractable problems in their core businesses.
The most intriguing example of this occurred at Kmart. In Kmart reached a peak in new store openings, adding facilities to its countrywide network. That would prove to be its limit. Over the next decade the company reined in expansion in its core business, convinced that the U. Its chairman, Robert Dewar, created a special strategy group whose purpose was to study new growth avenues and, in the parlance of the time, far-out ideas.
Rather, it is that the executive team failed to monitor and match the distribution and inventory management capabilities that its rival was pioneering in Bentonville, Arkansas. Throughout the next decade Wal-Mart continued to invest in its cross-docking distribution system, while Kmart pursued a range of disparate businesses, including PayLess Drug Stores, the Sports Authority, and OfficeMax.
As Kmart lagged ever further behind, its imagined need for outside-the-core growth platforms became real.
Our fourth major category is talent bench shortfall: a lack of leaders and staff with the skills and capabilities required for strategy execution. Talent bench shortfall merits careful definition, because it has become a fact of daily life in many industries and functions. Indeed, at this writing, shortages of critical talent are the primary concern of human resources departments globally, not just in high-growth markets but in a range of specialty skill categories, and they are expected to get worse.
What stops growth dead in its tracks, however, is not merely a shortage of talent but the absence of required capabilities—such as solutions-selling skills or consumer-marketing expertise—in key areas of a company, most visibly at the executive level. What stops growth dead in its tracks is not merely a shortage of talent but the absence of required capabilities, most visibly at the executive level.
Internal skill gaps are often self-inflicted wounds, the unintended consequence of promote-from-within policies that have been too strictly applied. Such policies, often most fervent in organizations with strong cultures, can accelerate growth in the heady early days of executing a successful business model.
But when the external environment presents novel challenges, or competition intensifies, these policies may be a severe drag on progress.
One important element in this category is a narrow experience base at the senior executive level that prevents a timely response to emerging strategic issues. Hitachi, which went into a growth stall in , illustrates this problem.
This narrowness extends to functional pedigree: The firm has historically had an engineering culture, with none of its top executives holding an MBA or other business degree. As Hitachi looks toward its centennial in , however, change may be in the offing: Kazuo Furukawa, who was named president and chief operating officer in , came up through the telecom and information systems sectors.
Few companies formally monitor the balance in the executive team between company lifers and newer hires who offer fresh perspectives and approaches. Furthermore, large companies have a fairly poor track record on incorporating new voices into senior management. We have identified a simple way to ensure balance in the senior executive ranks—what we call mix management. As noted, the four categories we have outlined account for nearly half of all the root causes we cataloged. A host of other, less common causes that came up in our analysis crossed a broad terrain, including failed acquisitions, key customer dependency, strategic diffusion, adjacency failures, and voluntary growth slowdowns.
The lack of awareness is particularly vexing, because it is so insidious. Strategic assumptions begin life as observations about customers, competitors, or technologies that arise from direct experience. They are then enshrined in the strategic plan and translated into operational guidance.
Eventually they harden into orthodoxy. This explains why, when we examine individual case studies, we so often find that those assumptions the team has held the longest or the most deeply are the likeliest to be its undoing. Some beliefs have come to appear so obvious that it is no longer politic to debate them. Part of the reason that few top teams question assumptions is that doing so goes against the nature of the senior executive mandate: The CEO and his or her executive team are paid to develop a vision and execute it—with resolve.
A third part is process: CEOs have very few opportunities to safely express their midnight anxieties. And the one opportunity for stock taking that is built into the annual calendar of most firms—the review of the strategic plan for the coming year—all too often fails to stimulate deep, searching conversation. To assist executives in spotting signs of vulnerability to growth stalls in their own organizations, we offer two kinds of tools. The first is a diagnostic self-test we developed at the conclusion of our research.
Are you about to hit a stall point? A diagnostic survey of 50 red flags can help signal the danger in time. Below is a sampling of red flags relating to premium-position captivity; other parts of the survey highlight other hazards. To the extent that your senior team and high-potential managers see these as areas for concern, you may be headed for a free fall.
The first two are effective in making strategic assumptions explicit, and the latter two are designed to test those assumptions for ongoing relevance and accuracy. A hallmark of these practices is that they are embedded in the work flow of the firm—the job of some individual or team—or otherwise built into core operating systems. Gary Hamel and his colleagues at Strategos have led the way on this practice.
The best-functioning squads include a significant share of younger, newer employees, who are less likely to be invested in current orthodoxies. Their efforts are most fruitful when the team is prepared to raise thorny issues and challenge entrenched beliefs, using methods ranging from reality checks—What industry are we in? Who are our customers?
What conventions did they overturn? One leading consumer-goods company told us that it had used this practice to kick off an inquiry into long-term growth pathways and to challenge conventions that had taken hold through the years. An abrupt and lasting drop in revenue growth is a crisis that can strike even the most exemplary organization. The authors' comprehensive analysis of growth in Fortune size companies over the….
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The record shows that if management cannot turn a company around within a few years, the odds are that it will never again see healthy top-line growth. Fortunately, the authors of the Corporate Executive Board have uncovered and categorized the most common causes of growth stalls. The majority of these standstills are preventable because, according to the authors, they arise from management choices about strategy or organizational design; external factors e.
Four categories predominate: Premium-position captivity. When a firm's world-class offering has won the most demanding customers in the market, it often fails to respond effectively to new, low-cost competitive challenges or shifts in customer valuation of product features.
Innovation management breakdown. Because most large corporations generate sequential product innovations, any systemic inefficiency or dysfunction in the innovation chain can cause extremely serious problems that last for years. Premature core abandonment. Managers may conclude too quickly that a core market is saturated. Or they may incorrectly interpret operational impediments in the core business as evidence that it's time to move into new competitive terrain.
Talent bench shortfall. Insufficient capabilities will stop growth dead in its tracks.
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