Day: June 8, 2016

In February, I discussed the challenges companies have dealing with a changing business environment and a corollary to that challenge is how to reignite growth once your company has stagnated. Chris Zook and James Allen tackled this problem in an article, Reigniting Growth, in the Harvard Business Review. In the article, the authors point out that almost all companies eventually face stall-out, “a sudden large drop in revenue and profit growth or a collapse of once high shareholder returns to well below the cost of capital. Stall-out occurs when the growth engine that powered a company to success stops working. This rarely happens because the business model has suddenly become obsolete—a common misconception. Rather, [their] research shows that the business has almost always become too complex, most often owing to bureaucracy that slows the company’s metabolism, or internal dysfunction that distorts information and hampers managers’ ability to make rapid decisions and take swift action on them.”

There is a consistent theme when looking at big companies that have stalled-out. They talk about being swamped with bureaucracy, overwhelmed by Powerpoints and an inability to act decisively even on great opportunities. While competition impacts your growth, success hinges on remaining fast, perceptive, innovative and adaptable. 94 percent of leaders of companies with $5 billion plus revenue believe internal dysfuntion was the main barrier to growth, not competition or lack of opportunity.

The authors identify three qualities that can help overcome stall-out. By rediscovering your insurgent mission, obsessing over the business front line and instilling an owner’s mindset, companies can reignite growth.

Rediscover your insurgent mission

The first key is to regain the focus and mission that drove your company’s growth. When stall-out occurs, it is almost always connected to creeping complexity. The authors suggest companies experiencing stall-out need to liberate resources, narrow focus and harness the vigor that drove early growth. The company should shed noncore assets and businesses. Then attack complexity in the core processes. Finally, your company should focus on reducing product complexity.

Part of the problem is the democratization – or socialism – of resources. As companies grow, internal budget processes spread resources evenly across businesses and opportunities. While this may feel fair to the management team, and all employees, it impacts growth and drives the company to mediocrity. Successful leaders instead make bold budget decisions to redifferentiate the company, usually establishing a major new capability that set off waves of growth.

Even after growth is reignited, companies need to renew their approach as being business insurgents. Companies should view their customers as underserved and their industries as setting insufficient standards, and should constantly emphasize what is special about themselves. Bold goals—not just the aim of living to fight another day—will sustain growth.

Conversely, you should not be scared to shrink your company to become more efficient and focused. By cutting back, it forces your company to focus on what is most important and reduce bureaucracy that does not increase value. It also allows you to dedicate more resources to growing your company.

Obsess over Your Businesses’ Front Line

The second key to reigniting growth is focusing on the front line of your business. As Zook and Allen write, “this obsession, which can often be traced back to a strong founder, shows up in three ways: an elevated status for frontline employees, a preoccupation with individual customers at all levels of the company, and an institutional curiosity about the details of the business.”

Usually, this obsession is what generated growth initially and the layering of bureaucracy chipped away at it. Other companies likely responded to the weakening relationships and provided better customer relationships and hired your best employees. By moving the focus back to what built the company, you can reignite growth.

Instill an Owner’s Mindset

The final component to overcoming stall-out is instilling an owner’s mindset throughout the organization. This is not just P&L responsibility, but giving employees personal responsibility for their actions and deployment of resources. Allow, and encourage, your employees to take risks. Eliminate the bureaucracy (think risk committees or really any committee) that takes decision making out of their hands. Allow them to partner with external companies. Encourage people to form internal teams to test new ideas. The key is give people the power to get things, important things, done.

Preempt stall-out

While the article focused on how to overcome stall-out, more importantly it also implicitly shows how to avoid stall-out. Rather than reaching a situation where growth has stalled, if you leverage the three keys above while still in a growth stage you should continue to grow rather than have to deal with a turnaround.

Key Takeaways

• Most successful companies eventually face a sudden, large drop in revenue or growth, stall-out, that is largely caused by an increase in bureaucracy.
• To overcome stall-out, companies need to focus on what made them great initially, obsess over their customers and front-line employees and instill a true owner’s mindset where employees are empowered to make key decisions.
• In addition to overcoming stall-out, these practices can help growing companies avoid the problem altogether.