|Four Factors that Affect Corporate Growth—or Not |
|November 8, 2006 -- By Dan Bobinski |
When growth occurs, it’s a good thing, right? Perhaps not. Manageable growth is good, but grow too fast and you could end up a sitting duck for failure.
Last year a study was conducted on the fifty-seven largest corporate crashes between 1988 and 2003. As reported by Business Briefings, in each of these crashes the company lost 40 percent or more of its value, with their combined losses totaling 2.5 trillion dollars. The one common thread among them? An amazing average of 30 percent growth during the five years preceding their crash. .
In addition to their phenomenal growth rates, almost all of these companies showed other desirable traits, as well: The ability to adapt quickly to change, leaders who were strong visionaries, and a success-oriented mindset that permeated the company.
Ask anyone if they would like these conditions and you’ll probably hear a resounding yes. In fact, a lot of companies are starving in these attributes, and many would pay dearly to get them.
But too much of a good thing can be a bad thing. In each of the companies that experienced major failures, these “success factors” existed in abundance.
Let’s look at these factors in more detail:
Growth. In most of these companies, to keep up with whatever real growth had occurred, leadership started looking at acquisitions to maintain their growth percentages. The downside of this rapid expansion did not allow for sufficient managerial oversight to develop and stabilize operations, leaving key performance indicators overlooked.
Subsequent analysis of these companies after their failures indicates that they could have safely grown 7.5 percent annually – enough to keep many stockholders happy. Thirty percent annually over a five year period is just too much. A company ends up suffering what I call the “round up” effect, wherein, like a dandelion that’s been sprayed with a weed-killer, it grows too fast to sustain itself and it dies.
In my opinion, this is one of the major landmines to watch out for after taking a company public. Before long, leaders may make decisions to appease stockholders who want short-term gains, not long term stability.
Change. The ability to adapt to changes is one of the most vital of all company survivability attributes. Yet excessive diversification coupled with too much attention devoted to new business ideas can starve a company’s core business strategy.
The result of over-diversification is a lost corporate identity. For example, although the digital communications company Qualcomm Incorporated is not a failure and has not declared any form of bankruptcy, some of their top personnel wrestled with a key question during the company’s phenomenal growth years in the mid-1990’s: “Are we a telecommunication company that makes chips or are we a chip company that’s also involved with telecommunications?”
Lucky for Qualcomm, this question got addressed before it became a problem. But for the fifty seven largest bankruptcies, this type of question remained a problem.
Leadership. Top executives with strong visions are great to have onboard. But those who gain too much power often become dangerous to a company’s survivability. According to the study, firms were more likely to achieve and sustain superior performance when powerful board members were able to keep powerful leaders in check.
Autocratic leaders pursuing lofty goals can take companies away from their core business and blur a corporation’s identity.
Success. Competitive reward systems were common in these business crashes. Such systems are powerful in spurring success, but they often remove a balanced management approach. As a result, employee trust begins to wane. Lower trust levels lead to subjective communication, which leads to poor decisions. Essentially, imbalanced management leads to severely weakened performance that many can’t see until it’s too late.
Interestingly, successful companies weren’t the only ones that suffered crashes from extremes in these four areas. Business Briefings also reports data about stagnant corporations that crashed with the same four factors in play: Growth, change, leadership, and success.
But, as you can imagine, the low-performing companies had problems at the other end of the spectrum. Each of the failing stagnating companies experienced at least three out of the following four problems:
• Stagnating Growth
• Tentative Change
• Weak Leadership
• Lack of a Success Culture
It appears that successful companies are those that pay attention to balance in these areas. They manage their growth and their change efforts, and they keep a handle on the strengths of their leaders and the pace of their success.
Bottom line, too much—or too little—of a good thing is a bad thing.
© 2006 Dan Bobinski / Leadership Development, Inc. You may freely forward this information providing the text is sent as an integral whole and contact information for the author is included, such as using the text that appears below: