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Successful companies lose

momentum for four main
reasons. All are within
When Growth Stalls
management’s control if
spotted in time. by Matthew S. Olson, Derek van Bever, and
Seth Verry

Included with this full-text Harvard Business Review article:

1 Article Summary
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work

2 When Growth Stalls

14 Further Reading
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications

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When Growth Stalls

The Idea in Brief The Idea in Practice

It happens even to exemplary companies: THE FOUR CAUSES OF GROWTH STALLS
after years of neck-snapping acceleration in
revenue, growth suddenly stalls. And no
Cause Explanation Example Key Symptoms
one saw it coming.
Premium A company with Levi Strauss ignored the rise • Market share plummets
Worse, if executives don’t diagnose the position long-successful of house brands and super- in narrow customer
cause of a stall and turn things around fast, backfires premium brands premium designer jeans while its segments.
a company stands little chance of ever re- ignores new, low- revenues were surging. Its share • Customer acquisition
cost rivals or major of the U.S. jeans market dropped costs jump.
turning to healthy top-line growth. shifts in customer by half over the 1990s.
preferences. • Key customers
It’s tempting to blame stalls on external increasingly resist service
forces (economic meltdowns, government enhancements.
rulings) and conclude that management is Innovation A company After 3M pushed its R&D budget • Senior executives
helpless. But according to Olson, Van Bever, management mismanages out to its units, the product- can’t monitor funding
and Verry, the most common causes of breaks down the processes centric divisions focused on decisions at the
growth stalls are knowable and preventable: for creating new incremental extensions, not business-unit level
offerings. major new offerings. 3M’s annual to check the balance
• A premium market position backfires growth rate fell from 17% to 1% between incremental
between 1979 and1982. and next-generation
• Innovation management breaks down investments.

• A core business is abandoned prema- Core business Believing its In the late 1960s, RCA decided • The company invests in
is abandoned core markets the age of breakthroughs in acquisitions or growth
turely prematurely are saturated, consumer electronics had initiatives in areas distant
• The company lacks a strong talent bench a company passed. It invested in mainframe from existing customers,
doesn’t fully computers and acquired products, and channels.
Understand these causes—along with their exploit growth consumer-products firms. • Executives refer to a
telltale clues—and you’ll be better opportunities in its Meanwhile, Steve Jobs and product line, business
existing business. Bill Gates were on the verge of unit, or division as
equipped to stop your firm from heading

starting companies that would “mature.”

into a fatal nosedive. revolutionize RCA’s former core
Company The firm has At Hitachi, executives • The executive team
lacks a strong few executives consistently came up from the comprises company
talent bench and staff with company’s energy and industrial lifers with a narrow
strategy- execution side, but Hitachi’s growth experience base.
capabilities. prospects lay elsewhere. No top • Management
executives held an MBA or other development programs
business degree. In 1994, Hitachi focus on replicating
experienced a devastating current leadership’s skills.
downward slide in earnings.

Ossified assumptions about customers, com- • Have teams develop visions of your com-
petitors, and technologies are the underlying pany’s future five years hence. Look for
causes of growth stalls. To prevent a stall, issues the scenarios have in common; they
surface these assumptions and test their accu- reveal core beliefs you should monitor.
racy. Here’s how:
• Ask a venture capitalist to sit in on strategy
• Commission a squad of younger, newer reviews and probe for weaknesses.
employees to ask questions such as “What
industry are we in?” “Who are our customers?”

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Successful companies lose momentum for four main reasons. All are
within management’s control if spotted in time.

When Growth Stalls

by Matthew S. Olson, Derek van Bever, and
Seth Verry

Senior management at Levi Strauss & Com- end. Today, with a new management team in
pany could be forgiven for not seeing it coming. place, Levi Strauss has undergone a company-
The year was 1996. The company had just wide transformation. It may be regaining its

achieved a personal best, with sales cresting $7 footing, but it has yet to return to growth.
billion for the first time in its history. This While more dramatic than many, this is the
performance extended a run of growth in story of a revenue growth stall—a crisis that
which overall revenue had more than doubled can hit even the most exemplary organiza-
within a decade. Since taking the company tions. It shares many elements with other
private in 1985, management had relaunched stalls, at companies as varied as 3M, Apple,
the flagship 501 brand, introduced the Dockers Banc One, Caterpillar, Daimler-Benz, Toys “R”
line of khaki pants, and increased interna- Us, and Volvo. What these companies would
tional sales from 23% to 38% of revenue and surely recognize in the story is the stall’s sud-
more than 50% of profits. Growth in 1995 was denness. Like Levi Strauss, most organizations
the strongest it had been in recent years. actually accelerate into a stall, experiencing
And then came the stall. From that high- unprecedented progress along key measures
water mark of 1996, company sales went into just before growth rates tumble. When the
free fall. Year-end revenue results for 2000 momentum is lost, it’s as if the props have
were $4.6 billion—a 35% decline from four been knocked out from under their corporate
years prior. Market value declined even more strategy. (See the exhibit “No Soft Landings.”)
precipitously: Analysts estimate that it went Typically, few on the senior team see the stall
from $14 billion to $8 billion in those four coming; core performance metrics often fail
years. The company’s share of its core U.S. to register trouble on the horizon.
jeans market dropped by half over the 1990s, As part of our ongoing research into
falling from 31% in 1990 to 14% by decade’s growth, the Corporate Executive Board re-

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When Growth Stalls

cently completed a comprehensive analysis sign. They are, in other words, controllable
of the growth experiences of some 500 leading by management. Further, even within this
corporations in the past half century, focusing broad realm, nearly half of all root causes fall
particularly on “stall points”—our term for into one of four categories: premium-position
the start of secular reversals in company captivity, innovation management breakdown,
growth fortunes, as opposed to quarterly premature core abandonment, and talent
stumbles or temporary corrections. The com- bench shortfall.
panies in our study included more than 400 In this article we’ll offer advice for avoiding
that have appeared on the Fortune 100 since these hazards, drawing from practices cur-
that index was created, some 50 years ago, rently in use at large, high-growth companies
along with about 90 non-U.S. companies of to foresee possible stalls and head them
a similar size. The study revealed patterns off. More generally we will explore why man-
in the incidence, costs, and root causes of agement is so often blindsided by these
growth stalls. (Our research approach is events. As we will show, a large number of
described briefly in the sidebar “The Search global companies may at this moment be
for Stall Points.”) perilously close to their own stall points.
On the quantitative record alone, we can Knowing how to avoid growth stalls begins
attest that Levi Strauss is in good company: with understanding their causes. Let’s look at
87% of the companies in this group have each of the four categories.
suffered one or more stall points. We can also
appreciate the consequences of such events. When a Premium Position Backfires
On average, companies lose 74% of their mar- By far the largest category of factors respon-
ket capitalization, as measured against the sible for serious revenue stalls is what we
S&P 500 index, in the decade surrounding a have labeled premium-position captivity:
growth stall. More often than not, the CEO the inability of a firm to respond effectively
and senior team are replaced in its aftermath. to new, low-cost competitive challenges or to
And unless management is able to diagnose a significant shift in customer valuation of
the causes of a stall and get the company back product features.
on track quickly—turning it around in a mat- We use the term “captivity” because it sug-
ter of several years—the odds are against its gests how management teams can be hemmed
ever returning to healthy top-line growth. in by a long history of success. A company
Deeper analysis sheds light on the most that solidly occupies a premium market
common causes of growth stalls, which turn position remains insulated longer than its
out to be preventable for the most part. competitors against evolution in the external
There is a common assumption that when environment. It has less reason to doubt its
the fortunes of great companies plunge, it business model, which has historically pro-
must be owing to big, external forces— vided a competitive advantage, and once it
economic meltdowns, acts of God, or govern- perceives the crisis, it changes too little too
ment rulings—for which management can- late. When the towering strengths of a firm
not be held accountable. In fact most stalls are transformed into towering weaknesses,
Matthew S. Olson (olsonm@ occur for reasons that are both knowable it’s a cruel reversal.
executiveboard.com) is an executive and addressable at the time. The exhibit Readers will recognize the intellectual kinship
director, Derek van Bever “The Root Causes of Revenue Stalls” reveals between our notion of premium-position
(vanbeverd@executiveboard.com) is the factors that lay behind the stalls of 50 captivity and the patterns of technology dis-
the chief research officer, and companies we went on to study in depth; ruption described by Clayton M. Christensen
Seth Verry (verrys@executiveboard clearly, a company can falter in many ways. in his landmark book The Innovator’s Dilemma
.com) is a senior director at the Corpo- One might almost think that sustaining (Harvard Business School Press, 1997). As we
rate Executive Board, an advisory and growth in a very large company depends on scan the broad data set of the Fortune 100 over
performance improvement network of doing absolutely everything right. But the the past half century, we are struck by Chris-
leaders of the world’s largest public root causes of stalls are not so varied or com- tensen’s acumen. In documenting premium-
and private organizations, based in plex that we can’t see patterns. position captivity in leading enterprises, we
Washington, DC. This article is adapted What the exhibit demonstrates is that the saw a cycle of disdain, denial, and rationalization
from the book Stall Points (Yale Univer- vast majority of stall factors result from a that kept many management teams from
sity Press), forthcoming in 2008. choice about strategy or organizational de- responding meaningfully to market changes.

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When Growth Stalls

Price and quality leaders such as Eastman retailing strategy and a product line that was
Kodak and Caterpillar, for example, have out of step with both ends of the denim
found themselves unable (or unwilling) to jeans market.
formulate a timely, effective response to the The market data relating to this growth
threat posed by foreign entrants. The owners stall were not hidden from Levi Strauss exec-
of iconic brands, such as American Express, utives; the challenge was to separate the signal
Heinz, and Procter & Gamble, may assume from the noise. The company’s years of success
that the decades-long investments they warped its interpretation of what it was
have made in their brands will protect seeing. Its story illustrates how difficult it is
their premium prices against lower-cost en- to respond to a threat in the absence of a
trants. Both Compaq and Philip Morris burning platform: If your sales are continuing
(now part of Altria) failed to respond to to rise, how do you focus concern? In 1999
signs of trouble in the early 1990s because Gordon Shank, then the company’s chief
they relied on performance metrics designed marketing officer, admitted ruefully, “We
around generous margins. didn’t read the signs that all was not well. Or
We saw premium-position captivity at we were in denial.”
work in the Levi Strauss stall when the company Although the onset of premium-position
failed to spot a strategic inflection in customer captivity is gradual, there are often clues that
demand. In cases like this one, organizations trouble is afoot, both in the external market
and their multiple sophisticated market- and in executive attitudes and behaviors. (See
sensing activities simply don’t recognize the the sidebar “When Does a Premium Position
importance of an emerging behavior or Become a Trap?”) Easiest to spot in marketing
customer preference in their core markets. data are pockets of rapid market share loss,
They continue to place their bets on product particularly in narrow customer segments,
or service attributes that are in decline, while and increasing resistance among key customers
disruptive entrants emphasizing different, to solutions wrappers and other bundling of
underrecognized features gain ground. services. It can also be revealing to focus on
In the early 1990s Levi Strauss enjoyed surg- metrics different from those you ordinarily
ing revenues even as its relationships with the emphasize. If you normally track profit per
Gap and other distributors faltered and as de- customer, for example, you are content when
signers and retailers introduced jeans products it rises. But would you notice if customer ac-
at the high and low ends of the market. The rise quisition costs increased even more rapidly?
of house brands and superpremium designer When it comes to management attitudes,
jeans looked manageable—or ignorable—as your ears may pick up the strongest clues:
long as healthy revenue growth continued. By Listen closely to the tone in the executive
the time the growth stall had become evident, suite when conversation turns to upstart
the company found itself with an expensive competitors or to successful rivals that are

No Soft Landings
An analysis of the growth histories of Fortune 100 and Global 100 companies that experienced stalls between 1955 and 2006 reveals this compos-
ite pattern. After a burst of energy, growth does not descend gradually; it drops like a stone.


9.3% 9.2% 8.8%

8.0% 7.8%
Rates 4.2%
2.5% 2.4%
1.7% 1.5% 1.1% 1.4% 1.9%
(0.5%) (1.0%) 0.7% 0.7%
0.1% 0.0% 0.0%
Years –5 –4 –3 –2 –1 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15

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When Growth Stalls

The Search for Stall Points

To understand the prevalence of serious for the 10 years preceding and the 10 first is that revenue growth, more than
growth crises in large companies, as years following must have been at any other metric, is the primary driver
well as their costs and causes, we ana- least four percentage points; and the of long-term company performance.
lyzed the experiences of more than 400 CAGR of the subsequent 10 years must This is not to say that revenue growth
companies that have been listed on the have fallen below 6% in real dollars. without profits is desirable, but high
Fortune 100 since its inception, in 1955, One stall point identified in this man- growth through margin management
and of about 90 comparable non-U.S. ner is shown below. alone is unsustainable. The second
companies. Some 500 companies over We then turned our attention to why premise is more mundane: It’s hard to
50 years gave us 25,000 years’ worth of companies stall. Out of the 500 compa- manipulate the top line over time, and
historical data and information to nies, we selected for in-depth case re- market value and profit measures are
mine for insights. A pattern that search 50 that were representative of much more variable. Revenue growth
emerged from these histories yielded the whole in terms of industry mix and guided us to the most meaningful turn-
the useful construct of the stall point— age. We assembled comprehensive ing points in corporate growth history.
that moment when a company’s dossiers on all of them, drawing on the We would be pleased to discuss any
growth rate slips into what proves to public record of financial reports and aspect of this methodology or detail of
be a prolonged decline. published materials, on case studies, our findings with analysts wishing to
We began by analyzing the revenue and on personal interviews. This enabled learn more or to replicate our approach.
growth records of every company in us to identify the top three factors con- We maintain an updated list of FAQs
our study to identify which companies tributing to each company’s growth about this initiative on our website, at
had experienced stall points and when. stall. After all these analyses we were www.stallpoints.executiveboard.com.
Specifically, we calculated the com- able to identify the root causes of stalls
pound annual growth rate (CAGR) of and the major categories they fell into. One Company’s Stall Point
each company’s revenue for 10 years We arrived at our framework purely in- Tracking the growth of the BF Goo-
before and 10 years after every year in ductively, from the bottom up. (See drich Corporation over a 20-year pe-
the past half-century for which data “The Root Causes of Revenue Stalls.”) riod, we can clearly see its stall point.
were available. To qualify as having Readers may be wondering why we Annual growth rates are shown for a
stalled in a given year, a company chose revenue rather than profit, value, decade before and a decade after what
must have enjoyed compound annual or some other measure on which to proved to be the stall year. The turning
growth of at least 2% in real dollars for focus our analysis. That is a fair ques- point in Goodrich’s fortunes came in
the 10-year period prior to the poten- tion, and we considered our choice at 1979, after which the company’s
tial stall point; the difference in CAGR length. It rests on two premises. The growth fell into secular decline.

Revenue $8B
in 2005
U.S. dollars



1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989

Year 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

CAGR 10 Years Prior 3.7% 1.4% 1.0% 2.1% 2.2% 2.5% 2.7% 2.3% (0.4%) (0.6%) (1.1%)

CAGR 10 Years After (1.1%) (0.9%) (3.2%) (5.5%) (5.6%) (6.5%) (6.2%) (5.9%) (4.8%) (8.3%) (7.1%)

Difference 4.8% 2.3% 4.2% 7.6% 7.8% 9.0% 8.9% 8.2% 4.4% 7.7% 6.0%

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When Growth Stalls

The Root Causes of Revenue Stalls

A careful analysis of 50 representative companies that experienced growth stalls revealed nearly as many root causes for them:
42 external, strategic, and organizational factors, which can be grouped into categories as shown here. We identified the top
three factors contributing to each company’s stall and considered those results as a whole in determining how large a role (in-
dicated by percentage) each category played. 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 break-
down, premature core abandonment, and talent bench shortfall.
■ Disruptive competitor

STRATEGIC price or value shift

Within FACTORS ■ Overestimation of brand

Management’s 70% protection

■ Gross margin captivity

Control ■ Innovation captivity

87% Premium- ■ Missed strategic inflection

position captivity in demand

23% ■ Curtailed or inconsistent

R&D funding
■ Overdecentralized R&D
Innovation management
■ Slow product development
13% ■ Inability to set new standard

■ Conflict with core company

■ Overinnovation
core abandonment ■ Financial diversification

10% ■ Misperceived market saturation

■ Misperceived operational

■ Core problems masked by

international growth
Failed acquisition ■ Earnings growth over core

7% reinvestment

■ Misconceived economics

■ Unsustainable financial acquisi-

Key customer
tion model
■ Unrealized synergies

■ Distribution channel shift

■ Customer strategy dependence

Strategic diffusion or ■ Monopsony buyer

Adjacency failures
■ Overextension of the formula

4% ■ Inability to manage

new model
■ Incorrect new business siting

Voluntary or stewardship
growth slowdown

■ Internal skill gap
Talent bench shortfall ■ Narrow experience base

■ Antitrust actions
9% ■ Loss of key talent
■ Key person dependence
Regulatory actions
■ Government-
subsidized Board inaction
Economic downturn
Geopolitical changes Organization design ■ Overdecentralization

1% Outside 2% ■ Weak decision-making structure

■ No strategic planning

National Management’s
labor market Control Incorrect
■ Incorrect competitive metrics
1% performance metrics
■ Inflexible financial goals

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When Growth Stalls

viewed as less capable. Is it acceptable, or history. By contrast, the secular growth stalls
routine, to dismiss them as unworthy? Do we identified were attributable to systemic
your processes for gathering intelligence inefficiencies or dysfunctions. Given that
about your competitors ignore some of these most large corporations rely on business mod-
market participants because of their size or els that have evolved to generate sequential
perceived lack of quality? Indulging in such product innovations, when things go wrong
behavior is common, but it’s a luxury that no here—at the heart of these organizations’
market leader can afford. most important business process—extremely
serious, multiyear problems result.
When Innovation Management For firms shifting the bulk of their R&D
Breaks Down activities out to their business units, our case
The second most frequent cause of growth studies provide a strong cautionary tale.
stalls is what we call innovation management The logic behind such shifts is clear: The
breakdown: some chronic problem in managing closer R&D is to markets and individual unit
the internal business processes for updating strategies, the higher its return on investment
existing products and services and creating should be. But problems seem to arise when
new ones. We saw manifestations of this at decentralization is combined with an explicit
every major stage along the activity chain of (or implicit) metric that demands a high
product innovation, from basic research and share of revenue growth from new-product
development to product commercialization. introductions. The result can be an overallo-
Where revenue growth stalls could be attrib- cation of resources to ever smaller incremental
uted to innovation breakdown, the problems product opportunities, at the expense of
emphatically did not center on individual sustained R&D investment in larger, future
product launch failures; a New Coke may product platforms.
occasionally belly flop, but the result is typi- A stark example of this occurred at 3M in
cally a temporary growth stumble rather than the 1970s, when the company experienced a
a fateful turning point in a company’s growth revenue stall after decades of robust top-line

When Does a Premium Position Become a Trap?

At the top of every industry are companies impediments to refreshing strategy. entrants will penetrate the upper ends of
that have built premium positions for them- It is possible to spot the onset of premium- our markets?
selves, dominating the market among the position captivity. The six yes-or-no questions
most demanding customer segments and below probe awareness of threatening Clues in Market and Competitor
providing products or services that lead the market dynamics, an executive team’s blind Research
field in performance, thus commanding spots regarding competitive threats, and • Do we fail to track shifts in secondary
higher prices. The organizational strengths in intelligence capabilities for recognizing an and tertiary customer-group behavior
product development, brand management, impending encroachment on premium turf. with the same rigor we use for our
and marketing that created these top posi- higher-end segments?
Clues in Market Dynamics • Do we exclude nonpremium players and
tions are sources of great pride to the firms
• Are we losing market share to nonpre-
that cultivated them. low-end entrants from our tracking of
mium rivals in subsegments of our
But attack from new competitors with competitive threats?
significantly lower cost structures, or changes A “yes” to two or more of these questions
• Are key customers increasingly resistant
in customer preferences that start slowly suggests the need to refocus research into
to paying price premiums for product
and then reach tipping points, can actually markets and competitors. The goal should
transform these dependable sources of be to map premium features and low-end
competitive advantage into weaknesses. Clues in Executive Team Attitudes competitor performance. A “yes” to four
Product innovation loses its ability to protect • Does the senior executive team resist the or more suggests an immediate need for
pricing premiums, and presumed brand and proposition that nonpremium players contingency planning: How might the firm
marketing strengths no longer dependably operate in the same business or product modify its current business model (includ-
protect market share. All the firm’s business category that we do? ing its margin requirements and cost ba-
processes and activities, developed and • Do we commonly dismiss the possibility sis) to respond to a low-cost entrant within
honed for the top end of the market, become that nonpremium rivals and low-end 18 months?

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When Growth Stalls

growth. Since its founding, in 1902, 3M had of R&D spending but how those dollars
followed a clear formula for success, developing are being spent. Is the senior team able to
innovative products with industrial applica- look into funding decisions at the business
tions that supported a premium position and unit level to monitor the balance between in-
then leapfrogging to the next opportunity cremental and next-generation investments?
as the market matured. This strategy, which Are R&D and other innovation resources
has been characterized as “the corporate at the corporate level budgeted separately
millipede” (“Make a little, sell a little, make a from incremental innovation? Is some por-
little more”), had by the early 1970s produced tion of innovation funding allocated to creat-
a portfolio of more than 60,000 products ing lower-cost versions of existing products
(the majority of them with sales under $100 and services? Given the long lead times
million), while more than 25% of total corpo- characteristic of the innovation process, flaws
rate sales came from products less than five are slow to surface—and time-consuming
years old. to remedy.
The growth potential inherent in this
niche-jumping strategy began to dwindle in When a Core Business Is Abandoned
the late 1970s, as the firm approached $5 The third major cause of revenue stalls is
billion in revenue. With the recession of the premature core abandonment: the failure to
early 1980s looming, 3M management decided fully exploit growth opportunities in the ex-
to hold R&D expenditures below historical isting core business. Its telltale markers are
averages of just over 6% of annual sales and acquisitions or growth initiatives in areas rela-
to push most of the R&D budget down to tively distant from existing customers, prod-
the company’s 42 divisions (usually organized ucts, and channels.
around individual product lines). This category has received significant atten-
Total growth slowed as divisions focused tion in the recent business literature. Perhaps
on ever narrower niche-segment opportunities. as a result, stalls attributed to premature core
From 1979 to 1982 the company saw its annual abandonment cluster in the period before
growth rate fall from 17% to just over 1%, 1990. We are tempted to credit the management
with sales per employee creeping downward consulting industry for having hammered
simultaneously. Because the bulk of R&D home the need for attention to core busi-
was controlled by product-centric business nesses. In particular, Chris Zook, of Bain &
units, major new-product development activity Company, has stayed on this issue with ferocity.
was replaced by incremental product line That is not to say that Fortune 100–size
extensions. The former CEO Allen F. Jacobson firms have mastered the art of generating
observed of that era, “Historically, our drive continuous growth in their core businesses.
for profit and our preference for developing Quite the contrary: The recent wave of private
premium-priced products aimed at market equity takeovers suggests that many public
niches meant that we were not comfortable companies still struggle in their efforts to
competing only on price. As a result, we never grow established businesses. Almost without
fully developed our manufacturing compe- exception, these take-overs are based on strat-
tencies. And when competitors followed egies for growing the core—strategies that
us, we would refuse to confront them—it was public-company executive teams are either
always easier to innovate our way into a unable or unwilling to pursue.
new niche.” The two most common mistakes we saw in
As we looked at the variety of ways in this category were believing that one’s core
which problems in the innovation manage- markets are saturated and viewing opera-
ment process can eventually produce major tional impediments in the core business model
revenue stalls, we were struck by the fragility as a signal to move on to new, presumably
of this chain of activities, and by how vulnerable easier competitive terrain. Either situation
the whole process is to management decisions invariably ended badly, with some competitor
made to achieve perfectly valid corporate moving in to displace the incumbent.
goals. There are some powerful clues, however, In the late 1960s Robert Sarnoff, the CEO
when a company is at serious risk. Most of RCA and son of David Sarnoff, the legend-
significant is probably not the overall level ary force behind the company, came to the

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When Growth Stalls

mistaken belief that “the age of the big rival was pioneering in Bentonville, Arkansas.
breakthroughs in consumer electronics—the In the early 1980s, while Wal-Mart was install-
age in which [his father] had built RCA— ing its first point-of-service system with a
had passed.” James Hillier, the head of the satellite link for automatic reorders, Kmart
company’s labs, asserted, “The physicists have was acquiring Furr’s Cafeterias of Texas, the
discovered about all they are going to for con- Bishop’s Buffet chain, and pizza-video parlors
sumer application in the near future.” as outlets for its retained earnings. Through-
One can hardly blame Sarnoff when even out the next decade Wal-Mart continued to
the physicists were advocating moving on— invest in its cross-docking distribution system,
and move on he did. He pursued initiatives in while Kmart pursued a range of disparate
three new, presumably higher-growth direc- businesses, including PayLess Drug Stores,
tions. First, mainframe computers seemed a the Sports Authority, and OfficeMax. By the
logical choice, given that technology-driven end of the 1980s Kmart was at least 10 years
big bets had powered RCA’s growth since the behind Wal-Mart in its logistical capabilities,
1920s. Second, he decided that marketing was handing Wal-Mart a “gimme” advantage of
the future and deployed huge resources to more than 1% of sales in inbound logistics
acquire companies in the consumer products costs. As Kmart lagged ever further behind, its
sector. Third, the company redirected internal imagined need for outside-the-core growth
resources from consumer electronics research platforms became real.
into marketing and brand management Of all the red flags signaling stall risk, one
projects. Meanwhile, Steve Jobs and Bill Gates of the most obvious is management’s use of
were on the road to starting companies that the term “mature” to refer to any of its prod-
would launch a revolution in RCA’s former uct lines, business units, or divisions. (The
What stops growth dead core markets. disinvestment in the core implied by the “cash
Just as interesting as getting it wrong on cow” cell of the growth-share matrix does
in its tracks is not merely core business growth prospects is the ten- modern managers no favor.) Established busi-
dency of executive teams to simply give up on nesses should be managed against significant
a shortage of talent but apparently intractable problems in their core revenue and earnings goals, and business
the absence of required businesses. The most intriguing example of leaders should actively explore the potential
this occurred at Kmart. A highly successful of new business models to rejuvenate even
capabilities, most visibly challenger to Sears as a general-merchandise the most “mature” businesses.
at the executive level. big-box retailer, Kmart relentlessly stole its
formerly indomitable competitor’s market When Talent Comes Up Short
share through the 1960s and 1970s. Our fourth major category is talent bench
In 1976 Kmart reached a peak in new store shortfall: a lack of leaders and staff with the
openings, adding 271 facilities to its country- skills and capabilities required for strategy
wide network. That would prove to be its execution.
limit. Over the next decade the company Talent bench shortfall merits careful defini-
reined in expansion in its core business, tion, because it has become a fact of daily
convinced that the U.S. market was saturated. life in many industries and functions. Indeed,
Its chairman, Robert Dewar, created a special at this writing, shortages of critical talent are
strategy group whose purpose was to study the primary concern of human resources
new growth avenues and, in the parlance of departments globally, not just in high-growth
the time, far-out ideas. He also established a markets but in a range of specialty skill cate-
performance goal for the company: 25% of gories, and they are expected to get worse.
sales should come from new ventures by 1990. What stops growth dead in its tracks, how-
What’s most disturbing about Kmart’s ever, is not merely a shortage of talent but
choices is not that management was tempted the absence of required capabilities—such as
to diversify in search of growth—however solutions-selling skills or consumer-marketing
misguided this appears in hindsight, given expertise—in key areas of a company, most
Wal-Mart’s concurrent gathering of strength. visibly at the executive level.
Rather, it is that the executive team failed Internal skill gaps are often self-inflicted
to monitor and match the distribution and wounds, the unintended consequence of
inventory management capabilities that its promote-from-within policies that have been

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When Growth Stalls

too strictly applied. Such policies, often most company growth rates and senior leaders’
fervent in organizations with strong cultures, backgrounds suggests that the sweet spot for
can accelerate growth in the heady early days external talent is somewhere between 10%
of executing a successful business model. But and 30% of senior management. That is a
when the external environment presents novel good target for the CEO and the board to
challenges, or competition intensifies, these use with the firm’s executive committee and
policies may be a severe drag on progress. for human resources to use with the top 5%
One important element in this category is a of the workforce.
narrow experience base at the senior execu-
tive level that prevents a timely response to When What You Know Is No Longer
emerging strategic issues. The most common So
marker of this lack of experience is managers’ As noted, the four categories we have outlined
tendency to follow a well-worn internal path account for nearly half of all the root causes
from a dominant business, market, or function we cataloged. A host of other, less common
to the executive suite. Hitachi, which went causes that came up in our analysis crossed a
into a growth stall in 1994, illustrates this broad terrain, including failed acquisitions,
problem. At the time, Hitachi accounted for key customer dependency, strategic diffusion,
2% of Japan’s GNP and 6% of its corporate adjacency failures, and voluntary growth
R&D spending. The downward slide in the slowdowns. A powerful observation can be
company’s revenue was devastating. Execu- distilled from this array: One culprit in all
tive management has consistently come up our case studies was management’s failure to
from the energy and industrial side of the bring the underlying assumptions that drive
company, but Hitachi’s growth prospects lie company strategy into line with changes in the
elsewhere. This narrowness extends to func- external environment—whether because of a
tional pedigree: The firm has historically had lack of awareness that the gap existed or was
an engineering culture, with none of its top widening, or because of faulty prioritization.
executives holding an MBA or other business The lack of awareness is particularly vex-
degree. As Hitachi looks toward its centennial ing, because it is so insidious. Strategic as-
in 2010, however, change may be in the sumptions begin life as observations about
offing: Kazuo Furukawa, who was named customers, competitors, or technologies that
president and chief operating officer in 2006, arise from direct experience. They are then
came up through the telecom and information enshrined in the strategic plan and translated
systems sectors. He is the company’s first into operational guidance. Eventually they
president with no exposure to its heavy elec- harden into orthodoxy. This explains why,
trical machinery business. when we examine individual case studies, we
Few companies formally monitor the bal- so often find that those assumptions the team
ance in the executive team between company has held the longest or the most deeply are
lifers and newer hires who offer fresh per- the likeliest to be its undoing. Some beliefs
spectives and approaches. Furthermore, large have come to appear so obvious that it is no
companies have a fairly poor track record on longer politic to debate them.
incorporating new voices into senior manage- Part of the reason that few top teams ques-
ment. Most studies agree that 35% to 40% tion assumptions is that doing so goes against
of senior hires wash out within their first 18 the nature of the senior executive mandate:
months—a statistic that is improving glacially as The CEO and his or her executive team are
we adopt new practices in talent management. paid to develop a vision and execute it—with
And management development programs all resolve. Another part is human nature: Intro-
too often focus on replicating the skill sets spection and self-doubt don’t often appear in
of the current leadership, rather than on de- the personality profiles of top executives at
veloping the novel skills and perspectives that large enterprises. A third part is process: CEOs
tomorrow’s leaders will need to overcome have very few opportunities to safely express
evolving challenges. their midnight anxieties. And the one oppor-
We have identified a simple way to ensure tunity for stock taking that is built into the
balance in the senior executive ranks—what annual calendar of most firms—the review
we call mix management. Our analysis of of the strategic plan for the coming year—all

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When Growth Stalls

too often fails to stimulate deep, searching in the real experience of the companies we
conversation. Indeed, the “assumptions and studied. Our 20/20 hindsight may enable you
risks” section of virtually all strategic plan to spot signs faster in your own organization.
templates is generally treated as a pro forma (See “Red Flags for Growth Stalls.”)
exercise rather than an occasion to go deep. Also included in our tool kit are four practices
drawn from those we’ve seen management
Articulating and Testing Strategic teams use. The first two are effective in making
Assumptions strategic assumptions explicit, and the latter
To assist executives in spotting signs of vul- two are designed to test those assumptions
nerability to growth stalls in their own organi- for ongoing relevance and accuracy. A hall-
zations, we offer two kinds of tools. The first is mark of these practices is that they are em-
a diagnostic self-test we developed at the bedded in the work flow of the firm—the job
conclusion of our research. Hoping to determine of some individual or team—or otherwise
how companies might foresee a stall, our team built into core operating systems.
spent considerable time looking at various finan- Commission a core-belief identification
cial metrics, from margin erosion to patterns squad. This practice is simple to execute and
in R&D spending. This effort was fruitless: Fi- involves calling on a diverse, cross-functional
nancial metrics—at least those available to the working group to go hunting for the firm’s
public—are as likely to lag behind as lead an most deeply held assumptions about itself and
organization’s change in strategic vitality. the industry in which it operates. (Gary Hamel
What we did find helpful was asking, What and his colleagues at Strategos have led the
could the company’s senior managers have way on this practice.) The best-functioning
seen in their markets, in their competitors’ squads include a significant share of younger,
behavior, in their own internal practices, that newer employees, who are less likely to be
might have alerted them to an impending invested in current orthodoxies. Their efforts
stall? We looked at our detailed case histories are most fruitful when the team is prepared to
for warning signs before the stall point that raise thorny issues and challenge entrenched
perhaps hadn’t received the scrutiny they de- beliefs, using methods ranging from reality
served, and uncovered 50 red flags, all rooted checks—What industry are we in? Who are
our customers?—to more provocative explora-
tions: What 10 things would you never hear
customers say about our business? Which
firms have succeeded by breaking the estab-
Red Flags for Growth Stalls lished “rules” of the industry? What conven-
Are you about to hit a stall point? A therefore our understanding of our tions did they overturn?
diagnostic survey of 50 red flags can market share, in several years. One leading consumer-goods company told
help signal the danger in time. Below • We test only infrequently for shifts us that it had used this practice to kick off an
is a sampling of red flags relating to in key customer groups’ valuation of inquiry into long-term growth pathways and
premium-position captivity; other parts our product/service attributes. to challenge conventions that had taken hold
of the survey highlight other hazards. • We are less effective than our com- through the years. We like the practice for
To the extent that your senior team and petitors at translating customer in- two reasons. First, it seems to strike the right
high-potential managers see these as sights into new product and service balance between traditional, closed-door
areas for concern, you may be headed categories. strategy discussions and all-company “jams,”
for a free fall. • Core customers are increasingly which tend to lose credibility and edge in di-
• Our core assumptions about the unwilling to pay a premium for our rect proportion to the number of participants
marketplace and about the capabili- brand reputation or superior perfor- involved. Second, it manages to simulta-
ties that are critical to support our mance. neously address areas of universal agreement
strategy are not written down. To watch the authors discuss their and issues that are in play.
• We haven’t revisited our market def- complete list of red flags and how to use Conduct a premortem strategic analysis.
inition boundaries, and therefore them to diagnose impending growth Many leaders have found it useful to charge
our list of current and emerging stalls, go to stallpoints.multimedia.hbr teams with developing competing visions of
competitors, in several years. .org. There you can link to the full diag- the future success—or failure—of the com-
• We haven’t refreshed our working nostic survey, at www.stallpoints pany as it would be reported in a business
definition of our core market, and .executiveboard.com. periodical five years hence. (See Gary Klein,

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When Growth Stalls

“Performing a Project Premortem,” Fore- is needed to support the group’s deliberations

thought, HBR September 2007.) The process and decision making. The members of the
typically takes place over one or two days at shadow cabinet are invited to executive com-
regularly scheduled offsite management gath- mittee meetings on a rotating basis.
erings, and teams senior executives with The benefits of this practice are manifold.
high-potential staffers from around the world. Because it provides such powerful seasoning
By seeing which issues the scenarios have in for the employees who participate, it becomes
common, leadership teams can identify the a mainstay of the leadership development
subset of core beliefs that should be most curriculum. And because senior executives
closely examined and monitored. are usually most attached to the assumptions
Appoint a shadow cabinet. Pioneered by underlying current strategy (it is their strategy,
a Fortune 250 manufacturing company, the after all), they find the fresh perspectives
shadow cabinet is a standing group of high- offered by this creditable, well-informed
potential employees who tend to be in midca- constituency extremely valuable. That said,
reer and are often in line for promotion to most executives to whom we’ve presented this
the director level. They usually meet the day idea respond that it would never work in
before an executive committee meeting, and their organizations. “The executive agenda is
their agenda matches as closely as possible the too confidential,” they say, or “Our executive
agenda for the following day, with presenters team is too impatient,” or “It looks like too
delivering dry runs of their material to the much work.” We agree that this practice is not
group and then providing whatever follow-up for everyone; in fact, we have visited board-
rooms where speaking candidly about short-
comings in company strategy would be a truly
career-limiting move. Organizations where this
The Long-Term Effects of Stalls is the case should pass on the idea. Not only
will it fail to achieve the desired effect but it
Fortune 100 and Global 100 Companies, 1955–2006
may cause more harm than good to the morale
The overwhelming majority (87%) of companies in our study had experienced a stall.
of staff members involved in the initiative.
Fewer than half of those (46%) were able to return to moderate or high growth
Invite a venture capitalist to your strategy
within the decade. When slow growth was allowed to persist for more than 10 years,
review. An effective way to bring an external
the delay was most often fatal: Only 7% of the companies in that category ever re-
perspective to bear on strategy assumptions is
turned to moderate or high growth.
to ask a qualified venture capitalist to sit in on
business unit strategy and investment reviews
Grew and probe for potential weaknesses. The bene-
13% fits for business unit managers come primarily
from specific challenges but more generally
from the practical, payback-focused lens that
Stalled Moderate the VC brings to the review. What’s more, the

87% or high impact of the venture capitalist approach can

46% live on well after the exercise. (Recording all
the questions and methods the VC uses to
Moderate or
high gather information will preserve the essentials
7% of the approach for later reuse.)
The obvious difficulty in implementing this
Slow or
Slow or
negative 26% negative
practice is identifying an external party who is
knowledgeable enough to add value to the
54% Acquired,
conversation but “safe” enough to be allowed
or gone
in the room. (In the current climate, represen-
private tatives from the private equity community

67% might easily meet the first requirement but

miserably fail the second.) The organization
Companies Growth in stalled Growth
that brought this idea to our attention was
in the study companies 10 years thereafter coventuring with a VC and so had begun to
after the stall build some operating trust.

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When Growth Stalls

Unlike corporate investors, VCs are accus- Of particular concern today is the shrinking
tomed to serving on the boards of portfolio half-life of established business models. The
companies; acting in a similar capacity for a importance of spotting change early enough
corporate partner isn’t much of a stretch. For to react in time is rising exponentially. The
the corporate partner, however, the experience practices we outline here create that early-
can be nothing short of eye-opening. The VC’s warning capability. As critical, they make the
perspective provides an in-the-moment test strategy conversation ongoing, rather than
of assumptions about markets, customers, once a quarter or once a year, and charge line
and competitors and brings an urgency to managers at all levels of the firm with leading
corporate processes that often feel routine. that conversation. Clay Christensen argued
After a stall sets in, the Deliberation around investment proposals in these pages a decade ago that competent
takes on a very different tone. For a venture strategic thinking was atrophying in the
odds against recovery
capitalist, each decision to fund is optional; executive suite because it occurred so infre-
rise dramatically with the usual approach is to release additional quently relative to other regular activities.
funding only when meaningful milestones (See “Making Strategy: Learning by Doing,”
the passage of time. have been achieved. Freedom to operate for a HBR November–December 1997.) As stu-
quarter—not a year—is the norm. dents of strategy-making in large corporations
since then, we have found that the problem
Renewing Competence in Strategy has only worsened.
The practices we recommend in this article Whatever other concerns are on the strategy
compete for space on an already overcrowded agenda, guarding against growth stalls should
executive agenda. What gives force to our be at the top. The tools we offer will enable
advocacy is that growth stalls can have dire the executive team to continually test the ac-
consequences: They bring down even the most curacy of its worldview and to flag any flawed
admired companies; they exact a sizable finan- assumptions that might trigger a stall if they
cial and human toll; and their impact may be go uncorrected. We know of no more power-
permanent. After a stall sets in, the odds ful investment for managing controllable risk.
against recovery rise dramatically with the
passage of time. (See the exhibit “The Long- Reprint R0803C
Term Effects of Stalls.”) To order, see the next page
Compounding this urgency, all signs point or call 800-988-0886 or 617-783-7500
to an increasing risk of stalls in the near future. or go to www.hbr.org

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When Growth Stalls

Further Reading
The Four Principles of Enduring Success Why Bad Decisions Happen to Good
by Christian Stadler Managers
Harvard Business Review by Giovanni Gavetti, Jan W. Rivkin,
July 2007 Ralph L. Keeney, Howard Raiffa,
Product no. R0707D Dan Lovallo, Daniel Kahneman, and
John S. Hammond III
Stadler provides additional advice for sustain-
HBR Article Collection
ing increases in revenue growth: 1) Exploit
April 2005
before you explore. Great companies don’t
Product no. 9653
innovate their way to growth—they grow
by efficiently exploiting the fullest potential To spot looming growth stalls, you need to
of their existing innovations. 2) Diversify your challenge assumptions and avoid the cognitive
business portfolio. Good companies, con- biases that can cause you to stick to a dangerous
scious of the dangers of irrational conglomer- status quo. This collection provides sugges-
ation, tend to stick to their knitting. But great tions. “How Strategists Think: Tapping the
companies know when to diversify, and they Power of Analogy” shows how to draw lessons
remain resilient by maintaining a wide range from one business setting and apply them to
of suppliers and a broad base of customers. 3) another to spark breakthrough strategies. “The
Remember your mistakes. Good companies Hidden Traps in Decision Making” reveals
tell stories of success, but great companies the cognitive traps that can mar strategic
also tell stories of past failures to avoid repeating decision making and suggests tactics for side-
them. 4) Be conservative about change. stepping the traps. “Delusions of Success: How
Great companies very seldom make radical Optimism Undermines Executives’ Decisions”
changes—and they take great care in their presents a four-step process for balancing
planning and implementation. overly optimistic forecasts of future business
performance with more realistic assessments.

To Order

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