Tuesday, June 2, 2009

Stall Points

Every month, Professor Jim Heskett of the Harvard Business School poses a question on the internet. This past month’s question was this: According to the book Stall Points, the authors found that growth rates for large companies: (1) increased up to the "stall year," (2) dropped precipitously in the following year, and (3) faced increasingly difficult odds of regaining momentum with the passage of time after the stall. Of the companies in the study, 87 percent had experienced a stall. Fewer than half of those were able to return to prior rates of growth within a decade after the stall. Why do these phenomena occur? Why do big companies, with access to people and capital, find it difficult to innovate and grow after becoming large?

You can read the whole thing here, including 81 responses to the question and Heskett’s summary which included a reference to my comment. But if you only want to see my brief comment, here it is.

My Comment
Two Concepts: Infestation and Cannibalization. First, when a company becomes large and successful, it attracts parasites, like moths to a flame. A parasite is an employee who is looking for a safe haven, a place already creating a lot of cash flow (which they want to tap into). They are not risk-takers. It is amazing to me how quickly a company can become infested with these parasites once the reputation gets out there. These parasites suck out the entrepreneurial drive.

Second, great new innovations succeed by obliterating the status quo. All of that "new" growth comes by taking share away from older industries and business models. When you have nothing, the rewards in reinventing an industry look huge--making the risk look worthwhile.

However, if you are now the market share leader, the reinvention ends up stealing from yourself (cannibalization). All of that reinvention looks like taking money out of one of your pockets to put into the other pocket. Why spend a ton of money and take a huge risk of destroying the core if the reward is the hope that you will get back all the share you already had?

To avoid the stall, a company has to diligently fight against parasite infestation and accept the virtues of self-cannibalization, realizing that it is better to cannibalize yourself than to have an outsider do it to you.

I am reminded of the SS Kresge company in the 1960s. They knew that for their new Kmart division to succeed, they would have to destroy the Kresge variety store core. They were willing to cannibalize themselves, and Kmart thrived for decades.

Then, when the supercenter concept came about, Kmart's first reaction was to try to build a supercenter that did not take share away from the core Kmart stores (avoid cannibalization). This resulted in a disaster supercenter called American Fare, a short-lived phenomenon. This time, by trying to protect the core, they killed the future of the company.

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