Why Companies Go from Hot to Not

A study suggests that preventable internal factors, such as management disagreement and a loss of focus, are key in derailing growth

By Steve McKee

Today, Google (GOOG ), Aéropostale (ARO ), and Panera Bread (PNRA ) are among the hottest growth companies. But it wasn't so long ago that Nintendo, Nokia (NOK ), and AOL were mentioned in the same breath. What happened? Believe it or not, nothing out of the ordinary.

One of the first lessons that all outfits learn is how hard it is to generate growth year after year. Even the best business models can't maintain a steep upward trajectory indefinitely. But for some, the problem goes beyond maintaining growth -- like rockets that eventually run out of jet fuel, some companies just plain stall.

It happens to most businesses at some point in their existence. The reasons for sputtering growth are seldom related to headline-making events, such as a scandal or mismanagement. Natural market forces and common (if unanticipated) management dynamics are usually the causes. And it often catches company leaders unaware, flatfooted, and unsure of what to do.


  As an advertising agency that makes its living helping companies expand, we wanted to find out more about the dynamics that fuel growth. We also wanted to understand the characteristics that cause growth to stall -- and determine if some or all of them could be prevented.

With that in mind, we commissioned a study of growth companies from across the U.S. We researched historical lists of fast-growth businesses going back two decades and made contact with over 400 of those still in existence. We probed areas as diverse as corporate structure, competition, branding, financial management, and strategy. The results were revealing.

The respondents' tenure with their companies varied a great deal, ranging from less than one year (1%) to over 20 years (nearly 20%). The average tenure was more than 12 years. Eight out of ten respondents were the founders of their outfits. The average age of our respondents was 48, though four were under 30 and two were over 70. Forty-five states and the District of Columbia were represented.


  The good news was that nearly 4 in 10 companies we studied had managed to maintain their growth trajectory. An additional 4 in 10 reported that expansion had slowed down but still remained positive. But 18% of company leaders reported that their growth had stalled or gone negative. They were the ones we really wanted to understand, and follow-up interviews would be the key: What were they doing about their stalled growth? Could they have prevented it? And how could others avoid suffering the same fate?

Every business had a slightly different story due to the unique circumstances they were facing. But the data also showed patterns into which many companies fell. All in all, we identified seven characteristics that commonly correlate with stalled growth. Three aren't surprising: They include economic upheavals, changing industry dynamics, and increased competition. What's interesting about these, however, is how commonly they catch companies off-guard. These factors do a lot of damage simply by going unrecognized for too long.

But the most insight came from four other, more subtle factors we identified: A lack of consensus among the management team, a loss of nerve, a loss of focus, and marketing inconsistency. The remarkable thing about these factors is that they're all internal, psychological in nature, and highly destructive.


  Our study found that regardless of what's going on outside of an enterprise, it's what's inside that counts. These dynamics -- all preventable -- are the hidden potholes waiting for their chance to give growth a nasty shock, and in some cases, ruin a company from the inside out.

Most of the struggling concerns in our study suffered from some combination of these seven factors. For them, understanding what went wrong was the first big step toward getting back on the growth curve. For other businesses, the ability to be on the lookout for dangerous dynamics such as these may prevent a growth meltdown.

In the coming months, I'll examine these seven characteristics in more detail and explain how their negative effects can be mitigated -- and even prevented. Stay tuned.

McKee is president of McKee Wallwork Henderson, an ad agency specializing in working with fast-growth companies and businesses whose ad budgets are under $10 million

Edited by Rod Kurtz

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