Business Case Study Opinion: Two-Thirds of the Fastest-Growing Companies Fail
It was an amazing weekend for me and my friends who were very interested in understanding the basic and fundamental reasons top companies, that have been tagged ‘fastest growing companies’ fail. I had earlier written a report on Nokia and this short write up spurred interests from top entrepreneurs and professionals. I decided to look at 10 more companies, looked in-depth at why these fast growing brands collapsed in the middle of the journey. As a leading consulting firm that is interested in working with emerging companies, we realize that hundreds, maybe thousands, of aspiring entrepreneurs will show up at the end of the year, maybe at Lagos startup pitch event in of funding for their startups. Some will succeed and go on to create fast-growing, promising companies.
An interesting research conducted by Kauffman Foundation: a follow-up study on companies five to eight years after they had appeared on the magazine’s list of the 5,000 fastest-growing companies. The outcome of the research was startling. About two-thirds of the companies that made the list had shrunk in size, gone out of business, or been disadvantageously sold. Why? Because they failed to make it through the fourth and final stage of enterprise maturity, where a company finally becomes self-sustaining.
Therefore, the framework of this opinion will consider the different stages of enterprise maturity and look at them in details:
The first and arguably the most important stage of venture creation is the first stage. In stage one, new companies find customers for their idea and test their product in real value exchange. In stage two, these startups optimize performance and quality delivery. They work on the operations because they need to keep the customers coming. They reiterate the entire value process and develop better products. The outcome of this second stage phenomenon is getting leads and more customers. Interestingly, all of the 5000 companies are past stage two since, without basic processes in place, they would have been unable to sustain the high growth rates required to make the list.
While, businesses are without challenges and tough times, and stage 3 is where the dark moments appear. New challenges come in. At the stage, the challenge of financial viability becomes important and to become financially successful, companies begin to build more sophisticated processes and talented human resources. At this stage, the companies can no longer depend upon the special talents of any one person. Hurray, passing this stage takes most companies to the most exciting stage where there is a need to create processes for developing entirely new products for new customers. This is the stage where keeping up with old products stay consistent with the cash flow and the need to lead the industry to arise. Without processes in place to continuously reinvent itself, a company is on a slow trajectory to irrelevance and failure.
The outcome of our research showed that leaders of our fastest-growing companies make one or more of these mistakes:
They remain focused on the day-to-day execution of some aspect of running the company
The falsely assume that financial viability is the end of the journey
They create an R&D unit and it focuses only on incremental improvement to existing processes and products- what we often call incremental innovation.
They drive their innovative talents away by only acquiring innovative companies.
And often, the next thought is ‘how can one avoid making these mistakes. This management or leadership can best be avoided by consciously creating a system and culture which focus on innovation, disruption, and efficiency.
But lets us think of a company that solely relies on the efficiency of business processes to achieve the fleeting emotional highs that come with rapid growth. There seems to be a huge risk and distraction associated with coming up with innovative products. When there is a culture of efficiency and growth, it’s tough to have a system that promotes disruptive innovation. Long-term survival and prosperity require a leader who can also craft a culture that rewards equally those who bring efficiency and those who innovate. Such leaders are rare and that is why so many companies see their growth evaporate and decline. Forewarned is forearmed.