Monday, November 2, 2009

Where ROI Hides When Growth Stalls

By Steve McKee

In 2002, my advertising agency was named to the Inc. 500 list of the fastest-growing private companies in America. It was quite an honor, and very exciting for a company that was only in its fifth year of existence. My business partner and I made plans to attend the Inc. 500 gala in Palm Springs and take our bows with the other 499 fast-growth companies.

There was just one problem. In the months leading up to the conference our growth stalled. We went from stellar returns to sagging revenues almost overnight, and we had no idea why. It was disconcerting, to say the least, and the conference ended up being less a celebration than a reminder of our ineptitude.

Necessity being the mother of invention, after months of soul-searching we made the difficult decision to spend some of our limited resources on a comprehensive study of corporations that had been named to the Inc. 500 list over the previous two decades. We wanted to see if we could unlock the secrets of those that had remained successful, and perhaps uncover other organizations that, like ours, had been tripped up. We wanted to learn from their experiences, both good and bad.

It was an eye-opening exercise. The first—and perhaps most comforting—thing we learned is that we were not alone. We learned that in any normal year, some 15 percent of companies experience flat or negative revenue growth, and over the course of a decade half of all companies do. (In 2009, some estimates suggest up to 90 percent of all companies are struggling with flat or negative revenue. Stunning.)

The reason most often blamed for stalled growth is, unsurprisingly, the economy. Other external events include aggressive competition and changing industry dynamics, such as the introduction of technological advances that change the playing field. But what we found is that external events, while significant, are not the real story; after all, every company has to deal with them. We wanted to know why some companies successfully navigate their way through difficult circumstances while others do not.

Our research told us why: When growth stalls, the real challenges come from within struggling organizations. We identified four internal, psychological factors that tend to do their damage by stealth, catching most corporate leaders unprepared. They include a lack of consensus within the management team, a loss of focus in the marketplace, a loss of nerve (as fear takes the place of good judgment) and inconsistency of execution.

Making matters worse is how these four internal dynamics tend to play off one another, creating a vicious negative feedback loop. If company leaders are unwilling or unable to look within, face facts and address these destructive internal dynamics, a return to healthy ROI may remain a dream long after the economy returns to health. When growth stalls, our research found, it’s what’s inside that counts. Leaders of struggling companies ignore that at their peril.

Steve McKee is president of McKee Wallwork Cleveland, a columnist for and the author of When Growth Stalls: How It Happens, Why You’re Stuck & What to Do About It.

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