Managing The Growth Paradox
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While every organisation needs to cherish and encourage innovation, it is surprising how few would be classified as ‘champion companies' by long-term investors, who don't like volatility. Market investors want management to do all things that managements do — run a tight ship, be efficient, balance long-term with short-term and not have surprises — on either side.
This is more difficult than it sounds. Most companies have a few great years and then slowly fade away. In a
Harvard Business Review article called ‘How The Growth Outliers Do It', researcher Rita Gunthur McGrath found that among 4,793 global companies with market capitalisation of more than $1 billion, only 8 per cent grew their revenues by more than 5 per cent every year for five years from 2004 to 2009. So there is a big difference between what investors want and what companies are able to deliver.
The reason why there are so few of these champion companies is because to perform consistently, over business cycles and technological and market disruptions, companies need to be innovative and adaptable as well as stable and consistent.
Innovation requires you to be hungry, to take risks, to sprint, while long-term and consistent growth requires scalability of leadership and getting backend systems and processes — which often tend to moderate, if not stifle, innovation and risk taking — in order.
Looking back at our experience in working with many companies in India, I know how impossibly difficult it is to combine the two aspects. This comes from three primary causes — management and internal factors; industry and external factors; and increasing volatility in all aspects of business.
First, many managements are not hardwired for steady growth — especially in India's highly entrepreneurial culture. Many high-growth companies thrive on chaos in their early days but are not able to graduate to large, stable organisations. A few good years lead to empire-building and complacency wherein managements ‘indulge' themselves — often at the cost of shareholder value. Consistent growth needs managements to be constantly evolving, learning, and always being a bit paranoid. Sometimes managements are ‘forced' to forsake short-term financial performance for risk mitigation and growth reasons. As in cricket, so in business; you don't need heavy hitters, you need unexciting steady performers.
Second, external factors play a big role, especially in India, where environmental uncertainty is very high due to regulatory and competition changes. Often, a company is a prisoner of its industry and can end up swaying with the industry cycle. Warren Buffett once said, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."
We have seen the fortunes of industries change rapidly, even the fortunes of good companies within these industries. In a free market environment, companies have more flexibility in business models; but this is harder in India because of legacy issues.
Third, over the years, volatility in every aspect of business has gone up — rapid technological change, frequent changes in consumer trends, globalisation, currency volatility, shorter business cycles, among others. Examples abound — Yahoo! being replaced by Google being replaced by Facebook. This is now a regular phenomenon. But investors still want stability.
One of the things champion companies do well is manage the paradox. They have a stable management, stable leadership transition, stable core values, and consistent strategies while being innovative. They have a bifocal approach — getting the long-term right and keeping a maniacal focus on short-term execution. They are very disciplined about what they do and what they do not do.
It seems easy to be stable and consistent, but human nature and the environment work against this. Managements are forced constantly to diversify, expand, broad-base while retaining focus and consistency. This requires ‘champion' managements. That is what makes them champions.
(This story was published in Businessworld Issue Dated 28-05-2012)