Economic Downturns Don’t Cause Growth Stalls—Bad Decisions Do

We are fielding a lot of questions through the website as well as in our live presentations around how the uncertain economy we all find ourselves in is complicating the challenge of crafting a coherent, robust growth strategy.  The question makes a lot of sense—someone recently shared the observation that all the planning they had done in the 2007 budgeting season gets thrown out the window when input costs in some categories are 40% higher than had been anticipated.
 
What’s really got people concerned is whether down economies lead to top-line growth stalls, and this is where the conversation gets interesting.  Despite its cheery name, Stall Points is not fundamentally a down economy concern.  It turns out that any time is a good time to stall.  Our study of the revenue growth trajectories of Fortune 100-sized companies across the past half-century reveals that recessions themselves rarely if ever dictate the truly big movements in individual company growth histories.  Rather, growth inflections—both negative and positive—are overwhelmingly dictated by individual company strategy choices and organization design decisions.
 
The relevance to our current situation, however, and the reason that it is particularly timely that executives pay attention to this issue now, is that, while downturns don't cause long-term growth stalls, they are a great time to make bad decisions that can have long-lasting consequences.  In particular, management has to watch out for the following assumptions:
 
#1: Assuming that premium customers who trade down in price or product quality will trade back up with the return to health in the overall economy.  What happens more often is that customer behavior changes become ingrained.  This opens the door for new disruptive competitors to steal share from formerly strong incumbents. This happened to Caterpillar in the 1970s and is the threat to every premium-priced supplier today, from consumer packaged goods through to B2B suppliers seeking to sell solutions add-ons or wraparounds to their traditional products.
#2: Spreading the pain of expense reductions equally across the workforce.  This is a very rational, well-intentioned decision on the part of management, but what happens most often is that employees who have mobility in the form of other employment options walk out the door, averaging down the quality of the remaining workforce.  This happened at Disney in the 1980s when the company’s core animation talent defected in droves and is the risk faced by companies that are imposing across-the-board salary caps and increase freezes today.
#3: Cutting back on R&D or marketing spending to support earnings growth.  It turns out that continuous projects like next-generation innovation projects or marketing campaigns are harder to restart—take longer to restart—than most managers believe.  This was the mistake behind Heinz's stall, from which it has never recovered, and is the most tempting mistake company leaders face today.
 
So, as you head into the planning season for a 2009 that promises, if anything, more of the same uncertainty we’ve contended with this year, make sure that your strategy is not based on any of the faulty assumptions we mention here.  As we demonstrate, they have led to growth stalls in even the greatest companies, with stubborn, long-lasting consequences.