Stall Points and Market Assumptions

Are Your Market Assumptions Still True?

You could be on a collision course for a stall point. Many companies don’t even recognize their market assumptions are wrong until it’s too late!

Stall points and incorrect market assumptions can almost be looked at as a Shakespearian tragedy. At some point, the market assumptions that allowed for the rise of a successful enterprise will no longer be true. Many companies are ill-equipped to recognize when their market assumptions are no longer true.

To explore this subject, Cascade Insights CEO Sean Campbell interviewed Derek van Bever, Senior Lecturer and Director of the Forum for Growth and Innovation at Harvard Business School and coauthor of “Stall Points.

Are Your Market Assumptions Still True?

Many companies are ill-equipped to recognize when their market assumptions are no longer true.

You can listen to the interview or read the modified transcript below. In print form, this interview has been edited for clarity and readability.  B2B Revealed – ON: iTunesStitcherTuneInGoogle Play

Sean: 

Today we’re going to be talking with Derek van Bever, coauthor of Stall Points: Most Companies Stop Growing Yours Doesn’t Have To.

Derek is a senior lecturer in a general management unit at Harvard Business School. He teaches building and sustaining a successful enterprise in the second year elective curriculum. He’s also the director of the Forum for Growth and Innovation, a research project sponsored by Professor Clay Christensen the author of the Innovator’s Dilemma. The project is focused on discovering, developing, and disseminating predictive theory on management and innovation.

Derek, welcome to the podcast.

Derek:

Thank you very much, Sean.

Understanding Growth In Fortune 100s

Sean: 

One of the reasons I think “Stall Points” is so great is because it’s based on really fantastic research. Tell me about the research that backs up the book’s findings.

Derek:

The book comes out of an assignment we were given by our corporate strategy members at the firm that I helped to found called the Corporate Executive Board (CEB). These members were really focused on what is probably the central question facing the strategist: How do we extend a top line growth run and how do we avoid a growth stall?

These members were really focused on what is probably the central question facing the strategist: How do we extend a top line growth run and how do we avoid a growth stall?

This is a gang that is very quantitatively oriented. They insist on rigor in research. We did what is, to our understanding, the most comprehensive analysis that has ever been done on the growth experience of the Fortune 100. Our study period extended from the invention of the index in 1950 to 2006.

For the 600 companies that had been in the index in that time, we looked at patterns of growth. We wanted to better understand:

  • The growth experience of very large firms.
  • How common it is for large firms to stall in their growth.
  • The market cap or talent defection consequences of stalls in growth.
  • The causes of stalls.

We produced some pretty interesting findings that had a big impact on the understanding and actions of a lot of our members.

What’s A Stall Point?

Sean: 

Could you define a stall point for us?

Derek:

This was a concept we had to invent. A stall point represents the point in a company’s history where there is a multi-year, and significant downturns in corporate revenue growth.  The stall point itself represents the greatest difference in the growth rate.

A stall point represents the point in a company’s history where there is a multi-year, and significant downturns in corporate revenue growth.

In our study of 600 firms, we examined each year they were in the Fortune 100 during 1950-2006. For each company, we examined a 10 year rolling average of each company’s revenue growth for the 10 years prior. We also looked at the 10 year rolling average looking forward.

For each year in their growth history, we were trying to understand the growth rate across the decade preceding and following the year where we saw the most significant inflection, or stall delta.

The stall point wouldn’t have been a point in time that the managers of the firm would have experienced some shudder of dread. Importantly, though, only 11 percent of the companies we studied could achieve a significant level of growth after the stall (defined as a 6 percent real growth rate in the period following the stall to the present day).

Hurry Up To Slow Down

Sean: 

In the book, you mention companies tended to accelerate into to the stall. Can you explain that?

Derek:

We’d like to believe that management has some foreknowledge that they are stalling. We’d like to think they’d have some sense when they’re in trouble.

Most want to imagine that if a management team notices that their company is slowing its growth, that they can bring it down for a landing the way that you might a glider. Unfortunately, firms behave a lot more like rocks than gliders when they approach a stall.

Unfortunately, firms behave a lot more like rocks than gliders when they approach a stall.

For example, we did an analysis of the average growth rate of stalling companies in the years before and after their stall point. You see a very common pattern where in the five years or so prior to a stall, companies are growing in the 8-10 percent range. In the year just prior to the stall, that jumps up to about 14 percent on average. Then they fall. For the next several years, they have negative growth. On average, for the next decade, they level out to like 1-2 percent. Very uninteresting real growth.

We hypothesize that growth before the stall may reflect the last gasp acquisition. This is when a company tries to use the acquisition to keep up a growth rate.

We hypothesize that growth before the stall may reflect the last gasp acquisition. This is when a company tries to use the acquisition to keep up a growth rate.

Stalls are often a surprise to management. What’s fascinating is that at times they’re carrying out their own growth strategy and something changes that they hadn’t been aware of and the bottom drops out. That’s extremely common.

Why Do Companies Stall?

Stall Points and Market Assumptions

Stall points happen when the market assumptions you’ve based your business on are no longer true. Photo Credit: © icholakov / Fotolia.

Sean: 

What drives a company into a stall?

Derek:

There is one common driver that we see.

I finally figured out why companies stall!

Seth Verry, the researcher who was in charge of managing the team on this project, came to me and my coauthor, Matt Olson, one day. Seth came running out of the office as we were taking the elevator down. He said, “I finally figured out why companies stall!” We’re like, “Okay Seth. What is it?” He said that it’s because the things they believed the longest or the things that they believe the most deeply are no longer valid. Basically, what they know is no longer true.

For example, in a lot of the stall companies that we’ve studied, there was someone, some voice in the wilderness, who was calling attention to the problems that were discovered. For stall companies, the voice in the wilderness wasn’t able to get traction. They weren’t able to get an audience inside the firm.

With companies who experienced a stall, the gap between what was believed to be true and the emerging external reality widened. That was the chasm into which the company’s fortunes fell.

The market assumptions that underpin our strategy begin as direct observations of reality. As managers, we’re interacting with customers and competitors and we get what’s going on. We build a strategy that is firmly rooted in reality. Those observations then become the foundation of our strategic plan. They become the pillars of the operational guidance that we give our management teams and frontline staff. Eventually, they become “unspoken orthodoxy,” if you will.

We run into trouble when these market assumptions become outdated.

For example, premium-position captivity can be in some ways be thought of as very, very similar to being disrupted. In this category, there is something companies try to convince their premium customers to accept that they are unwilling or no longer willing to accept from them. Here, the market position is eroded from below. These companies are captive to, in Clayton Christensen’s terms, the “sustaining trajectory.” In other words, companies try to improve their product to make more money from their best customers and become blind to the reality that’s emerging underneath them.

This clearly happened with Caterpillar, with the entry of Komatsu. This is from memory, but when confronted by Komatsu, Lee Morgan, the chairman of Caterpillar, said, “Komatsu prices their product 10-15 percent below ours. That tells you all you need to know about their quality.”

How could he have missed it so completely?

How could he have missed it so completely? Disdain and denial of the emerging competitor is in some ways a very human reaction.

Here is an analogy to understand premium-position captivity: we’re stuck at the top of the market and the momentum shifts to the bottom.

Innovation breakdown is a failure to sufficiently invest in new ventures. When the core of the business runs its course, there’s nothing to sufficiently replace it with.

With premature core abandonment, companies give up on the core of their business.

Take the example of Kmart overtaking Sears and then Walmart overtaking Kmart. Both Sears and Kmart had assumed that, logistics cost being what they were, this was a 1 percent gross margin business that you couldn’t do much about. Walmart realized that this probably wasn’t true. Instead, Walmart saw an opportunity to double the margin of the business.

Giving up on the core of the business for greener pastures is a sign of trouble.

Giving up on the core of the business for greener pastures is a sign of trouble.

There is also talent bench shortfall. People tend to hire people who look just like they do. If you have great chemistry during an employment interview, you may be thinking, “Oh boy, I really like the cut of that person’s jib. They’re just like me when I was younger.” That’s fine. That creates a nice interaction.

However, sometimes business needs people with very different experiences. Suddenly, you may need very different capabilities from those that were required in the past. In these instances, you may find yourself completely flatfooted when you’re hiring people and training them up to replace you. The challenges that we face in the future are very different from the challenges we faced in the past.

When we become unhinged from understanding what’s happening at the frontier of our market, that is what causes all of these different manifestations to stall.

Sean: 

Working with Fortune 500 accounts, sometimes I feel I have to be a bit of a cultural anthropologist.  When I interact with these large companies over time, it’s pretty clear each one aims for hiring people who focus on a certain way of processing problems and deriving solutions.  All of which affects their ability to understand their market assumptions in a non-biased way.

For example, one large Fortune 500 might focus on creative problem solving, another might focus on individuals who think about solutions from more of a quantitative perspective.

That focus on “like hires like” exhibits in all kinds of funny ways. One of our clients, a very well-known big tech company, they never show up on time for a meeting. Never. It’s the complete opposite for one of our accounts that is engineering driven. All fourteen of their research stakeholders on our project will show up precisely on time. It’s almost like a single tone when they join the conference bridge.

As a research firm, it’s our job to discover findings to meaningfully impact decisions.

As a research firm, it’s our job to discover findings to meaningfully impact decisions. We spend a lot of time thinking about how to package our findings so that they get through to our stakeholders within the context of their company climate. We have to figure out how they think and their base market assumptions in order to communicate effectively with them.

That said, I’d like to get your comments on how the leaders of companies impact stall points.

How Does Leadership Loss or Change Affect Market Assumptions and Stalls?

Derek:

Usually, in the firms we looked at, which made over a billion dollars in revenue, heavy dependence on an individual leader was the exception, not the rule. It is the exception to have a larger than life individual removed from the equation leaving a vacuum so drastic, you can see it externally. One example is Disney. Disney was caught (completely understandably) flatfooted when Walt Disney died.

For most of the enterprises we looked at, it would be a real board malfeasance if they were unprepared to fill the gap of a departed leader.

Homogenous Leadership Is a Problem

Sean, you mentioned in an earlier conversation that you asked your students to look at the composition of management teams and boards in companies to see how narrow the paths were to the very top of the house. You asked them to look at how often a single dominant business unit would be the staircase to the management committee or for inside members of the board.

I would encourage your listeners to do that same analysis for themselves. Celebrating a great core of business that is able to generate significant talent is great. However, I’d caution that the narrow sourcing of top leadership is very highly correlated with the group think that misses things” phenomenon.

A real diversity in top leadership is important.

A real diversity in top leadership is important.

A bias toward promoting internal talent can be a real liability, as 3M discovered back in the day when they were trying to get into the consumer business and discovered that they really had no internal consumer competency. I suppose most companies wouldn’t do that any longer, but 3M is the great cautionary tale if you’re committed to only promoting from within.

Sean: 

Thanks for mentioning that exercise we talked about before. It was always really illuminating for the students and for me. I would have my students use it across different companies in the Fortune 500. I had my students look up the bios on the company web page for the 15-20 senior leaders. I had them read up on these leaders to see what business unit they worked in, and what business units they worked in over time. Often, we found a business unit that the bulk of those leaders came from. That business unit was the hotbed that gave the company its start or direction.

If the leadership of the company all comes from the same place, they probably have a pretty focused view of the world. Also, they’ll be ill-suited to deal with things like disruptive competitors, or an upstart who prices way below market value while still delivering a good quality product or service. Uniform leadership is also unlikely to develop cutting edge acquisition strategies and is even less likely to start any sort of disruptive business unit themselves.

Derek:

I’m sure most of your listeners are trying to figure out how to take advantage of the new opportunities that digital channel and products offer. Or they’re defending themselves against having their models picked apart by competitors who don’t have their asset base. That divide currently creates enormously different responses to threats and opportunities.

Sean: 

We see this kind of problem a lot these days within a typical B2B sales team. The selling model is so radically different now from a few years ago. Major changes have happened. Many large tech companies just can’t even conceptualize how these upstarts are selling, much less the changes to the marketing funnel, and the buyer’s journey that these same upstarts are leveraging. All of which means that it’s harder now for big tech companies to figure out how the other guys are being successful and how they can mirror that success.

What would be your advice for either minimizing the likelihood of a stall or surviving one in an effective way?

Red Flags and Market Assumptions

Your sales team may pick up on red flags that the C-Suite hasn’t noticed. Photo Credit: © Oleksandr Rozhkov / Fotolia.

Do You Know How To Spot a Red Flag?

Derek:

Of the 600 Fortune 100 companies we studied, 87 percent stalled in their growth at some point during the 50 years we looked at. Half of that group were able to restart again to some level of growth at about 1- 2 percent above GDP. Everybody who restarted, restarted fast. They were growing, they stalled, and they got right back up on the horse.

Our hypothesis for this was that the companies that were able to restart their growth after a stall were able to quickly and accurately diagnose how their market assumptions had fallen short of the current situation. They reevaluated faulty market assumptions that led to poor strategies toward customers, markets, competitors, technology, etc.

One of the most effective ways for stimulating action is actually covered in our book. At the end of our research, we sat down with the whole team and asked, “Knowing what you know now and looking back across all the case studies we’ve done, what could or should management have seen in the moment that would have been a red flag?”

We then created a red flag diagnostic made up of 50 questions about finance, sales, marketing innovation, R&D strategy and business planning. We recommend these things be investigated inside the firm. It’s a test, essentially, for:

  • The CEO.
  • The executive committee.
  • The next generation of leaders.

It’s interesting to give these folks the test and then compare their answers.  Where does the CEO see a problem that the rest of the firm doesn’t? Does the rest of the firm see a problem that the CEO doesn’t? Where do the younger managers see things that the more experienced managers don’t? All of these gaps in perception are really interesting to investigate.

You’re likely to find some premium captivity. The sales force knows whether customers are no longer willing to accept a price increase. The sales force is going to see this in a way that top management will be insulated from.

Top management may grumble, “We’ve added more products to the solution we sell. We’ve added more features to this product. We’ve increased the pricing. It’s not taking in the marketplace. It must be sales.”

While management may be patting each other on the back and saying, “How happy are we?” The next generation may be saying, “Oh God, they don’t see it, do they?”

While management may be patting each other on the back and saying, “How happy are we?” The next generation may be saying, “Oh God, they don’t see it, do they?”

The difference in responses to the red flag test is where you can really begin to spot and isolate the things you should focus on.

Anybody can go get the book or go online and download the appendix that these questions are in and do as I’m suggesting. If nothing else, it’s a great conversation for the management. It could really spot some very isolated things that you need to focus on.

Don’t Ignore Your Dead Deals, Study Them

Sean: 

From a competitive intelligence standpoint, your sales force might be your first indicator that a competitor is probing your customer base and trying to win them to their side.

We also tell our clients that it’s important to examine the companies that made no decision at all, or at least it appears that they didn’t.  These are the entries in your CRM that aren’t marked as a loss but are marked with comments like – “stopped responding,” “didn’t have budget,” or “didn’t request a proposal.”

What’s interesting is that a lot of times, we’ve found that dead no decisions were wins for a new and disruptive competitor.

For example, when we probe dead deals, as opposed to probing losses, we find that 50-60 percent of them are a loss to a disruptive competitor. Your sales leadership is probably thinking, “We’ll just get them next time, they weren’t ready to buy.”  But they were ready to buy.  Just not from you.

Finally, these disruptive competitors usually start eating at your customer base from the bottom, meaning they are focused on smaller deals. This makes it even harder to realize when what appeared to be dead deals were actually losses.

Derek:

You remind me of something that Clay and I wrote in an article a couple of years ago on disruption and consulting. In the course of our research, Clay said something quite memorable. He said, “Disruption always enters via the basement door.”

Just as you’re saying, we get so focused on how well we are serving our Fortune 50 customers, how well we are growing those relationships etc., that the threats bubble up unnoticed from below. In classic disruptive response or non-response asymmetric motivation, when our small customers are getting eaten away we’re like, “Yeah, yeah, right, that’s too bad but how are we doing in our key accounts?”

That’s completely understandable from a human perspective and completely understandable from today’s economics perspective but somebody should be paying very much attention to those dead, no decision outcomes and saying, “What are we missing? How is the market evolving away from us in a way that we should wake up to today?” That’s a really good point.

Sean: 

Before we wrap, why don’t you tell me a little about the work that you’re doing today.

Derek:

Clay and I got to know each other back when we were first working on the research that ultimately led to Stall Points. Clay had just published Innovator’s Dilemma. (One of us has sold millions of copies. The other one hasn’t. I tell my students that they can join an incredibly select club if they buy “Stall Points.” Take it out from your local library or buy it if you want to boost our sales figures!) I now teach in Clay’s course and I think you mentioned the name. It’s called Building and Sustaining a Successful Enterprise.

I guess the summary of my points so far is that if you’re lucky enough and skilled enough to build a successful enterprise, the reward for you as the leader is that someday you’re going to have to change.

The better your business is, the more clearly you lead your segment, the harder it’s going to be to pull off that change.

The better your business is, the more clearly you lead your segment, the harder it’s going to be to pull off that change.

Somewhat ironically, you, as the CEO of the organization, are going to be the only one who really sees the need for that change. In some ways, you now have to be on two skis. You have to make sure that the existing business competes and runs as well as it can. On the other side, you have to lay the foundation for what’s to come. That is the lonely position of the leader.

We are helping to train what we hope will be tomorrow’s leaders on how to spot these kinds of emerging concerns. Then, personally, Clay and I are in a team working on a larger problem for all of us that he has dubbed “The Capitalist’s Dilemma.” That is, how do we restart economic growth and employment growth and how do we shift from investing in innovations that liberate capital and destroy jobs and redirect that capital and focus into businesses that consume capital and create jobs?

How do we get the economy moving again? It’s a big problem, but stay tuned because we’ve published a little bit on this in HBR. We’re drawing on the alumni network of the school- in our case, the 9,000 students who have taken our course over the last dozen years. We’re using them as partners to understand how this problem presents in the sectors they now work in such as government, finance, and corporations. We’re trying to understand things we could collectively do to restart growth and job growth.

We’re trying to understand things we could collectively do to restart growth and job growth.

I think we are quite committed to focusing on the kinds of innovations that generate the most growth. I welcome your listeners to check out The Capitalist’s Dilemma and get involved in any way they might like if this problem worries them as much as it does us.

Sean: 

That’s an incredibly worthwhile area of work. I want to thank you for being on the podcast. Your kind comments to your colleague aside, I think you’re owed at least a few more thousand sales. “Stall Points” is a really great book.

This transcript was modified for clarity and readability by Isabel Gautschi.

This interview is brought to you by Cascade Insights. We specialize in market research and competitive intelligence for B2B technology companies. Our focus allows us to deliver detailed insights that generalist firms simply can’t match. Got a B2B tech sector question? We can help.

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.