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  • Writer's pictureJohn Q Leonard

6 Truths About Growing Companies


1. Growing companies are motivated to cater to their best customers, and good firms often go to great lengths to delight their best customers for a number of reasons. In fact, looking backwards in time at data always supports the notion that the most effort should be put into satisfying those customers who are the most profitable to the business. This all seems sensible enough. It is what we are taught in business schools, and most executives believe it without question, even though it often leads to ruin.

2. Profits tend to be best upmarket; where the highest margins can be commanded and the most demanding customers will be delighted to pay for satisfaction. This is only true only to a certain point however; eventually the pace of innovation outstrips customers’ willingness to pay for improvements over previous methods of doing a particular job. Whenever these limits of diminishing returns are approached, the largest firms in the industry tend to get outpaced by new entrants that are innovating along different dimensions of the value networks.

3. During a growth phase, each company must choose whether to deploy resources toward developing new products to satisfy the most demanding customers and continue to enjoy the highest margins, or take action to defend the down-market position from new entrants utilizing lower cost business models. It is not difficult to imagine which choice is typically made by large firms. Remember though, deciding on how to be different is an essential part of having a strategy. Creating good strategy is about learning to be different in a way that maximizes your strengths with measures that are difficult for larger, entrenched incumbents to counter.

4. The management teams of large growth companies are asymmetrically motivated make the choice to move upmarket to satisfy the most demanding customers where they can command the highest margins.

5. Most companies move up market as a result of incentives to grow the business. Wall Street wants the market cap to increase at a steady clip, and managers are incentivized to comply by sustaining incremental innovations of current products. It seems less risky to try to invent new customer groups when there are already existing customers to satisfy.

6. Blindly following this growth strategy is what most often causes big industry leaders to fail.

“God threw us a curveball when he created the world because he made data only available about the past, and he oriented us to look in the future – and it’s a big problem.” -Clayton Christensen

JqL

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