The downside of success

After the turmoil of the 2008 global financial collapse, there have been many worries about the resilience of Europe’s largest banks.

For those worrywarts, there has been some fairly good news. Recent stress test results announced for Eurozone banks by the European Central Bank indicated that four in five made the cut. That’s largely positive and it made me think, what if large corporations around the world also went through a similar exercise?

There is such a stress test for public companies, and it takes place every day on the stock market. Unfortunately, over the last couple of weeks a seemingly inordinate number of giant companies have started to receive negative scores. For example, IBM, McDonald’s, Amazon and Coca-Cola recently announced missed financial targets, citing everything from concerns over obesity to bad press in China for their troubles. Questions have even arisen about the outlook for growth at Wal-Mart and AT&T. And of course Tesco has been mired in a downward slump for more than a year.

What gives? Is the middling global economic recovery to blame? Are severe challenges in places like Africa or Russia taking a bite out of the bottom line?

No. Global giants have always dealt with the difficulties that come with a worldwide footprint.

The problem with the giants is that they’re in a battle with the fundamental forces of business, and right now they’re losing. There are five such fundamentals that are at the heart of corporate survival.

Running a global, complex company in 2014 is one of the most difficult management and leadership challenges imaginable. After all, Coke is sold in almost every country in the world; Wal-Mart employs 2.2m people. For companies such as these, not only do you need to run your business, but you also need to think about how to completely change it at times. Few large companies are adept at pulling off both these tricks. Maybe that’s why IBM has fallen behind in cloud services and mobile, two of the most important changes in the IT world. They require different organisational structures and even different talent for success than IBM’s core businesses.

Successful companies build strong cultures that reinforce that success. Adapting to change often requires leaders to break that culture. That’s not easy.

2. The formula for growth is not infinite

There are clear pathways to growing a business. Once you have your core product or service, your opportunities come from selling it to more customers. Eventually the quest for customers leads to new markets. Simultaneously, companies seek to expand. Perhaps they look for new ways to leverage their main products, or they seek to offer new services.

And that’s it. Growth comes from selling the same thing to new customers or selling new things to existing customers, or both. What happens when a company and its leaders have pretty much played all these cards? Where else can Coca-Cola sell their products? Are there some product categories that Wal-Mart and Tesco have yet to uncover?

3. New growth opportunities usually involve more risk

Once a company begins to exhaust its core growth formula, it has got to look further afield. And that means expanding into tangentially related businesses where they may no longer have the inherent advantage.

Amazon is a particularly intriguing example, because its managers are taking all sorts of new risks via expansion, even while its core business — ecommerce — is growing by leaps and bounds. It’s not impossible to make this work, but the degree of difficulty goes up exponentially when you enter a market or product category where you don’t have the upper hand. Amazon’s failure in a variety of new ventures, from smartphones, to tablets, to search is a case in point.

4. It’s much less fun to compete when growth slows

Growth is great, but when the natural trajectory of growth slows, you’ve got to compete on price and other features. That’s much less fun, because you’re now fighting a zero-sum game for market share points, and it’s much less lucrative.

Not only is your business strategy tougher to pull off when growth slows, but a company’s addiction to meeting and beating market expectations (remember the score sheet, aka, the stock market?) creates all sorts of negative side effects. Cost cutting starts to dominate, for instance. That’s not necessarily a bad thing … until it becomes the go-to strategy to push earnings per share growth. There are natural limits to cost cutting, because at some point you start to lose great talent, cut back on new initiatives and push out other priorities. For example, the disastrous Gulf oil spill in 2010 was triggered, at least in part, by BP’s maniacal attention to cost cutting.

IBM has spent more money on stock buybacks and dividends than research and development for some time, a strategy that certainly pushes earnings per share up, but only makes it tougher to compete, and even tougher to find a new path to renewed growth.

5. No company lives forever

This is the one nobody in the executive suite really wants to hear about, but it’s simply a core lesson of business history. Of the top 100 companies by revenues in 1955, for example, only about a dozen still enjoy that same ranking almost 70 years later. Everything leaders do to grow a business is designed to forestall the day when that growth stops. And of course new waves of entrepreneurial ventures rise to take up the top spots over time. After all, back in 1955 Wal-Mart and Amazon were nowhere to be found, and McDonald’s was a tiny regional player. Today they’re all giants. What will we see in another few decades?

Companies that become giants in their industries are not immune from these five fundamental forces. At some point they become so big that the classic pathways to growth become constricted, and the inevitable rise of new companies start to take their toll. At some point, all successful companies become too big to succeed.