Growth Strategies: Growing with the Flow

A look at how various Inc. 500 companies achieved high growth in flat and perishing markets.

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Achieving high growth in an expanding market is tough enough, but how do companies make the Inc. 500 while battling it out in developing, flat, or -- perish the thought -- declining markets?

Gadi Rosenfeld was in a lousy business. He and his partner, Dan Court, had seen how much local-area networking of office computers had grown, and so in 1989 they started a business to install local-area networks (LANs) in law offices. But they were too late.

No sooner had Rosenfeld and Court entered the market than they realized that, although it was growing, it had attracted a flood of entrants -- and the competition was hurting profitability. "Margins kept on slipping," Rosenfeld says. "This business was becoming a commodity."

Rosenfeld and Court could have tried to tough it out. Instead they sought a way to make their company distinctive. They began to specialize in scanning legal documents into the computer and then storing the information on CD-ROMs. To date, New York City-based Legal Information Technology has grown from sales of $120,000 in 1989 to $6 million in 1993, and it is #36 on this year's Inc. 500 list. Although the company still does systems integration and LAN installations, Rosenfeld estimates that 85% of its business now consists of scanning information onto CD-ROMs and coding it. By switching to a less-developed market, Rosenfeld and Court have been able to command higher margins.

Whether he's conscious of it or not, Rosenfeld is exploiting the product life cycle, one of the hoariest of marketing concepts. Open any introductory-marketing textbook and you'll find it: a hill-shaped curve that represents the way a market's sales grow, plateau, and then someday decline as that market goes from birth to obsolescence. The curve is usually divided into four stages: introduction, during which a new market struggles for acceptance; growth, during which sales begin to take off and new competitors appear; maturity, during which sales growth levels off, unless producers develop new uses for the products or services; and decline, during which sales fall because of some new alternative. Experts argue about the usefulness of the product-life-cycle model, particularly of its later stages: obviously, some products -- say, vegetables -- can linger in maturity for centuries without any signs of decline, while others are rejuvenated and start another upward surge. Still, there's some powerful truth behind the notion of a life cycle in markets. The product-life-cycle theory predicts, for example, that in the latter stages of a market's growth, the growth will attract a great many new competitors, which will put pressure on prices and individual companies' margins. That sounds an awful lot like the situation Rosenfeld and his partner faced in the LANs-for-law-offices business; unwittingly, they had entered their market too late. By switching to the scanning-and-imaging business, Legal Information Technology effectively moved to a different curve -- one in which the company could start earlier, at which point the profit potential was greater and the competition less intense.

Intuitively, we'd expect most Inc. 500 companies to be in emerging or growing markets; after all, it's easier for a new entrant to grow quickly in a market in which there's enough growth to go around. And, in theory, entrepreneurial companies should do best in those phases: once a market reaches maturity, it often becomes big enough to be served primarily by big companies, many of which may have started out small and grown with the industry. Sure enough, the Inc. 500 includes a disproportionate number of companies in areas of the economy that are experiencing new growth. To prove that to yourself, scan the list and try imagining what the economy would be like if it were a mirror of this year's Inc. 500. It would be a pretty weird place: for every restaurant (there are two on this year's list), there'd be at least a dozen companies distributing computer hardware. It would be easier to spot a systems integrator than a supermarket. And there'd be scads of telecommunications companies -- but just try finding a plumber.

You get the picture: an equal-opportunity representation of the economy this is not. Still, the Inc. 500 does contain plenty of representatives of mature businesses, from Contract Manufacturer (#58), which builds trailers, to Pencils (#405), which sells office supplies. How, we wondered, do companies' growth strategies vary with the stage of the market in which they operate? To find out, we interviewed 20 Inc. 500 companies, chosen to represent a variety of stages of industry life cycles.

Perhaps the most striking finding of our research was the extent to which Inc. 500 companies have grown because of their willingness to change plans and directions quickly, as Gadi Rosenfeld did. Of the 20 companies in our sample, almost half either changed direction substantially in the course of growth or grew out of opportunities a founder had spotted while running a previous company. These entrepreneurs have flourished because of their willingness to be flexible, to follow changing markets toward growth. If one product or service proved too mature or too competitive, they'd often shift resources to another, related market in an earlier stage of the product life cycle or seek some submarket in which they could compete more effectively. The process of developing a fast-growing small entrepreneurial company -- if these 20 companies are representative -- is one of trial and error, in which success belongs to the CEO who is least attached to his or her original plans. What that means is that almost any company owner can try to play the rapid-growth game -- any company owner who is willing to be flexible, that is. If growth is on your agenda, consider the following queries, which we developed from our conversations with this year's Inc. 500 and roughly categorized by the stages of a market's life cycle. (Note that some companies appear in more than one category because their markets have gone through profound competitive change in just a few years.)

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