Do you know how many companies that appeared in the top 25 of the Fortune 500 back in 1961 were still alive 50 years later? Six, according to IBM, which is listed among them. What happened to the other more than three-quarters of those once-elite firms? Like the majority of companies today, their failure to innovate in a world prone to disruption led to their eventual demise.
Mark Leslie, a lecturer in management at the Stanford Graduate School of Business, offers the best explanation I've ever heard about this phenomenon in First Round Review. In his article, Leslie identifies what he terms the corporate "Arc of Life," which explains how most successful startups go through an initial growth phase, with revenue and market share increasing each year. Yet over time, this growth peaks, slows, and then plateaus as the companies mature. This phase is followed by a gradual sputtering out, plummeting into negative growth as new players enter the market and the companies fail to keep up.
Though the timeline varies for different firms, this unfortunate cycle has been shown to be somewhat inevitable. The question then becomes, how can you increase the chances that your organization will be among the ones that prolong their high point in this cycle for longer than others, avoiding the downfall? Leslie points out that firms that have figured this out, like IBM, have managed to reinvent themselves and stay relevant for decades or longer.
Here are some keys, inspired by Leslie's work, on how to make this happen:
Learn to transform. Innovation, which Leslie terms "strategic transformation," is necessary to lengthen your company's growth curve over the long haul. Many leaders prefer the more comfortable strategy of lingering as long as possible in a controlled growth mode, riding on the market leadership they've attained from past decisions rather than taking on new risks. But this seemingly "safe" choice--which relies more on metrics-focused execution and an emphasis on operational excellence and efficiency--has some significant drawbacks.
While leaders who are more "operationally driven" than "opportunity driven" may be loved by Wall Street because of their reliable quarterly performance--at least initially--the former leaders miss out on chances to do something big that will up their future game. Rather than plodding dutifully along, think about how you can shake things up with new ideas that may be risky, but may also catapult your company into a successful transformation, on a new growth trajectory ahead of competitors.
Scan for the "sweet spot." As a company travels along its Arc of Life, there's a specific window between the initial growth phase and reaching full maturity where change and renewal have the best chance to thrive. Leslie calls this moment "maximum optionality," or the "sweet spot" of optionality. When you reach this spot in your company's life cycle, it's a great time to take calculated risks to extend your growth curve--and also avoid the plateau or dip that's likely just around the corner if you don't do something different.
Here are some clues that you may be within your company's "sweet spot," ready to seize the future by using unconventional strategies or taking bold, innovative risks to reach your goals:
- The startup phase is behind you and the enterprise has traction.
- Corporate revenue is climbing year-over-year, you're seeing strong profits, and the organization's current business model has achieved relative stability.
- You now have the market influence and the resources to continue to grow your core business while trying something new.
Pivot and climb. In my last post, I described how Pluralsight recognized its sweet spot of optionality a few years back, when we decided to transition our business model from in-person training to an online training platform--despite the fact that we reached a few million in revenue with no outside funding from our original model. After launching in 2004, we recognized the convergence of several new technology trends in 2007 that suggested we could successfully take our training business online, if we were willing to innovate and pivot toward what we saw on the horizon.
It wasn't an easy decision to in essence "throw away" half of our company's revenue by risking a new direction. But as Leslie points out, companies that see the sweet spot coming and grab hold of its opportunities can leverage their transformation into a whole separate growth curve, extending their life expectancy into a new incline (and avoiding the decline) with each innovation. After making our pivot, we tripled revenue the following year, and have continued to experience triple-digit growth in the years since then.
I believe from personal experience that Leslie's findings are the key to building a successful business over the long term. As he states, "when taken together, a series of successful transformations--big or small--will meld over time into an overarching story of transformation and extended life expectancy." I couldn't have said it better myself.