One obvious trait of high-performance companies is that they are all adept at launching new businesses — a process that we call climbing an “S-curve.”
The Sumitomo Group traces its humble origins to the 17th century, when Masatomo Sumitomo opened a book and medicine shop in Kyoto. Since then, over the course of almost four centuries, not only has that family business outlived numerous shoguns and emperors as well as two major world wars, it has continually grown and thrived, entering one new market after another, including copper smelting, trading in textiles and sugar, mining, electric cable manufacturing, forestry, banking, and warehousing. But Sumitomo is the rare exception that proves the rule: Many companies might be fortunate enough to launch one successful venture, but the vast majority will stumble badly when that business begins to mature. In fact, one of the main reasons why so many companies — even large corporations — are here today and gone tomorrow is because they couldn’t make the jump to a new, growing business from an existing, slowing one before revenues from that core market have stalled.
Indeed, past research has repeatedly shown that, once a company’s revenues have flattened, the chances for recovery are anything but promising. In one study, two-thirds of stalled companies ended up being acquired, taken private, or forced into bankruptcy. Moreover, once a business has stumbled badly (annual sales growth slowing to less than 2%), it has less than a 10% chance of ever fully recovering.1 Such sobering statistics raise the crucial question of how companies can avoid such growth stalls in the first place.
That question has become all the more urgent in today’s hypercompetitive environment. When Sumitomo was founded in pre-industrial Japan, the company could enjoy decades of prosperity from its core business before having to branch out. Not so today, when any success invites quick imitation – and replacement. Blockbuster had barely established itself as a force in movie rentals before Netflix was already knocking at the door. It’s no wonder why the average lifespan of companies on the S&P 500 has shrunk drastically, from 75 years in the 1930s to just 15 years in the 2000s.2