Small Business

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When fast-growth outfits falter unexpectedly, panic can prompt "safe" decisions that turn out to be recipes for disaster

Courage. It takes a great deal of it for an entrepreneur to risk everything on a new, unproven venture. Many fail trying, but even those who make it face an unpleasant reality: successful navigation past the startup phase, into steady growth, only qualifies a company to take even greater risks. And sometimes company leaders lose the stomach for it.

That was among the findings of a study my firm recently completed, looking at some 400 of America's fastest-growing companies over the past 20 years (see BW Online, 02/11/05, "Why Companies Go From Hot to Not"). Nearly two in 10 of those companies had lost their footing -- and our study identified seven key reasons why. Three of those factors (economic factors, changing industry dynamics, and aggressive competition) fall under the heading of "external uncontrollables." Four are related to internal dynamics. This month, I'll explore the second of those four internal dynamics: a loss of nerve.

Case in point: Krispy Kreme (KKD). Founded back in the 1930s, Krispy Kreme was a cult brand, cheerfully pleasing customers in the southeastern U.S. But in the 1990s came an aggressive expansion plan, pushing Krispy Kreme to the 400-store mark in just a few short years. As consumers in new cities lined up around the block to sink their teeth into an Original Glazed, it was easy to assume that Krispy Kreme could do no wrong. The company went public in 2000.

BAD RECIPE.

Four years later, something unexpected happened. Krispy Kreme's growth simply stopped. For 17 consecutive quarters, it had seen dizzying same-store sales growth averaging 12.6%. But in the second quarter of 2004, same-store sales rose only an anemic one-tenth of 1 percent. Both the management and shareholders were at a loss.

Was it the low-carb craze? Tough new competition? High gas prices? Whatever it was, it took Krispy Kreme by surprise. This led to a crippling loss of nerve and resulted in the company slashing its new-store openings. As CEO Scott Livengood put it, "There is no point in opening stores if we aren't able to achieve the full measure of their potential."

This is a fairly common scenario. Growth companies can easily suffer from overconfidence, and when hit with external challenges such as a recession or an aggressive competitor, find themselves in an unfamiliar place. It shakes their confidence and causes them to lose their way. This can be quite frightening to a company used to double-digit growth.

AVOID DESPERATION.

In our study, companies that had stalled often showed clear markers of this loss of nerve. For instance, stalled companies are less likely to take creative risks than their still-growing counterparts. When their market sweet spot starts to sour, they tend to overlook it (as in the case of Krispy Kreme) or simply freeze in their tracks.

A few years ago, when Deloitte & Touche published a report entitled The World's Top 200 Growth Companies, they described what happens this way: "Young companies can ride early momentum for a while. But eventually, their lack of a growth infrastructure -- capability -- will bring their success to a halt." Part of that growth infrastructure is the ability to deal with unforeseen setbacks.

We've seen this in our practice as well. One of our clients had occupied a sweet spot in the market for years, but changing industry dynamics put the outfit increasingly on the defensive, as customers were slowly lured away by aggressive new competitors. The response had been to advertise more heavily and offer discounts in a desperate attempt to retain their clients.

SCRIMPING ON FUEL.

What was called for in their case, however, was not bigger sales or better execution, but the courage to reformulate the customer experience and reinterpret the brand. This called for significant change, which caused a lot of discomfort in a company that had grown comfortable in its familiar niche.

Increasing the ad budget, as this company temporarily did, is not a common response. More often, companies that lose their nerve cut marketing spending along with other important investments. Our study found that companies that had stalled were less likely to be funding their marketing plans sufficiently.

The worst news is that not only is marketing often cut back, so are capital expenditures as well as research and development -- key growth drivers of business. You can't spend your way to success, but in a rapidly changing environment you can't save your way there either.

CYCLING THROUGH.

The biggest problem with a loss of nerve: it can feed on itself. Companies in our study who had stalled were much more likely to say they are afraid of making mistakes as they looked to the future. This fear can cause a form of decision paralysis, which leads them to become too conservative, second-guessing their own moves. This only exacerbates the problem -- and invites competitors in for the kill.

When a company loses its nerve, the most important thing it can do is admit it. A loss of momentum shouldn't be seen as a failure, as it's likely a result of the success of the company's business model. Growth ebbs and flows for every company, and when it ebbs, a leader must recognize that priority No. 1 is to get it flowing again. In business, as in life, courage isn't the lack of fear -- it's being afraid and yet still moving ahead.

Next month: A look at the third of four internal dynamics that cause growth to stall: a loss of focus.

Steve McKee is president of McKee Wallwork Cleveland Advertising, an ad agency specializing in working with fast-growth companies and businesses whose ad budgets are under $10 million.

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