When Hot Growth Goes Cold


Just because a company receives high marks from business experts doesn't mean it won't fall victim to any of seven notorious factors

You've heard of Intel and AMD, leaders in the semiconductor industry. But you may not have heard of Agere Systems (AGR) -- and if you're an investor in this chipmaker, you may wish you never had.

Agere holds the distinction of being the worst performer in the 2005 Shareholder Scoreboard published by The Wall Street Journal. An investment of $1,000 in 2003 would have dwindled to less than $500 just one year later. Ouch.

SINGING THE BLUES.

What happened to the company investment analyst Charles Glavin now calls the "Rodney Dangerfield of semiconductor stocks"? Agere certainly can't claim it's in a declining industry. Far from it. The company makes chips for PDAs, mobile phones, and even the iPod mini (AAPL). Agere can instead chalk up its troubles to poor execution in the face of intense competition.

Agere's story is not unique. In fact, of the 100 companies listed in BusinessWeek's 2002 rankings of Hot Growth Companies, 37 suffered negative returns over the following two-year period.

Singing Machine rode the karaoke wave all the way to No. 1 that year, only to see its shares drop more than 90% in the next 24 months. Like Agere, it met up with killer competition. Another company once at the top of the Hot Growth list, oil-rig builder Friede Goldman Halter, saw such a turn of events that it filed for bankruptcy two years later.

OUTSIDE CAUSES.

Over the past several months in this column, I've examined companies whose once high-flying growth had fallen back down to earth, sometimes with a thud. Lucent (LU). Kodak (EK). Zippo. Burger King. Krispy Kreme (KKD). Volkswagen. Boston Market. Staples (SPLS). Home Depot (HD). Pier 1 (PIR). Wendy's (WEN).

Even though most of these companies belong in the business hall of fame, their ups and downs demonstrate that no company has immunity against the factors my firm's study identified as growth killers. We surveyed 400 companies once recognized for monster growth and learned that nearly 2 in 10 subsequently saw their revenue growth go flat or even turn negative.

We identified seven key factors that commonly cause companies to stumble. Competition, like that faced by Agere and Singing Machine, is one of three external factors.

A second factor, an economic upheaval, struck JDS Uniphase (JDSU). It saw the total market for its fiber-optic components shrink from $15.5 billion to $1.5 billion in four short years because of the dot-com implosion.

A third external factor, changing industry dynamics, caused Rite Aid (RAD) to suffer. The nation's third-largest pharmacy chain, it has had difficulty adjusting to the advent of mail-order prescriptions. Rite Aid has averaged a negative 10% return for the past 10 years.

INTERNAL MENACES.

Of course, every company has to deal with economic downturns, environmental changes, and fierce competition over the course of its existence. While the timing of these events may not be predictable, the inevitability of them happening is.

Indeed, businesses can blame the remaining four factors, more subtle and subversive than the others, for really putting a kink in things. Like roaches that scatter when the light comes on, these characteristics hide inside companies, leaving evidence of their existence even as they go unrecognized.

Destructive external forces become truly problematic when combined with (factor 4) a lack of consensus inside the company, (5) a loss of nerve among top management, (6) a loss of focus in the marketplace, or (7) inconsistency in execution -- and sometimes all of the above.

FECKLESS SCRAMBLING.

In our practice, we have witnessed this vicious cycle as companies that begin to stumble naturally start to question the effectiveness of their marketing. Their understandable loss of confidence leads to infighting among the management team, as people argue about how to address the challenge (and sometimes about how best to even define it).

Forward momentum gets lost, spending becomes inefficient, and the company changes direction too frequently in search of a magical silver bullet. Then sales continue to stagnate, and confidence continues to flag, perpetuating the cycle.

What can a struggling company do? Clearly, it needs a new (or renewed) vision so it can once again aggressively attack the marketplace. But before that can happen, management must do two things.

STOP DENYING.

First, management needs to identify the source of the challenge. Most of the time, it will correspond to uncontrollable elements in the marketplace -- which, when recognized, will enable the company to set aside the blame-shifting that all too often happens when growth stalls.

Second, the company must take a good hard look within and recognize the contributing internal factors fueling its unproductive behavior. These destructive characteristics are probably no one person's fault -- they simply arise as a result of the difficulties facing the company. But they're not likely to go away by themselves, and recognition is the first step to getting them fixed.

The good news: It can be done. Laserscope (LSCP) made the BusinessWeek Hot Growth list in 1991, then spent the better part of the '90s losing focus as it targeted too many markets. Having narrowed its efforts to a single core-customer base in 1999, Laserscope has regained its status as a growth company.

So what do you do when growth stalls? BusinessWeek editors may have put it best as they analyzed this year's crop of growth companies: "A favorable market helps, but as the best Hot Growth performers show, execution matters more."

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