Overcoming Lock-in to Grow

We often think management either invests for the long term, or robs the long term to prop up short-term profits. But, as you might imagine, reality is more complicated than this simple trade-off. When companies grow they create practices which help them grow. The longer they grow, the more they lock-in those practices, becoming really good at what they used to do – but increasingly unable to do new things. If they get too focused on what they used to do, pretty soon that’s all they do. When competition increases and markets shift, they see revenues and profits fall while they keep doing what they are locked in on.

Consider Wal-Mart (WMT), a company that grew dramatically in the 1970s-1990s. But if we look back the last eight years – well, there's not been much to get excited about. Wal-Mart locked in on its low price success formula 40 years ago and hasn't done anything really different since. Thus revenue growth since 2000 has been anemic, while profits have increasingly come at the expense of employee benefits and domestic manufacturers rather than more revenues.

Companies lock in on their early success formula to grow rapidly while the market grows. But inevitably competitors start copying the early leader, and they beat down both sales growth and returns as they catch up with leader capabilities. Competitive shifts make the leader run harder and harder, but the lead gets narrower and narrower. Today Target, Kohl’s and other retailers offer prices almost as low as Wal-Mart, but with wider selection, better quality merchandise and superior store ambiance. Wal-Mart still does well what it has always done, it’s just not that much better than competitors any longer.

Now Wal-Mart is nearing saturation of its low-price stores in the U.S.A. Capital expenditures are going to be cut by one-third, and dollars are being shifted to store remodeling in a defensive move reacting to competitors rather than opening new stores to regain leadership. New store openings are targeted at emerging markets. But Wal-Mart already wrote off huge investments and exited failed efforts in Germany and France. Its Canadian and U.K. efforts have been marginal. In Japan, Wal-Mart only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla five years ago. Wal-Mart has made no case that its success formula is at all viable outside the U.S.A., and especially in emerging countries. It’s unclear Wal-Mart’s “defend & extend” strategy (defend old stores with sprucing up while extending the business offshore) will create much, if any, incremental revenue or profits.

Now compare Wal-Mart to Google Inc. (GOOG) and we can see why investors get so much more excited. In the last year Google has moved beyond its original, and still high growth, search and ad placement business into other high-growth businesses such as mobile telephones. And Google recently announced it is going to legally offer books and other copyrighted material to customers in some unique online ways - including competing with Amazon's e-book (Kindle) business. Unlike Wal-Mart, Google avoids lock-in to its traditional search business by entering new high-growth businesses with new demands from new customers. And in each market, Google enters with new products intended to be better than what's out there today. It’s Google’s constant willingness to develop future new business scenarios, compete aggressively in each new business, provide disruptive solutions when entering the business and using White Space to test new product launches and learn that makes Google so exciting.

Instead of defending & extending “search,” Google keeps throwing itself back into the rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't require everything to work right for it to grow revenue and profit through its White Space projects. Because it is still looking for new sources of revenue by entering new, high-growth businesses, Google is more likely to continue expanding its value for customers, suppliers, employees and investors.

Adam Hartung is managing partner at Spark Partners, and author of the recently published book from Financial Times Press, Create Marketplace Disruption: How to Stay Ahead of the Competition. He previously has worked as a corporate executive, leading business development for both PepsiCo and DuPont. And he has been an international consultant with the Boston Consulting Group, Coopers & Lybrand and Computer Sciences Corp.