How the Growth Outliers Do It

I recently read “How the Growth Outliers Do It” (Harvard Business Review, Jan – Feb, 2012) by Rita Gunther McGrath, a Professor at Columbia Business School. She and her colleagues conducted research to find out what makes high growth companies different. They asked the simple question: How many publically traded companies with market capitalization of at least US $1 billion grew by > 5% each year during the decade 2000 – 2009. It turned out that only 10 of the 2,347 companies (0.43%) that qualified across the entire period grew their net income by > 5% in all 10 years, and only five grew both revenue and net income every year (0.21%). Confirmed: growth is hard! Nonetheless, they found that these outliers shared some common characteristics:

• “On the one hand, they’re built for innovation. They enter new markets before competitors do; they’re good at experimentation; they hold everyone accountable for new ideas; and they can move on a dime.”
• “On the other hand, they’re extremely stable. Chief executives have come up through the company; strategy and organizational structure stay consistent for long stretches; client retention is unusually high; and the corporate culture is strong and unchanging. Those characteristics may seem contradictory, but stability appears to be what makes innovation — and steady growth—possible.”

There are many interesting findings in this study, but I want to comment on just two. First, concerning how companies can become better-built for innovation, study after study has demonstrated that companies that are good at innovation are clear about their target customers’ unmet needs. Hence, when a new technology arises, they are quick to apply it to better satisfy those unmet customer needs. Knowing the customers’ unmet needs also enables companies to be good at experimentation. When applying the scientific method to innovation, companies should have a validated customer need in mind so they can experiment on the efficacy of their new solution alone. This is what Thomas Edison did. He did not attempt to experiment on new solutions until after validating that the target customers’ need was important and unsatisfied. (Ideas-first or needs-first: What would Edison do? White Paper, 2009, Sarah Miller Caldicott).  To conduct experiments that attempt to uncover or validate customer needs AND solution efficacy at the same time is to confound two experiments and misapply the scientific method.

Secondly, although Professor McGrath doesn’t speak to this in her article, my experience working with dozens of companies to enable them to innovate is that the best define their business and their markets according to the customer needs to be satisfied, not the products or services they sell. Products, services and technologies come and go as they continually evolve and improve. But customers’ underlying needs (what people want to accomplish, feel, and experience) remain remarkable stable over time. When these underlying needs are known, they provide leadership with a “north star” by which to navigate through turbulent times. This enables them to quickly innovate and yet remain stable as an organization at the same time.

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