Why do established companies hit a growth plateau—and how can boards avoid “illusory growth” strategies?

​Is your CEO trapped by investor pressure? How to escape the “growth curse” and build long-term corporate strategy​

Discover Escaping the Growth Curse by Yves Doz and Keeley Wilson: why growth stalls in mature firms, how short-term metrics mislead, and what boards can do to protect strategic assets and long-term value.

Continue reading for the board-level checklist: how to spot cosmetic growth, reset metrics beyond short-term earnings, and steer strategy through a plateau without sacrificing the company’s strategic assets.

Recommendation

Large companies listed on the investment markets face steady pressure to deliver growth. Investors punish companies that don’t keep expanding, yet organizations that deliver what the market demands in terms of continual growth may kill themselves in the process. This is because mature companies eventually plateau – at least for a time – and managing a company on the plateau requires different skills and strategies than managing for growth. INSEAD professor Yves Doz and management expert Keeley Wilson explain that common strategies for delivering constant growth may be fatal. That is why they give a new name to the usual corporate drive to keep getting bigger: “the growth curse.”

Take-Aways

• Established companies’ growth usually stalls.
• Short-term growth is often illusory.
• Growth “plateaus” as companies mature.
• Today’s CEOs face stress and intense scrutiny.
• Diverse stockholders have different motivations.
• Pressured CEOs are seldom appreciated for maximizing their long-term goals.
• Boards must take strategic action.
• Directors should be long-range planners and thinkers with knowledge and experience.
• Uninformed board members enable executives to present short-term, illusory performance reporting.
• Companies must recognize and conserve their strategic assets.

Summary

Established companies’ growth usually stalls.

The growth trajectory of well-established companies almost inevitably plateaus, contrary to investors’ hopes and expectations. Therein lies the “growth curse.” Investment managers insist on growth; boards of directors, CEOs, and corporate managers strive to meet those expectations. However, when growth proves unachievable, companies often try to provide something that looks like growth, flying in the face of what’s really happening. A few companies win this risky game, but many more lose.

Strategically coming to understand that growth is not limitless requires a new way of thinking and a fresh focus on the future built on strategies that ensure long-term prosperity, even during a plateau period.

“Over the past four decades, the growth curse has become a pervasive problem for the companies ensnared by it, the people whose lives are made miserable by it, and the societies that ultimately suffer as a result of it.”

In theory, boards try to recognize what lies ahead, but, in fact, they usually provide mere oversight as they rubber-stamp their executives’ strategies. Instead, the boards of mature companies should exercise strategic governance amid measured progress as part of their primary role: representing the corporation’s stakeholders.

Short-term growth is often illusory.

Chief Executives so abhor growth slowdowns that they defy reality by promising short-term boosts to the bottom line. To deliver, they milk the core of a mature company instead of investing in new, long-term growth opportunities. McKinsey Global Institute research found that companies that invest continually and report earnings based on “cash flow, not accounting decisions” – that is, companies that are “managed for the long term” – outperformed their more myopic peers.

“Since [the] German sports brand PUMA published the world’s first environmental profit and loss in 2011, a small number of companies are beginning to put a financial figure on the environmental costs of their business activities.”

The shenanigans that companies undertake to boost short-term growth often prove likely to cause environmental damage. This manifested in the Volkswagen emission scandal when VW executives conspired to cheat emissions tests, so they could meet their sales targets. Accounting standards don’t usually require firms to report the cost of externalities, such as “environmental damage, pollution, waste, [and] water and land use.” Firms focused only on short-term growth often are reluctant to acknowledge these costs.

Growth “plateaus” as companies mature.

Growth pressure mounted in the 1970s as globalization brought companies a variety of advantages, including access to international markets. The 1990s brought even stronger growth pressure as industries converged. Later, digital platforms drove businesses to follow up on otherwise one-and-done sales by offering customers extra services or support to generate additional revenues from established clients. This emphasis on growth is seductive, but it is often inappropriate for mature businesses.

“Geopolitical and environmental changes are putting global supply chains in jeopardy (think of trade barriers, the Russian invasion of Ukraine, and the increased incidence of flooding resulting from climate change).”

Companies in their prime may find that potential growth opportunities appear small compared to their powerful core businesses. Even mighty Intel isn’t immune. The design and production of ever more powerful, less costly microprocessors enabled Intel to dominate computer and server markets. But that game changed. Mobile devices and gaming set-ups now drive demand. Intel has been investigating these and other potential growth avenues, including “chips for autonomous vehicles.” However, transitioning to a diversified business model requires new skills, and Intel has yet to prove itself outside of its familiar arena.

Today’s CEOs face stress and intense scrutiny.

Disruption, digitalization, and other modern business forces contribute to uncertainty and pose threats. Shareholders can be mercurial. The CEO has become a celebrity, the face of corporate performance. For example, during the late Jack Welch’s tenure as CEO of GE, he presided over a 2,829% increase in GE’s market capitalization. He had star power, and his name was synonymous with GE’s management, then considered among the world’s most successful. Welch wore the company’s success like a laurel wreath, though now his name is linked to its failures.

“The more analysts cover a particular company, the lower the likelihood of that company making long-term capital investments because management is under such intense pressure to deliver short-term results.”

Welch became GE’s CEO in 1981. Under his leadership, earnings per share (EPS) became the top business metric. GE’s research correlated profits with market share, leading to Welch’s demand that each company under GE’s umbrella rank number one or two in its sector. Creative definitions of markets, industries, and sectors followed. GE made its EPS numbers consistently, but it ended up delivering only the illusion of growth – mostly through legerdemain. Fortune magazine described GE’s approach to share buybacks as, “one of the most value-destroying repurchase programs in the annals of corporate America.”

Diverse stockholders have different motivations.

Academics argue that corporations exist to serve the interests of their owners — their shareholders. This means aligning management’s interests with shareholders’ interests. However, shareholders vary greatly, adding to this challenge. Some shareholders are short-term speculators who hold their positions for mere seconds or minutes, buying and selling through automatic programs. Some investors aim to beat the market by deploying in-house analysts to spot potential opportunities or problems before they become public knowledge. Others are “activist…fund managers” with a variety of objectives. Some resemble the corporate raiders of the 1980s looking for gain by changing the corporation. Activist investors who attain seats on a board of directors can signal the endgame for the company’s CEO.

“Complexity is profoundly disturbing for corporate leaders.”

Activist campaigns are growing worldwide. The California State Teachers Retirement System, for instance, was a major Apple shareholder, and it pressured the company to address device addiction among youngsters. Accordingly, Apple unveiled controls on screen time. In another activist move, Norway’s sovereign wealth fund declared its intention to push climate initiatives onto companies it invests in if it finds they are not paying sufficient attention to this issue.

Pressured CEOs are seldom appreciated for maximizing their long-term goals.

Mark Fields, former CEO of Ford, took the company’s helm in 2014 and led it to record-breaking earnings. Recognizing impending technological shifts, he invested aggressively in R&D, choosing future prosperity over the short-term appearance of earnings growth. When investors who prize growth above everything cratered the stock price, the board fired Fields. A similar scenario played out at DuPont when CEO Ellen Kullman led the company from January 2009 to October 2015. During her tenure, she affirmed the importance of R&D and DuPont beat the S&P 500. Earnings slipped as the Asian market shrank, and the board got the jitters when DuPont eked out a victory against activist investor Nelson Peltz and his Trian Fund Management. Kullman, a lightning rod during the conflict, subsequently announced her retirement.

“A study of Fortune 100 companies found that over a five-year period, 40% of leaders were caught up in wrongdoing allegations that were serious enough to be covered in the media.”

Today’s pressure for short-term earnings growth is unfolding amid a complex ethical context that demands environmental responsibility and social probity. Corporate managers tend to embrace “linear models…planning and…forecasting,” but rational explanations and logical thought seldom capture the complexity that confronts companies in the real world. The usual emotional makeup of corporate leaders, who tend to value control, leaves them ill-equipped to address complexity. Being somewhat narcissistic and fully afraid to fail deters them from risking a secure present in exchange for an unknown future. Malefaction on the scale of Enron’s Jeffrey K. Skilling and WorldCom’s Bernie Ebbers is uncommon, but even well-intended CEOs can inadvertently create a culture that prioritizes achieving its statistical goals over avoiding the hazards of a constant push for growth that ignores the company’s core.

Boards must take strategic action.

Chief executives who drive cosmetic, illusory impressions of growth accelerate the deterioration of value and endanger their companies. Most executives, having matured in the regime of shareholder capitalism, don’t have the mindset or the skills necessary to withstand pressure for short-term earnings or to focus instead on long-range outcomes. Boards feel pressure from investors and from managers who prioritize short-term earnings.

“When the board owns the strategic direction of the firm, its role shifts from one of relative reactivity in merely approving the CEO’s strategy to being much more proactive.”

The old notion that boards serve as mere “monitors” can impede individual directors from challenging or questioning a star CEO. Yet in the wake of a crisis, critics will impugn the board for not having taken early action. Even if directors suspect internal problems, exposing the company’s flaws may cause unpalatable financial consequences. The Volkswagen emission scandal, the collapse of Theranos, and other such outcomes highlight the need for changes in the role of the board.

Directors should be long-range planners and thinkers with knowledge and experience.

Strategic direction should be the board’s call, although the CEO and the executive team will implement the strategy. The board should act as the organization’s voice of conscience to ensure its fidelity to its mission and also serve as a cushion that prevents outside pressures from pushing management in the wrong direction. Boards must goad executives into facing complexity and should develop and deploy appropriate strategic metrics, going beyond financial reports to elucidate long-term well-being. The board should get to know people a level or two below the C-suite, so its members can appreciate the quality of talent in the organization and get a clear picture of what’s underway. Proper planning for succession is one of the board’s most important responsibilities.

“If boards are to be effective…directors will not only need to be impartial and highly engaged, but they will have to bring no personal agenda to the role.”

Directors should be high-minded people who undertake that role as a public service. Directors with self-interested motives vitiate boards. If you are assembling a board, prioritize cognitive diversity. Directors need a strategic mindset, including the ability to ask questions that don’t occur to others and to see connections between what others consider disconnected phenomena. Boards with fewer than ten members appear more effective than larger boards. Consider term limits for directors to balance the needs for both continuity and change. Independent board assessments are potentially useful, but few boards undertake them.

Uninformed board members enable executives to present short-term, illusory performance reporting.

Many directors acknowledge that they do not fully understand the industry in which their firm operates. This is unfortunate because having the perspective of an outsider makes it harder to understand potential sector disruptions. Board members must avoid “passive monitoring.” They need the knowledge and skill to recognize what is happening within their company and outside of it. Typically, big changes don’t come out of nowhere. In its heyday, for example, Blockbuster had more than 9,000 stores in America. It failed to react to crucial technological changes long after those changes had manifested. Blockbuster was aware of video-on-demand as early as 2001, but executives ignored it because the company relied on its storefronts and profitable late fees. Even as customers shifted to Netflix, Blockbuster board members and executives stuck with their obsolete model.

“Where can the board turn to get a true gauge of…strength or fragility? How can directors assess whether…nascent problems are cyclical or structural?”

Cost-cutting at Toys “R” Us left its stores messy and staffed with low-wage, inexperienced employees. The company committed to a big-box format, but customers chose Walmart and Target. Store managers hid the truth from higher-ups to protect their jobs. When upper management came to understand the company’s problems, an existential crisis was at hand. Board members need courage and commitment to dig beyond impressive financial performance reports and ferret out hidden problems.

Companies must recognize and conserve their strategic assets.

Worthwhile strategic assets are scarce and not easily copied or transplanted. The state of those assets – how robust they are and how well management and the board understand and guard them – can either buoy or drag down a company’s prospects. Such assets may include research and development, branding, corporate culture, visual identifiers, “(unpatented) technology…and customer loyalty.” For example, Walt Disney drew a map in 1957 illustrating how his company’s enterprises would complement each other. Decades later, that map still captures the company’s functions. Southwest Airlines founder Herb Kelleher told his executives to emulate automaker Ferrari’s Formula One racing team to minimize the turnaround time planes spent on the ground. As a result, Southwest planes are airborne and racking up revenue hours daily at a rate of 40% more than the competition.

Intangible assets constitute about 67% of the value of firms in the S&P 500 and comprise a large chunk of the value of service firms, which contribute the lion’s share of GDP in developed countries. Accounting standards in the United States do not recognize intangible assets. In fact, the more valuable a strategic asset is, the greater the difficulty companies face in determining its value. In the context of leveraging a firm’s strategic assets, “targeted acquisitions” and redeploying the resources already on hand can bolster growth. Today’s organizations need dedication and drive to thrive. To ensure their long-term corporate well-being, boards and leaders must craft their strategy and empower their workforce to avoid “the growth curse trap.”

About the Authors

Yves Doz is the Solvay Chaired Professor of Technological Innovation and Strategic Management Emeritus at INSEAD. Keeley Wilson is a senior researcher at INSEAD focusing on global innovation and management processes.