In With The New

What Makes Companies Grow

One striking finding from the study shows that firms that used a market penetration strategy, trying to increase penetration of their current markets by selling new products to existing customers, didn't grow as fast or perform as well on other measures as firms that stressed diversifying by introducing new products to markets they'd never sold to before. The difference was amazing: Companies following the diversification strategy grew 87 percent faster, on average, than those relying on penetration. Businesses that tried to grow by mergers and acquisitions, likewise, turned in poorer performances than those with an aggressive diversification bent. These findings are rather surprising, considering the record number of mergers and the current popularity of con-servative stick-to-your-knitting strategies.

An even bigger surprise was the low correlation of international expansion with rapid sales growth. The report essentially determined that companies boasting more international sales were no more likely to grow rapidly than those that looked mainly at domestic and regional markets. Going global, in other words, is not a requirement for fast growth despite the widely held opinion to the contrary. "The assumption I'd had going in was that if you were going to grow, you'd have to go overseas," says Cox. "But that was a surprisingly small part of it."

Sometimes your employees just need a little TLC. Read "You're My Hero" and learn how to play older sibling.

The study found a strong tie between rapid growth and certain employee compensation practices. Connecting pay to incentives was indeed a powerful growth-booster. In fact, the more importance companies placed on incentive pay, measured as a ratio of incentive to base pay, the stronger their sales growth.

A policy of giving stock to employees was also heavily connected to sales growth. However, companies that offered stock only to the CEO didn't get any benefit from the practice. Only when equity participation is broadly spread are sales likely to be supercharged. The study even found that the strongest sales growth rates of all were from companies that gave stock to everyone but the CEO. These companies reported 115 percent average growth, compared to flat sales for those with CEO-only stock plans. This connection was one of the strongest found in the study. Says Cox, "The equity compensation was the big piece."

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This article was originally published in the October 2000 print edition of Entrepreneur with the headline: In With The New.

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