The Paradox of Fast Growth Tigers

Forty-one companies with sustained growth of over 20 percent To understand them, forget diminishing returns and classical economics Reinforcing loops and growth cycles Profitable, fast-growing companies like Microsoft and Home Depot are the darlings of Wall Street and the envy of their competitors. But what factors determine their success? And what can managers do to emulate such stellar businesses within their own organizations? To answer these questions, we screened the 9,450 publicly listed companies on the Compustat database for those that have grown dramatically over the past ten years. We also analyzed individual businesses such as Microsoft Windows, Medco's pharmacy benefits management (PBM) program, Lotus Notes, Apple Newton, Hughes DirecTV, Enron Capital and Trade Resources, and Midland Bank's First Direct. We discovered that highly profitable fast growth is not confined to just a couple of firms. Between 1984 and 1993, 41 publicly listed companies focusing on one major line of business managed to increase their revenues and operating income by 20 percent per year. They created over 300,000 jobs and added $110 billion in market value during this period of sustained fast growth. These "tigers" are the swiftest, most powerful enterprises in the global marketplace. New games Our case studies reveal that these tigers have pursued "new game" strategies. First, they provide radically improved products and services to customers, thereby creating entirely new markets. Lotus Notes, for example, is a network software product that enables groups of people to work together and share knowledge efficiently. It was designed from the ground up to support collaboration, and includes advanced workflow routing, synchronized replication of databases, and sophisticated encryption. Medco's PBM allowed healthcare payors to monitor drug use among their patients efficiently, ensuring lower costs and better medical outcomes. Second, tigers shape industry structure in the markets they create. Lotus has built an entire industry around Notes, with application developers, system integrators, trainers, and hardware companies working together to provide value to end users. Lotus plays a major role in defining the interrelationships between all these different players. Medco's PBM is at the center of pharmaceutical care, selecting drugs from pharmaceutical companies, delivering them via mail order or pharmacies to patients, submitting claims to payors, and collecting information on patterns of drug usage. Our field research indicates that tigers create new markets with few if any rivals, and are able to preserve their competitive advantages for long periods. This presents a paradox for traditional microeconomics, which holds that outstanding performance is difficult to sustain. Similarly, conventional strategy frameworks are not very useful in understanding the dynamics of new markets or how companies can actively shape these markets to their advantage. To analyze barriers to entry, switching costs, exit costs, supplier power, and so on may work well when an industry is well established and stable, but it is of little use in predicting the eventual structure of an emerging industry. Otherwise, why would other players in the industry have allowed Microsoft and Intel to secure their current position? For answers, we must turn to new ideas bubbling up on the fringes of microeconomics and organizational theory. They focus on the dynamics of market development and offer fresh insights into the methods by which some firms maintain successful position. The economics of increasing returns Increasing returns economics rejects the conventional wisdom that industries are rapidly prone to diminishing returns as a result of competition between firms for scarce resources. This view states that returns from marginal investments quickly shrink as competition mounts. …