Stages of Company Growth and Innovation
The four main stages that companies grow through are: innovation, fading returns, mature and subpar. Each stage in the
company’s development entails different rates of growth and rates of return versus their cost of capital.
1 2
1 Innovation
• Young companies typically see
sharp increases in return on
investment and significant
investment opportunities
• Period of rising returns and
heavy investment
• Substantial entry into and exit
out of the industry are
common at this point in the life
cycle
3 4
2 Fading returns
• High returns attract competition,
generally causing economic
returns to move toward the cost
of capital
• Firms earn excess returns, but
the return trajectory is down with
moderate investment
• Investment needs also
moderate, and the rate of entry
and exit slows
Key Principles
• Sustainable value creation has two dimensions: (i) the magnitude of the
spread between a company’s return on invested capital and (ii) the cost of
capital and how long it can maintain a positive spread.
• Competitive advantage is almost never stable. Because of competition,
advantages companies have over their peers are getting a little bit wider
or narrower every day.
• Competitive forces and endogenous variance drive returns toward the
cost of capital.
• The industry is the correct place to start an analysis of sustainable value
creation. It’s critical to develop an understanding the lay of the land, which
includes getting a grasp of the participants and how they interact, an
analysis of profit pools, and an assessment of industry stability.
3 Mature 4 Subpar
• Competing companies approach • Competitive forces and
competitive equilibrium technological change can drive
returns below the cost of capital,
• As a result, companies earn the
requiring companies to
cost of capital on average, and
restructure/consolidate
competition within the industry
ensures that aggregate returns • Look for shedding assets, shifting
are no higher business models & focus of
capital allocation, reducing
• Investment needs continue to
investment levels, sale etc.
moderate.
• Firms can file for bankruptcy to
reorganize the business
Sources
Links to References:
• Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation