(The Industry Standard)

No one likes a Monday morning quarterback. Especially after a drawn-out drubbing of the home team -- like, say, the recent decimation of the tech sector.

But a study released this week by Ernst & Young and the Kaufmann Center for Entrepreneurial Leadership confirms what many dot-coms have learned the hard way: There can be some serious pitfalls to hypergrowth.

The study examines the 1997 to 1999 corporate performance of 1,045 leading companies that were chosen as finalists for Ernst & Young's 2000 Entrepreneur of the Year Awards. The companies ranged in size, age and industry and represented 17 countries.

The study aims to identify the factors that enabled some companies to effectively balance sales growth and profitability, and ultimately, to become leaders in their industries. By examining the difference between these "leaders" and other, less-stable firms, the researchers uncovered five common culprits that caused up-and-coming companies to falter.

1. Over-Diversification: Keeping an eye on opportunities for expansion is an important part of maintaining a healthy and successful business. But too much emphasis on diversification can be a bad thing, according to the study.

Take Amazon.com. The e-retailer leveraged its success away from music and books and into unrelated areas and got burned. For example, its furniture store, a partnership with Living.com, was shut down last August when Living.com folded.

Over-diversification is a problem because growth and innovation alone aren't sufficient means for achieving lasting success. Innovation must be tempered with efficiency, profitability and true wealth creation, according to the study.

2. Globetrotting: The famed Harlem Globetrotters could do no wrong regardless of how elaborate or tricky the stunts they attempted. But when companies go global in search of a slam dunk sales boost and a reputation as a serious competitor, they often foul up.

"Internationalization is often oversold," says Larry Cox, research director for the Kaufmann Center. "We found that whether you are international or not does not seem to affect success."

Globalization is a huge expense, and success in one country does not always guarantee success in others. In fact, the study found that among successful companies, only 21 percent of sales come from global efforts.

3. Spreading Ownership Too Thin: The study also found that rewarding employees with stock and other ownership incentives had a direct and positive effect on growth -- but only to a point, revealing that there is such a thing as too many owners.

"Leader" companies were able to strike a delicate balance between offering ownership to upper management, to the rank-and-file and to investors. This enabled these firms to achieve profitability rather than merely spur growth.

4. Believing Supply Must Meet Demand: In many emerging markets, companies scramble to fill what seems to be insatiable demand for their products and services. This often happens without any thought to the future sustainability of that demand or the ability of the company's infrastructure to meet it. Often, while sales revenues are going through the roof, these companies are setting themselves up for an equally dramatic fall.

"The survey showed us that if you push all of the levers that say growth, there is a limit," says Cox. "At some point you need to think about becoming profitable."

5. Overbuying: Acquisitions are a good way to expand into new markets. In fact, the study found that "leaders" are more willing than their rivals to expand through mergers and acquisitions. But the hunger for expansion must be balanced with the assurance of profitability and sound business strategy.

"Mergers and acquisitions will stimulate growth, but growth isn't all you need to do," says Cox. "You must also be strategic in how you grow, and if you move into markets you don't know, you are taking a risk, which is entrepreneurial, but may not be good management."

The study comes out about a year too late to save most companies in the dot-com sector. Nevertheless, it reinforces the hard lessons learned over the past year and offers cautionary tales for those companies lucky enough to still be left standing.

"Some of the things dot-coms could have done would have been to temper growth with profitability, enhance [market] penetration and use [ownership] incentives to increase profitably rather than growth," says Cox.

But too often, that's easier said than done.

Copyright (c)2000 The Industry Standard