79. How to Join the Gazelle Club

The Gazelle Club

The year 1994 was a vintage year for high-growth company analysis. David Birch concluded that 3% of the fastest growing companies, known as gazelles, created most of the new jobs in the U.S. Also, Bruce Kirchhoff concluded that 4% of firms formed in 1977-78 started growing and hiring rapidly six years after being founded. And, David Storey concluded that 4% of startups that survived 10 years were responsible for 50% of new jobs in the overall economy.

Researchers have gone on to try to correlate the gazelles with high innovation rates, and no one disputes the idea that firms with superior growth and profitability—compared to their peers–do so by differentiating themselves through innovation.

The Great Distributor Divide

For the past 35 years, Al Bates has looked at financial survey stats for over 10,000 distributors in over 40 different channels. He ranked the entire pool of repeat survey subscribers by pre-tax Return on Total Assets (ROTA) and uncovered a great chasm. The top 5% averaged over 20% ROTA consistently over a 15-year period, while the bottom 90% survived at 7% ROTA. We can assume that as persistent, self-selected survey participants all these companies must be open to improvements. How then do the two groups differ in mindset?

Based on the research, my guess is that the top 5% are perpetual learners and fearless experimenters. The bottom 90%, by contrast, likely vow to try harder every year without deviating from general industry beliefs and best practices. Their generic, commodity practices yield commodity, herd-level results.

How to Be Better

My own research concludes that over 30% of distributors have experimented with customer profitability analysis. Using analytics, these companies know they have a few big profitable accounts that pay for all of their losing accounts, hopefully with some residual operating profits.

Bates’ top 5% see past their initial superficial fears of confronting losing customers of all stripes. They muster the courage to invent new ways of serving both their best and their losing accounts. They likely perform small-bet experiments that teach them how to win a bigger share of the best accounts, while turning losers into winners or, better yet, into their competitors’ losers.

For specific steps on how to go from commodity hell to gazelle heaven, contact me at bruce@merrifield.com.

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