These Innovative Companies Will Continue Growing

By Andrés Cardenal - July 23, 2012 | Tickers: AAPL, KO, IBM, PEP | 0 Comments

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Conventional wisdom says that size and growth don't go together, it’s very difficult for companies to keep producing above average growth rates once they reach a certain size. Conventional wisdom is right, when describing conventional companies, but some businesses are special enough to be exempt from this general rule.

Apple (NASDAQ: AAPL) is a paradigmatic example about the growth versus size discussion, as many analysts point out that the company cannot continue delivering its outstanding growth rates now that it has become the biggest company in the world as measured by market cap. But that point of view is underestimating the innovative power of Apple and the dynamics of its business.

Apple is not, Coca-Cola (NYSE: KO). Coke is a fabulous company, but it has become so dominant that growth opportunities are limited by its size. Coca-Cola owns the leading position in carbonated drinks around the world; consumption is still growing in emerging markets but it is quite flat in developed nations. Coca-Cola could still gain more market share from PepsiCo (NYSE: PEP), but considering it already has the two leading carbonated drinks with Coke and Coke Light respectively, there doesn't seem to be a lot of room for Coca-Cola to keep expanding much faster in that business.

There are innovations and changes in the drinks business, both Coke and Pepsi have been expanding into healthy products like waters, juices and sports drinks as a new source of growth, but these products compete with carbonated drinks to some extent. Once a company becomes a giant in a stable industry, growth tends to naturally slow down.

But that's not the case for a company like Apple, the iPhone replaced the iPod for many users, and the iPad may cannibalize Mac sales to a considerable degree. But that's no problem at all in Cupertino, in the words of Steve Jobs: If you don't cannibalize yourself, someone else will.

As long as Apple can continue producing innovative value added products, there is no visible limit for growth. Apple is not satisfying a particular need; it is creating its own demand by launching desirable products. I never thought I needed an iPad, until I had one in my hands.

The most innovative companies in the world apply the concept expressed by Henry Ford: If I had asked people what they wanted, they would have said faster horses. It is not about satisfying an existing need, you need to bring superior and disruptive products to the market, and people will buy them.

Sustaining high growth rates is easier for smaller companies, no doubts about that. But some extraordinary businesses can keep growing at exciting rates as they continue creating new products and services which are demanded by their customers, regardless of market share or company size.

Over the last 30 years, IBM (NYSE: IBM) has invested over $150 billion in research and development, producing over 75,000 patents. 2011 was the eleventh year in a row where the company filed and won more patents with the US Patent Office than any other company, in the planet. And the company knows how to transform those innovations into viable products and services.

Where is the limit for growth in IBM? It depends on the company and its ability to continuously innovate in a successful way. Customers in other industries can feel their thirst satiated after having enough to drink, but in this case their needs are never ending as long as the products are valuable enough. New technologies to make a business more productive and efficient, are something most clients just can't get enough of.

Size can be a limitation to growth in many cases, but before reaching conclusions for a specific company, investors should take a deeper look at its innovative potential and the dynamics of its industry.

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