Managing Business Growth

Dr. Harris Turino

Agenda The Concept of Growth

The Source of Growth

Life and Death in History:
Examples form World Class Companies

Part I: The Concept of Growth

o The Essence of Growth o Three Growth Horizon o Value Building Growth

Company Growth
What is company growth?
The increasing of firm value

How to measure it?

Market value (# of share x share price) Valuation formula
FCF1 FCF2 Firm Value ... 1 2 (1 wacc ) (1 wacc )
(series of discounted free cash flow in the future)

Free Cash Flow

REVENUE COGS SG&A Depreciation Other Expenses Interest Tax NET PROFIT

Top Line

core business new business

Operational Excellent (Cost Efficiency)

Bottom Line

+ Depreciation /+ Additional Working Capital Capital Expenditure Invested Capital

FREE CASH FLOW

Return on Invested Capital (ROIC)

ROIC = Profit Invested Capital Profit Revenue Revenue Invested Capital

ROIC =

(Operational Excellent)

Cost Efficiency

Revenue Generation
Core business Grasp new opportunities

Securing The Current

Sustaining The Future

Revenue From Core Business

Core business:
o Generate current cash flow from current business revenue o Finance current operation and investment for the future

Current (core) business will be deteriorated overtime decreasing current revenue & margin
o Case: Apple in the beginning of 1990s o Case: Pfizer (Norvask) in the end of 2007 o Case: IBM in the 1980s

Company has to grasp more revenue from new business opportunities!

Three Growth Horizon

Future
Idea generation Idea development

PROFIT

Horizon-3: Create viable options Horizon-2: Build Emerging Business Horizon-1: Extend and Defend Core Business

Idea diffusion New business launced

Existing business that generate cash today

Now Now

TIME

Future

Sustained revenue growth occurs if there is the flow of portfolio across Horizon

Growth Horizon in Product Life Cycle

Early Adoption Emerging Market Market Growth Late Growth Mature Market
F
E G H

Declining Market
I

Industry Sales

D C

Horizon-1
Time

Horizon-2
Circle size is proportionate to sales

Managing Horizon
H1
Firm
Established business, as cash generator

H2
Young business, high revenue growth

H3
Promising ideas for future business

Perspective Focus

Short-term (now)
Maximize profitability & sustainability Strengthen CA

Middle-term
Resourcing to support new business Build CA

Long-term
Explore options for future oppr. Insulate from existing business Screen the most viable options (set priorities)

Challenge

Exploit remaining Take advantage opportunities before rivals do through incremental Increase revenue innovation & market share Transform the business (if needed)

Unhealthy Condition
H1
V V V

H2
V V

H3
V V V -

Description
Company face serious growth problem Too focus on the future, neglect the current Loss of energy and growth direction Focus on the current, no growth engine Rich of creative ideas, but fail to commercialize Unclear future prospect

Value-Building Growth
Healthy companies have ability to balance their profit and revenue growth (value-building growth).
o H1 = securing current cash flow (profit) o H2 and H3 = prosperous future revenue growth o Flowing H3 H2 H1 = sustaining the business growth

Revenue and profit often seem like competing objectives.

Too focus on one side is likely to decrease firm value.

1984-1994
High Unrewarded Grower
18%

McKinsey & Co
Average
3%

1994-2004
Growth Giants

Revenue Growth

9% 11
36%

18%

45% 29
GDP TRS Growth 6% Performers

Challenged

27 33%
26%

19%

33%

33 3%
36%

Low

TRS Performance

High

Part II: The Source of Growth

o Conceptual Thinking o Pragmatic Thinking

Conceptual Thinking
Edith Penrose (1959):
Firm as bundle of resources o Resource and capabilities o Differentiate among firms Firm growth is driven by excess resources o Entrepreneurial spirit o Zero marginal cost o Growth limit Firm growth relates to the environmental context o Productive opportunities o Environmental changes

Resource-Based View
Jay Barney (1986):
Firm Growth = Sustainable above average profit

Growth Giants

SCA (Sustainable Competitive Advantage)

Strategic advantages of the firm that are superior among its rivals, and make firm gains long term superior profit Strategic resources (and capabilities) that significantly contribute to build firms SCA

VRIO Resources (Strategic assets)

Example
Company Toyota Walmart Apple Microsoft SCA Strategic Resources

Efficient production cost

Low price Industry Breaker (trend setter) Market leader

Kaizen Lean manufacturing

Global sourcing Operational excellent Innovative culture Visionary leader Huge market share Product expansion Pool of creative engineers

VRIO Resources (Strategic Assets)

Valuable? Rare? Costly to Organized Competitive Imitate? by superior Implication capabilities?
NO YES YES YES YES NO YES YES YES NO YES YES NO YES Disadvantage Parity Temporary Advantage Temporary+ Advantage Sustained Advantage

Profit Implication

Below normal Normal Above and short run Above+ and short run Above and long run

Strategic Assets Stock

Strategic assets are deteriorated over time.
To maintain VRIO, strategic assets stock need to be added, accumulated, expanded, or increased its quality continuously. Example: o Toyotas lean manufacturing has adopted by its rivals or different industries. o But they can not achieve the quality as high as Toyota.
Experience, knowledge creation, acquisition, R&D, etc

Strategic Assets Stock

From Conceptual to Pragmatic Thinking

Resources-Based View uses the internal perspective to sustain company growth.
Example: o Increase accumulated strategic asset stock to achieve organic growth o Acquire other companies to get specific knowledge or increase sales

Edith Penrose (1959) said that firm growth relates to the environmental context, i.e. excess resources must match with productive opportunities outside. Let us discuss source of growth more pragmatically.

Pragmatic Thinking
McKinsey & Co (2008):
Firm growth is contributed by three sources: o Market Share Gain organic growth o Merger & Acquisition (M&A) inorganic growth o Portfolio Momentum market growth Along 1999 2006, 416 observed companies enjoyed 10.1% of revenue growth.
Total Growth 10.1%

6.6%

3.1% 0.4%

Portfolio Momentum

M&A

Market Share

Source of Growth: Within Two Periods

Source of Growth
Portfolio Momentum Overall Sample 1999 2006 2003 2008 Growth Giant 1999 2006 2003 2008

TOTAL GROWTH

6.6% +

7.7% + 3.6% + 0.6%

10.0% + 5.0% + 1.8%

11.4% + 5.9% + 3.3%

M&A

3.1% +

Market Share Gain

0.4%

Total Growth

10.1%

11.9%

16.8%

20.6%

Source of Growth: In Some Sub Categories

Source of Growth: In Some Industries

Portfolio Momentum High-tech Retail & wholesale Consumer goods Financial Institutions Telecommunication Health Care Electric power & natural gas Media & entertainment 48% 43% 37% 46% 53% 47% 43% 32% M&A 16% 31% 40% 32% 29% 37% 43% 56% Share Gain 36% 26% 22% 21% 18% 16% 14% 11%

Part III: Life and Death in History

- Examples From World Class Companies -

Why Growth is Important?

Shareholders Perspectives Managers Perspectives

Increase wealth

Recruit and retain talents Attract capital Increase bargaining position with other parties

SURVIVE (sustaining the business)

The Survivors

The survivors are not the biggest or the strongest, but the fittest to the environmental changes.

Who are The Survivors?

The Survivors In Business

The survivors are those who can adapt

to the changes.
Kodak Walkman Firestone Apple Fuji Film Boeing ignore digital camera technology late to enter digital music player not enough respond to radial technology move from PC to digital music move from analog film to digital imaging move from jumbo jet to small-medium aircraft

Thank You