COVER STORY Going for Growth – But get ready for tougher times ahead

No doubt about it. Some New Zealand companies have been doing very nicely. Despite the deflationary earnings effect of the strong New Zealand dollar, the robust domestic economy has, over the past year or two, made it relatively easy environment for business growth.
The country’s Top 200 companies last year chalked-up total profitability increases of more than 120 percent. And the median adjusted net profit growth of 12 percent recorded by listed stocks in the year to June 30, suggests 2004 will also deliver strong shareholder returns.
As reflection of strong balance sheets, robust cashflows and paucity of investment opportunities, companies have been returning increasing dollops of money to their shareholders. The median growth in dividends paid during the last reporting season was massive 24 percent.
But now slowdown in GDP growth is in sight. It will have an impact and forecasters predict fall in future earnings expectations. There’ll be no “free-ride” on returns next year but some companies remain more upbeat than cautious.
Six perennially successful listed stocks – Ebos, DB, Cavalier, Port of Tauranga, Michael Hill, and Hellaby Holdings – have delivered shareholders 20 percent-plus growth every year for the past 10 years. They all pursued new opportunities either organically or through acquisition to build their businesses. Each of these firms also created substantial value from its trans-Tasman operations. Unfortunately Australia doesn’t represent growth for good many Kiwi companies. The trans-Tasman experiences of The Warehouse and Telecom serve as sinister reminder that Australian acquisitions, like most buy ups, usually destroy shareholder value.

Management capability
So why do some management teams fail to deliver when others manage to grow, regardless of economic cycles? Simple, says ANZ’s head of integrated capital solutions Joseph Healy, they outgrow their management capability. If management has fundamental weaknesses, they invariably surface during times of significant growth. lack of management capability is the single biggest risk facing growth companies, says Healy. “CEOs must ask themselves whether their management team comprises the right people to take the business to the next level and what investment should be made in training and development.”
Well-managed companies with clear direction and sensible growth strategy are more likely to deliver strong growth. Some organisations have clear sense of markets, management resources and capital. Others don’t. “It’s the discipline of developing business plan, thinking about the business in detail and ensuring that the right skills are both in place and tied to the business,” says Healy.
There are many ways to grow business and once companies established strong domestic position they should assess their horizons for long-term growth. Adding new products is always an option but, faced with an inability to get more out of the local economy many either look for bigger share of the local pie through expansion or diversify into growth markets offshore. Acquisitions can provide access to management talent, intellectual property and new customer base. What sometimes spurs the decision to head offshore is the realisation that additional local expansion or acquisition might also deliver margin decline.
As companies grow, from domestic to international or from single product to multi-product businesses, different management challenges present themselves that require different management skills, says Healy. It doesn’t mean the founders must leave but, he says, “they must augment their style with complementary skills”.
Peter Maire, chairman and co-founder of rapidly diversifying electronics firm Navman, agrees. He admits the “big blunder” his company made during its first growth phase was not bolstering up management expertise fast enough. It backfired and became more acute when the big growth finally kicked in. “But we would have made an even bigger mistake if we’d been greedy and floated the business in New Zealand back then,” he says reflectively. “The business would have expanded but it wouldn’t have been on solid global scale.”
Since writing his strategic plan for growth eight years ago Maire has delivered 100 percent year-on-year sales growth. This year he expects total sales to double to $200 million. With the assistance of Nasdaq-listed US-based Brunswick controlling 100 percent of the stock the company is on target to reach $1 billion revenue by 2009. “Going from $100 million to $200 million in sales requires hugely greater input, every part of the business gets stretched,” he says.

Staying nimble
But contrary to his original plan, Maire now concedes these targets won’t be achieved if the company “tries to do it all locally”. He has been building the management team, but not fast enough. Staff numbers have climbed from 240 two years ago to 600 and that has been “tough” on the company. Entering room filled with people and finding the longest-serving employee has six months service isn’t easy, especially when it comes to defining culture. “Even though we’re now part of huge corporation, we’d like to think we’re nimble enough to make better and quicker management decisions,” says Maire. “But as we can no longer get everyone together to call the game plan, communication gets slower.”
Navman’s original growth strategy was written in 1997. There’s no longer an expectation that the company can grow its human resource grunt to 1000-plus staff predominantly from New Zealand, admits Maire. In hindsight, the “NZ Inc” notion that “we could establish global technology centres of excellence [in New Zealand] was fatally flawed”, he adds. He simply can’t get the research and development staff needed to build such beast and today has at least 40 R&D vacancies to fill. “There’s no lack of capital, market availability or contract manufacturing around the world. What’s missing is an R&D ‘brains-trust’ which we need to grow the business,” says Maire. “It’s possible to put in additional mass production factories but we can’t find the people to run them.”
Of the 600 staff Navman now employs all but 150 reside locally. Maire expects to see reversal in these numbers as he aggressively acquires more R&D expertise offshore, and opens more channels to global markets. To keep doubling its year-on-year sales the company must transform itself from high-value, low-volume business to high-volume, low-value model. Around 50 percent of Navman product is now manufactured offshore. Maire expects these numbers to increase rapidly as the company’s high-volume model unfolds. “We’ve learned not to trust the New Zealand dollar and the local economy. Taxation, communication, and distance from global markets make New Zealand tough environment in which to grow business.”
What, then, is Navman’s approach to tackling offshore markets? It comes down to getting the fundamentals right, says Maire. “Once you know how to set-up marketing channels in country X you can repeat that model pretty much anywhere.” In market where technology has limited shelf-life the focus is on growing the market infrastructure around the world and getting more product into those markets as fast as possible. “For technology company like Navman, if we’re not growing by at least 20 percent we’re going backwards,” says Maire. “Even the marine business which is in mature market is growing by 30 percent.”
Maire is, however, amazed by how relevant the original growth plan is to today’s business. It was conceived when the company had only $3 million in sales. The plan put the company into three businesses – consumer & marine electronics and fleet tracking, plus lots of markets. “The underlying synergies between these businesses really made them cook,” says Maire. “Each business required different model. For example, having started our own sales operation for fleet tracking serving trucking companies in Manchester, we subsequently rolled-out

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