Somehow the announcement that an organisation intends to concentrate on extracting sales from its existing activities and return excess capital to shareholders doesn’t have the same buzz to it as one in which company announces ‘growth strategy’ that involves expanding its activities and acquiring other enterprises.
David Jones, with its 35 Australian department stores and $1.9 billion in sales, has been to hell and back with its growth strategy. Having made great success out of re-focusing its stores, few years ago it decided to go for growth. The plan involved acquiring an online retailer, which would see DJ’s goods sold via the internet, and establishing chain of gourmet food stores. Neither worked. The food outlets have been sold, and the online activities have been downgraded. It’s back to core business. The financial result, as announced by the Australian Financial Review back in June, is $136 million in write-offs and operating losses in three years.
The David Jones story would be unremarkable if it weren’t so typical of many public and private companies’ experience – on both sides of the Tasman. The list of failed growth strategies by public companies is huge – Burns Philp with its expansion into spices and antibiotics, AMP in insurance, Amcor in packaging, BHP Billiton in range of ventures, Boral in construction materials.
A recent examination of the growth strategies of 24 high-profile Australian companies concluded that their losses totalled $47 billion (Business Review Weekly, June 5-11, 2003). News Corporation alone lost $12 billion on its Gemstar venture. Kiwi companies like Air New Zealand have suffered similarly. And this is shareholders’ wealth!
What is going wrong here, and what are the strategic options available to achieve growth?
Pressure for growth
The pressure to grow business comes from the key stakeholders, one of the latter being the shareholders or, in small-to-medium enterprise (SME), the owners. Shareholders hope that growth means increased wealth.
But growth pressure can also come from customers. Their demand for products or services forces com-
panies to keep ex-
panding – not necessarily profitably. I recently suggested to the manager of man-
ufacturer of steel silos that it might cap its growth, as its rapid expan-
sion was putting huge financial pressure on the organisation. His response was that he’d “love to”, but his customers “wouldn’t allow” him. “Turn down any orders, and they’re likely to take the whole of their business elsewhere,” he said.
Pressure to grow also comes from employees, especially management. Employees gain from growth through enhanced career prospects: growing business delivers opportunities for promotion and accompanying salary increases. If bonus system is tied to growth, the connection between growth and personal gain is even more explicit. client in the electricity industry complained recently that lack of growth was stifling the organisation. Why? Because no turnover in management and supervisor ranks meant no openings for younger employees – and their frustrations were showing.
It’s easy to see why business growth becomes taken-for-granted, especially in public companies. It can serve so much self-interest. But is growth good for ‘every’ business?
To grow or not to grow
You wouldn’t guess it by looking at the financial press, but many businesses don’t want to grow. Sure, they’d like some additional income, but significantly expanding their operations – that’s another matter. These businesses have reached equilibrium with their environment.
The majority of small-to-medium enterprises are in this position: convenience stores, specialty shops of all kinds, medical and dental practices, small accounting firms and manufacturers, to name just few examples. In these cases, stability has been achieved between the pressure from the owners for growth and that from management; often they’re the same people. The business serves the owners’ needs for wealth, and the owner-managers can’t see any benefit from the increased hassle. Here’s specific:
Barry is general manager of medical centre of 33 doctors, most of whom are partners, and 30 nurses and administrative staff. He’s not medical practitioner. Over the years he has been frustrated by the partners’ lack of interest in growth. Sure, each would like to grow his or her income. But, as partnership, this depends on each partner growing his or her part of the practice, or on adding new partners or employed doctors – thus spreading overheads. The partners don’t want to work more hours, so the business can only grow by bringing in new partners or employing more doctors. Since the practice is already providing the full range of services required by medical practice in the area, this step won’t advantage the business competitively, nor will it benefit patients. The existing partners feel that growth wouldn’t significantly advantage them financially, either. In the general manager’s view, the business has reached stalemate. From the owners’ (partners’) perspective, things are okay.
Once you separate ownership from management, owners and managers almost challenge each other to come up with the grandest growth plans. It is most obvious in public companies where shares are openly traded. Here shareholders’ views are expressed via the board. In the case of David Jones, management was pressured by the board to grow David Jones and start Foodchain, the chain of gourmet food stores. Management saw some benefits in pursuing growth and so the escalation began.
Having decided to grow, the next question is how to go about it?
Expand existing business First and most obvious, it’s the way most businesses approach growth. Hire more employees, buy more plant, expand operations. It’s also relatively risk-free, provided the base business is financially sound. But it can take time. Public companies often see it as too slow, which is why they favour acquisition. David Jones estimates that the department store market will grow by about three percent year for the next 10 years – perhaps too slow for some shareholders.
One analysis of Lend Lease’s failed growth plan in the United States contrasts it with Westfield’s parallel success in New Zealand and Australia. Lend Lease stripped $6.2 billion off its shareholder value between 1999 and 2003. It chose the fast way to grow in the US: spend $3.1 billion buying six separate US businesses. By contrast, Westfield Holdings chose slower route and expanded its existing business over 20-year period. In the same period that Lend Lease’s value dropped by $8 billion, Westfield’s rose by $4.6 billion.
Clone the business Cloning involves taking process or business within an organisation and repeatedly reproducing it in identical form. The obvious examples are franchising and licensing, but it can also be special form of the first option, which is to expand the existing business. If based on successful business model, it can be quick-fire approach to growth.
Walmart, that huge US low-priced department store chain, is in the process of cloning its stores worldwide. It is already the world’s largest retailer, with 3400 US stores, but plans to have 5000 in five years. There are now 1200 stores outside the US in nine countries and they account for 16 percent of the chain’s total sales. They are also targeted for expansion.
Licensing and franchising allow business to expand by using franchisee’s capital and by transferring employee supervision issues to the franchisee. The fast food industry has done this to perfection, McDonald’s being the classic example. But Dymocks in bookshops and Jim’s Mowing in domestic lawn care are others.
McDonald’s, for instance, has used franchising to become America’s second-largest employer and, until recently, achieved 140 quarters of uninterrupted profit growth since its 1965 sharemarket float. Jim’s Mowing and other franchises in the Jim’s Group have grown from zero