Growing old…profitably

Guest blogger and a Group Chair for the mentoring and business coaching group The Executive Connection and lecturer at QUT Executive MBA, Guy Hamilton looks at a board’s role in spotting and managing a maturing business

Philips, once an electronics and white goods powerhouse that today occupies a much more modest position in the global market, is but one corporate reminder that markets and customer demands do not stand still. And that a business model left unchanged will, with few exceptions, mature and eventually decline.

With executive management focused on day-to-day performance, it’s vital that the board actively reviews and discusses the status of the current business model to determine whether it needs to be refreshed or changed. A business in decline not only erodes shareholder value – which for most boards puts them at risk of not delivering on one of their core responsibilities – but has other associated challenges such as the ability to retain staff.

Consider the diagram below:

Pic 1 blog 116

And just as transformational change in a business takes time, so too does changing a business model to retain strong growth, with significant effort and resources required to adopt the new strategic direction.

A board has an important role to play in looking out to the future and asking itself whether its business will be fit for purpose and competitive in 10 years’ time and how it future-proofs the operation against maturation and decline. With the digital economy sweeping across all industry sectors, there’s an associated heightened risk of becoming a ‘legacy’, the impact of Air BnB on the hotel industry (have you noted the steady decline in average room rates?) and Uber on the taxi business being cases in point.

The following diagram illustrates three primary options available to boards:

Pic 2 blog 116

They can re-invent the business, they can manage the decline or they can consider exit strategies.

Re-inventing a business model to maintain growth is easier said than done, a common pitfall for management and boards struggling to maintain growth being to embark on acquisitions, diversification strategies or buying into industry sectors where they have no obvious ‘right to win’ – as illustrated by Woolworths and its Masters debacle – when what’s required is great care and hard-nosed commercial thinking.

Qantas and the birth of Jetstar to tap into the burgeoning budget carrier market without eroding its valuable full-service business offers a good example of correctly managing transition. In Qantas’ case, it went a step further, took into account new carriers and the massive increase in long-haul capacity to and from Australia they created, and embarked on a back-to-basics strategy that focused heavily on the Asian routes that offered genuine opportunity and a right to compete.

Where a business has invested heavily in building market share or productive capacity, Option 2 may make sense for a period. While many corporates have pursued this route through the post-GFC years, the big question now is whether this can continue to provide shareholder value growth. Businesses following this option, with a linked strategy of building cash reserves to leverage opportunities in an emerging growth cycle, invariably end up back at Option 1.

The final option, the exit strategy, should always be considered by boards, especially where it could provide significant shareholder returns….or when Options 1 or 2 are not compelling. It’s important, though, to devote the time a good exit outcome with enterprise value demands. A question I often ask boards is “would you buy your business, and if so, why and for how much?”

Great boards are constantly looking to the future and assessing the three options. And while simple answers are rarely available, the more proactively and regularly a board considers such matters the clearer the right path becomes.

Until next time,

Kate.

Share on social media...
Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInPin on PinterestEmail this to someone

Leave a Reply

Your email address will not be published. Required fields are marked *

This blog is kept spam free by WP-SpamFree.