The business world divides itself into two types of companies: those that live for growth and those that don’t.
Our observation, supported by the mass of business literature, is that if you are not growing, you are shrinking. This doesn’t mean you have to exhibit huge growth or low growth, but growth appropriate to your market environment. We have worked with many stagnant companies, or companies who are being “harvested” (favorite word of the moment), and it is not a pretty sight.
Businesses are living organisms, and growth provides your workforce with opportunities for better and bigger rewards, excitement, adventure, and, in general, a sense of fun and contentment. There is room for employee advancement, geographic movement, new learning, and challenging hurdles that provide a sense of accomplishment.
The converse, stagnant or shrinking companies tend to embody the worst of business: no room for advancement, fewer learning experiences, general malaise, and defeatist attitudes.
Everyone has a choice: which would you rather be?
At Avalon, we try to help you decide what growth posture you should choose as well as understand the underlying implications. For example, there are certain rules of thumb used in manufacturing industries, such as for every doubling of revenue, your Sales, Marketing, and Administrative (SG&A) costs should increase 40% to 50%. Not double, not 10%. If you are planning the future, you should budget correctly.
Industry comparables are a valuable resource. If you are in a technology intensive market, typical growth rates can exceed 20% per year or more, demanding tremendous working capital needs to support the growth. And the downside is that most high growth businesses cannot self-fund or throw off enough cash in the early years to support their growth, hence the need for alternative financing mechanisms. If you have a compelling enough story, you can do a capital auction across multiple banks. While Avalon does not raise capital, we do provide qualified industry sources that have been very successful and understand your specific business.
A counter-intuitive approach may require you to downsize first. That is, your present product/service mix may not be right as you target different markets. Whether you are a private or a public company, it is crucial to understand which parts of your portfolio contribute to profitability or to share price.
Avalon has helped many companies perform a portfolio analysis to suggest which parts of your company to invest in, including shareholder value analysis as depicted below.
- “ACS” Division drives the value of the consolidated firm, contributing $2.50 in market value for every $1.00 in investment
- “BMS” Division is a solid but unremarkable performer, contributing $1.00 in value for every $1.00 in investment
- “CSS” underperforms, contributing only $0.30 for every dollar of investment
- “DES” and “FPS” are destroying value
A second factor when considering a new growth posture is what is your risk of investment. While there are many mechanisms to address risk, Avalon has found that a robust analytical approach, whose foundation is data provided by your staff, is an excellent mechanism to influence decisions. An example of a Monte Carlo approach Avalon has used is shown below. An outcome matrix is derived with input from employees, resulting in possible alternatives. The “ameoba-like” charts on the right display potential outcome envelopes for all of the possibilities. This perspective allows senior management to decide (a) whether the investment is warranted, (2) provides a quantitative output and “trail-of-crumbs” as to how the answer was derived, and (3) allows a perspective into investments that can promote the upside while minimizing the downside.
Avalon has invested in many tools and skilled practitioners to help you understand your growth potential. We invite you to call us to help you achieve your goals.