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Managing Business

Growth

Dr. Harris Turino

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Agenda

The Concept of Growth

The Source of Growth

Life and Death in History:Examples form World Class Companies

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Part I:

The Concept of Growth

o The Essence of Growtho Three Growth Horizono Value Building Growth

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Company Growth

What is company growth?The increasing of firm value

How to measure it? Market value (# of share x share price)

Valuation formula

...)1()1(

ValueFirm2

2

1

1

wacc

FCF

wacc

FCF

(series of discounted free cash flow in the future)

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Free Cash Flow

REVENUE COGS

SG&A Depreciation

Other Expenses

Interest Tax

NET PROFIT+ Depreciation/+ Additional Working Capital Capital Expenditure

FREE CASH FLOW

Operational Excellent

(Cost Efficiency)

Top Line core business new business

Bottom Line

Invested Capital

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Return on Invested Capital (ROIC)

ROIC =Profit

Invested Capital

ROIC = Profit

Revenue

Revenue

Invested Capitalx

Cost Efficiency(Operational Excellent)

Revenue Generation Core business

Grasp new opportunities

Securing The Current Sustaining The Future

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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 deterioratedovertime decreasing current revenue & margin

o Case: Apple in the beginning of 1990s

o Case: Pfizer (Norvask) in the end of 2007o Case: IBM in the 1980s

Company has to grasp more revenue from new

business opportunities!

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Now Future

Now

Future

TIME

PRO

FIT

Horizon-1:Extend and DefendCore Business

Horizon-2:Build EmergingBusiness

Horizon-3:Create viableoptions

Three Growth Horizon

Idea generation Idea development

Idea diffusion New business launced

Existing business that

generate cash today

Sustained revenue growth occurs if there is the flow of

portfolio across Horizon

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Growth Horizon in Product Life Cycle

EarlyAdoption

EmergingMarket

Mature Market Declining Market

Indu

stry

Sales

Time

MarketGrowth

LateGrowth

0A

B

C

D

E

FG H I

Circle size is proportionate to sales

Horizon-1

Horizon-2

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Managing Horizon

Firm Establishedbusiness, as cashgenerator

Young business,high revenuegrowth

Promising ideas forfuture business

Perspective Short-term (now) Middle-term Long-term

Focus Maximizeprofitability &sustainability

Strengthen CA

Resourcing tosupport newbusiness

Build CA

Explore optionsfor future oppr.

Insulate fromexisting business

Challenge Exploit remainingopportunitiesthrough incrementalinnovation

Transform the

business (if needed)

Take advantagebefore rivals do

Increase revenue& market share

Screen the mostviable options (setpriorities)

H1 H2 H3

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Unhealthy Condition

H1 H2 H3 Description

- - - Company face serious growth problem

- - V Too focus on the future, neglect the current

- V V Loss of energy and growth direction

V - - Focus on the current, no growth engine

V - V Rich of creative ideas, but fail to commercialize

V V - Unclear future prospect

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Value-Building Growth

Healthy companies have ability to balance theirprofit 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 competingobjectives.

Too focus on one side is likely to decrease firmvalue.

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Growth

Giants

Unrewarded

Grower

TRSPerformers

Challenged

29

33

11

27

GDPGrowth

High

Low

R

evenueGrowth

TRS PerformanceHigh

36%26%

Average18% 3%

36%

33%

45%

6%

3%

18%9%

19%33%

1984-1994 1994-2004McKinsey & Co

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Part II:

The Source of Growtho Conceptual Thinkingo Pragmatic Thinking

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Conceptual Thinking

Firm as bundle of resources

o Resource and capabilitieso Differentiate among firms

Firm growth is driven by excess resources

o Entrepreneurial spirito Zero marginal costo

Growth limit Firm growth relates to the environmental context

o Productive opportunitieso Environmental changes

Edith Penrose (1959):

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Resource-Based View

Jay Barney (1986):

Firm Growth =Sustainable above average profit

SCA(Sustainable Competitive Advantage)

VRIO Resources(Strategic assets)

Growth Giants

Strategic advantages of thefirm that are superior amongits rivals, and make firm gains

long term superior profit

Strategic resources (andcapabilities) that significantlycontribute to build firms SCA

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Example

Company SCA Strategic Resources

Toyota Efficientproduction cost

Kaizen Lean manufacturing

Walmart Low price Global sourcing Operational excellent

Apple Industry Breaker

(trend setter)

Innovative culture

Visionary leader

Microsoft Market leader Huge market share Product expansion Pool of creative engineers

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VRIO Resources (Strategic Assets)

Valuable? Rare? Costly toImitate?

Organizedby superiorcapabilities?

CompetitiveImplication

ProfitImplication

NO Disadvantage Below normal

YES Parity NormalNO

YES TemporaryAdvantage

Above andshort run

YES NO

YES Temporary+Advantage

Above+ andshort run

YES YES NO

YES SustainedAdvantage

Above andlong run

YES YES YES

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Strategic Assets Stock

StrategicAssets Stock

Experience, knowledge

creation, acquisition,R&D, etc

Strategic assets are deterioratedover time.

To maintain VRIO, strategicassets stock need to be added,

accumulated, expanded, orincreased its quality continuously.

Example:

o Toyotas lean manufacturinghas adopted by its rivals ordifferent industries.

o But they can not achieve thequality as high as Toyota.

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From Conceptual to Pragmatic Thinking

Resources-Based View uses the internal perspective tosustain company growth.

Example:o Increase accumulated strategic asset stock to

achieve organic growthoAcquire 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 mustmatch with productive opportunities outside.

Let us discuss source of growth more pragmatically.

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Pragmatic Thinking

Firm growth is contributed by three sources:

o Market Share Gain organic growtho Merger & Acquisition (M&A) inorganic growtho Portfolio Momentum market growth

Along 1999 2006, 416 observed companies enjoyed10.1% of revenue growth.

McKinsey & Co (2008):

6.6% 3.1%

0.4%

Portfolio Momentum M&A Market Share

Total Growth10.1%

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Source of Growth: Within Two Periods

1999 2006 2003 2008

6.6% 7.7% 10.0% 11.4%

3.1% 3.6% 5.0% 5.9%

0.4% 0.6% 1.8% 3.3%

Total Growth 10.1% 11.9% 16.8% 20.6%

1999 2006

+

+

+

+

+

+

Source ofGrowth 2003 2008

+

+

Overall Sample Growth Giant

PortfolioMomentum

M&A

Market

Share Gain

TOTALGROWTH

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Source of Growth: In Some Sub Categories

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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%

16%

31%

40%

32%

29%

37%

43%

56%

36%

26%

22%

21%

18%

16%

14%

11%

Portfolio Momentum Share GainM&A

Source of Growth: In Some Industries

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Part III:

Life and Death in History- Examples From World Class Companies -

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Recruit and retain talents Attract capital Increase bargaining

position with other parties

Why Growth is Important?

ManagersPerspectives

ShareholdersPerspectives

Increase wealth

SURVIVE(sustaining the business)

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

The Survivors

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Who are The Survivors?

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The Survivors In Business

The survivors are those who can adapt

to the changes.

Kodak ignore digital camera technologyWalkman late to enter digital music playerFirestone not enough respond to radial technology

Apple move from PC to digital musicFuji Film move from analog film to digital imagingBoeing move from jumbo jet to small-medium

aircraft

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Thank You