Evolution or revolution

AS usual the question arises as to whether the recent performance of the leading global exchanges heralds a bear market or a simple, reversible but dramatic "correction". This time the pointers, for the United States at least, begin to look increasingly ominous.

By Professor Tom Lambert Frsa

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Published: Sun 11 Mar 2007, 8:34 AM

Last updated: Sat 4 Apr 2015, 10:47 PM

Even those commentators that are traditionally most optimistic are suggesting that the USA could be facing a considerable downturn in the latter half of the year and, in spite of the spectacular growth of Asian countries as economic power houses it may be too early to challenge the old adage that "when America sneezes the world catches a cold".

Not everything is doom and gloom, however. The International Monetary Fund has revised its forecast of economic growth in the United Kingdom from 2.75 per cent to 2.9 per cent for the year. This is a forecast that augurs somewhat better for European trade. Continued economic growth in a mature market of around three per cent a year is comfortable though hardly exciting.

We have yet to see whether this apparent confidence is simply "whistling in the dark" and whether the economic indicators in the USA have yet to be been taken fully into account in assessing the risks to world trade.

Big is less than beautiful

Over the last forty years those corporations with a market capitalisation in excess of $25 billion have routinely announced expansion plans that would add massively to the value of their shares and have, equally routinely, failed to deliver as they have proved to be unable to grow sufficiently to add anything of significance to their attractiveness to investors.

If times turn out to be as difficult as some are now forecasting in the USA a strategy of growth or bust may adversely affect their position as a safe bet when times are hard. A manic approach to growth in difficult times can lead to an equally frenzied search for acquisitions that can be far more risky than organic growth through undramatic, but meaningful added customer and shareholder value.

The result is that although investment in the corporate giants may seem the obvious strategy in tough times it is often a case of battening down the hatches against any storms to come rather than a genuine growth strategy. The question is, therefore, "are there reliable pointers to effective growth strategies that will deliver enhanced shareholder value as well as security in bad times as well as good?" Recent research suggests that the answer may be "yes".

New products — new markets

Recent examination suggests that nothing adds to shareholder value more than innovation. Corporations that are consistently successful in introducing new products or in opening up new markets can add up to $2.00 for every dollar of new revenue. This is not without risk, but it is consistently the best bet in difficult times. The difficulty for large corporations lies in the fact that leviathans frequently have rested on their laurels and have cut back on innovation. The difficulty for smaller companies may be to access the necessary resources - especially when times are hard.

Expansion into an adjacent market

The costs of expansion into an adjacent market combined with the need for strategic skills of the highest order tend to lessen the value of share growth, but recent research suggests that companies that manage this well can expect enhanced shareholder value of around one dollar for each dollar of additional revenue.

Customer centricity

The few strategies that have been shown to be successful are backed by a genuine commitment to the customer. For example, I have alluded before to Toyota's "lean" processes that are designed to deliver enhanced customer value and make no apology for doing so again.

As Rick Waggoner of GM has clearly stated, his corporation's comparative difficulties have increased as the company "moved further away from the customer".

Acquisition

Historically growth through acquisition has had its limited successes and in theory buying out a competitor or reducing duplication and costs should succeed today. The simple fact is, however, that acquisitions rarely deliver the goods and recent business history is littered with examples of companies acquired at great cost and divested at a considerable loss. In a manner of speaking this reinforces the dictum of Tom Peters that suggests that companies achieve excellence and growth by "sticking to their knitting" and doing what they do best, better.

As a generalisation the acquiring corporation frequently lacks the skills and experience to conduct the business of the acquired company optimally and, whether they are able to retain the existent management team or not, it is in the nature of headquarters staff to interfere in places where their "little knowledge is a dangerous thing". Predicted operational savings often fail to materialise and change may be approached and implemented with more enthusiasm than realism.

Growth by acquisition is a risky strategy that can deliver, but research suggests that it is more likely to reduce shareholder value, in the short-term, by as much as four per cent and eventually the acquired company will be disposed of with a further deleterious effect on the balance sheet.

The take away

Most commentators have become increasingly pessimistic about the US economy's ability to achieve the fabled "soft landing". In world trade terms in spite of the powerful emergence of China, India and other new giants, the USA is still the main driver of global trade. If the USA is heading for a recession we will all find ourselves at risk.

In difficult times investors are frequently drawn toward the comfort blanket of the giant corporations. This attraction is enhanced by predictions of growth that, with only two major exceptions in the last 40 years, have failed to materialise. Success has come hand-in-hand with innovation and customer centricity when it has come at all.

The threat of recession in the USA may not materialise, but before the outcome is known the wise investor and businessperson will be assessing risk and identifying contingent action. There are a few proven indicators of continued success during troubled times. It might be time to look for them or create them within your own business.


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