Organic Growth Checklist
- Do you have control over 80% of the market for additional volume?
- Do you have control over 80% of the additional raw material need?
- Do you have the know-how?
- If you start up on a declining market, will you cope financially?
- Will you maintain your focus on your current markets?
- And finally, the eye of the needle, why are you so much better than your competition on this? Why will you succeed when others fail?
If you cannot affirmatively answer the above questions you speculate to some degree on whether growth is beneficial to your investors.
At the risk of alienating the growth evangelists that base their reasoning on the success stories of the world: by default half of all expansion capexes into a market fail to deliver on their financial expectations. This is by default since capital cost is calculated by the discount rate used for these expansion capexes’ NPV calculations.
Growth is good! For the few! The companies with the best basic conditions for growth and the ability to capture growth will show superior shareholder returns, but the companies lacking that should focus on getting their existing house in order before growing – otherwise they will most likely destroy value. Earn the right to grow!
Sometimes, only one player on a market ends up making (a lot of) money, while the others will not recover their capital cost. In other words, few will in real life recover their NPV of zero. Still, on average, the market ends up around the expected NPV of zero. Not because half of the players reach it, but because the few that succeed often win so big it compensates for the losses of the many.
Most companies talk about growth as the factor that will lead to increased shareholder value. But the above statement implies that growth will be the factor that for most companies will lead to decreased shareholder value. As obvious as it sounds, only successful growth leads to increased value for company owners. However, growth is not successful by default.
How can YOU make sure that unsuccessful growth does not happen to your company?
Over the last several decades we have seen many, many cases of unsuccessful growth. And only a handful of successful ones.
We have put together a checklist that we discuss with our clients. We give the “green light” if all are checked. If you cannot “check” all the bullets you are to some unknown degree speculating with the owners’ capital. You may think you’re taking calculated, well-reasoned risks, but you may just as well be speculating. Here is our checklist:
You must already be in control of over something like 80% of the market for the additional capacity. This can, for instance, be achieved by consolidating “old” capacity into the new. If this is true for you then you’re not really growing much, you’re consolidating. It can also be achieved by having customers within your own company (integrating more), or through contracts. If you are in a growing market you might be OK still, unless your marginal output will be a substantial part of a year’s market growth for your market (others will also try to grow in a growing market).
You must also already have access and/or control over something like 80% of the raw material supply for your capacity increase. You might succeed if you “go to war” for the remaining 20%, but probably not if you need to fight for more. In many cases this is not easy to achieve, but sometimes it is. You should be OK with <80% if your input is a commodity.
Do you have the know-how? Is this a known market/technology for you? Or with this growth are you entering something new? Do you internally have the know-how? If you don’t, then you need to acquire the company or the people to fulfil this requirement.
If you find yourselves in truly poor times when you enter the market with your new capacity, will you be OK from a financial point of view? Or are you risking your company?
If you already have a business today; will you be able to maintain your focus on this? Have you already treated your current business the way you should? Or are you avoiding doing what you should be doing in your current business just to save the capital for your expansion opportunity? Because that is a classic recipe for company failure.
Then to the one where so many companies fail: Why are you so much better than the others in this market? Because you have to be just that; truly better than the others. 9 out of 10 male drivers think they are better than the average male driver – that mentality applied to business is another given recipe for failure because the success proportions might be the opposite; maybe only 1 out of 10 will succeed. Self-confidence is good, but the belief in oneself when adding capacity must be realistic, and we often see companies thinking they are so much better than the others – while there is little to no proof of that; it is simply a mantra chanted by the leadership of the company.
We’re not saying you should say no to a growth opportunity if you do not comply with above, but understand that you are to some degree gambling with your owner’s capital and you are at great risk of becoming one of those who fail.
If you do fulfil the above, spend more money than you first expected on grasping the opportunity; do not hold back. You must secure the quality of what you do. Move faster and be more resolute. Conquer the opportunity before someone who does not fulfil the above comes in and ruins the market.