Creating new S-curves - developing new engines of growth - ideally before the current cycle of growth reaches maturity.

Every business goes through the S-curve cycle of growth: 

• infancy (low growth), 
• expansion (rapid growth) and 
• maturity (slow growth).

No matter how successful the product is, growth must slow at some point (maturity phase), due to a number of reasons:

• increased competition, 
• market saturation, 
• technology disruption, 
• regulatory changes and 
• changing consumer preferences.

VALUE CREATION OR DESTRUCTION:  MANAGEMENT'S ROLE

Ultimately, whether a company remains VALUE CREATIVE OR DESTRUSTIVE, depends on how well management understand this inevitability, its mindset and how successful it is in creating new S-curves - developing new engines of growth - ideally before the current cycle of growth reaches maturity.

New S-curves could include 

• tapping into new selling channels and geographies for the existing products, or 
• it could be expansion into a related business - for instance, starting a new product line and going upstream or downstream, or 
• diversification into something entirely different and unrelated.

In short, the S-curve is dynamic over the company's life, that is, the company should continuously reinvent, reinvest and create new S-curves to start new growth cycles. 

We see real-life examples of how this is done every day.

Companies starting new S-curves to start new growth cycles:

QL started Family Mart

YTL Power entered a new S-curve selling power to Singapore and enters the AI related sector.

Padini started Brands' Outlets.

Scientex growing its manufacturing business organically and through acquisitions and entering the property development sector business successfully.

KGB supplying its products to many industries and to many countries.

Facebook promoting Metaverse (but unsuccessfully).

Microsoft branching into cloud computing and AI.

Amazon continues to reinvent itself, selling books initially, and now selling almost everything. (Many new S-curves)

Of course, growth comes with a price too. 

Some growths can be good and some can be very bad for the companies.

Shareholder wealth in a company is destroyed with failure to find new S-curve.

With no growth or business in decline, value of company shrinks (contracting PE x lower EPS); value is destroyed.

There are many companies in Bursa Malaysia in this category. 

Companies that have STEEPER S-curve cycle of growth with LONGEVITY will also trade at .HIGHER valuations

Savvy investors know about the corporate life cycle: 

• start-up, 
• rapid growth phase, 
• mature growth phase, 
• stagnation or outright decline.

Companies in their startup phase lose money.

If they're successful, though, they enter a rapid growth period, where sales - and eventually profits - shoot upward.

Then, alas, comes the point when the company has exhausted all of the easy growth opportunities. The low-hanging fruit has been picked. The company enters a mature phase in which sales maybe growing, but at a much slower rate than before.

Finally, in a company's dotage, it's all management can do to grow the company at all. The company's either in stagnation or outright decline.

Best time to invest is during its explosive growth phase or the mature slower growth phase of a successful company. Emphasis: growth phase.

S-curve cycle of growth

Every business goes through the S-curve cycle of growth: 

• infancy (low growth), 
• expansion (rapid growth) and 
• maturity (slow growth).

Different businesses have a different S-curve shape and longevity.

Some S-curves will be steeper (stronger rates of growth) than others due to major innovation (e.g. Nvidia) that drives rapid adoption and demand across multiple market segments (market size).

Some S-curves will have greater longevity, that is, sustained high growth (expansion phase) for a longer period of time (e.g Amazon, Apple, Facebook) for a longer period of time because of, intellectual property protection or strong network effects. These have enduring competitive advantage.

Companies that have steeper S-curve with longevity will also trade at higher valuations.

Industry Life-Cycle Analysis

Stages of Life-Cycle of Business / Industry

• Embryonic
• Growth
• Shakeout
• Mature
• Decline

Embryonic

Industries in this stage are just beginning to develop.

They are characterised by:

• Slow growth as customers are still unfamiliar with the product.
• High prices as volumes are too low to achieve significant economies of scale.
• Significant initial investment.
• High risk of failure.

Companies focus on raising product awareness and developing distribution channels during this stage.

Growth

Once the new product starts gaining acceptance in the market, the industry experiences rapid growth.

The growth stage is characterised by:

• New customers entering the market, which increases demand.
• Improved profitability as sales grow rapidly.
• Lower prices as econmies of scale are achieved.
• Relatively low competition among companies in the industry as the overall market size is growing rapidly.  Firms do no need to wrestle market share away from competitors to grow.
• High threat of new competitors entering the market due to low barriers to entry.

During this stage, companies focus on building customer loyalty and reinvest heavily in the business.

Shakeout

The period of rapid growth is followed by a period of slower growth.

The shakeout stage is characterised by:

• Slower demand growth as fewer new customers are left to enter the industry.
• Intense competition as growth becomes dependent on market share growth.
• Excess industry capacity, which leads to price reductions and declining profitability.

During this stage, companies focus on reducing their costs and building brand loyalty.

Some firms may fail or merge with others.

Mature

Eventually demand stops growing and the industry matures.

Characteristics of this stage are:

• Little or no growth in demand as the market is completely saturated.
• Companies move towards consolidation.  They recognize that they are interdependent so they stay away from price wars  However, price wars may occur during downturns.
• High barriers to entry in the form of brand loyalty and relatively efficient cost structures.

During this stage, companies are likely to be pursuing replacement demand rather than new buyers and should focus on extending successful product lines rather than introducing revolutionary new products.

Companies have limited opportunities to reinvest and often have strong cash flows.  

As a result, they are more likely to pay dividends.

Decline

Technological substitution, social changes or global competition may eventually cause an industry to decline.

The decline stage is characterised by:

• Negative growth
• Excess capacity due to diminishing demand.
• Price competition due to excess capacity.
• Weaker firms leaving the industry.

Limitations of Industry Life-Cycle Analysis

The following factors may

• change the shape of the industry life cycle, 
• cause some stages to be longer or shorter than expected, or 
• even result in certain stages being skipped altogether.

These factors are:

• Technological changes
• Regulatory changes
• Social changes
• Demographics

Industry life-cycles analysis is most useful in analyzing industries during periods of relative stability.

It is not as useful in analyzing industries experiencing rapid change.

Not all companies in an industry display similar performance.

The question of how to allocate profits is linked to where a company is in its life cycle

One of the most important decisions management makes is how to allocate profits.

The decision of what to do with earnings is linked to where a company is in its life cycle.

The question of how to allocate profits is linked to where a company is in its life cycle.

1.  Development Stage

In the development stage, a company loses money as it develops products and establishes markets.

2.  Rapid Growth Stage.

The next stage would be rapid growth, in which a company is profitable but growing so fast that it may need to retain all earnings and also borrow funds or issue equity to finance this growth.

3.  Maturity and Decline

In later stages, maturity and decline, a company will continue to generate excess cash, and the best use of this cash may be allocating it to shareholders.

Venturing Into Early-Stage Growth Stocks

For investors, young growth stocks can trigger dreams of wealth - and nightmares of poverty. These companies are often early-stage ventures that offer rapid revenue growth, but have yet to deliver earnings growth or much of a business track record. As such, the potential returns can be enormous, but investing in these stocks can also be risky. There are several points investors should consider when analyzing early-stage growth stocks.

Overview
The key features of early-stage growth stocks are rapid revenue growth but no earnings. Spending heavily to gain a market foothold, many growth companies - even those with strong sales revenue growth - can lose a lot of money in their early years. At the same time, these companies normally have a limited operating history, making it even more difficult for investors to judge the companies' current performance and value.

To stay on the safest side, many investors prefer to steer clear of companies with these risky characteristics. On the other hand, the next biggest and most rewarding stocks may be found among these kinds of stocks. The trick is to size up the risk.



To demonstrate how to evaluate an early-stage growth company's risk, let's consider Nasdaq-listed XM Satellite Radio Holdings (XMSR), a company that has been striving to become an established player in the fast-growing global satellite radio broadcasting market. Turning to XM's 2004 Form 10-K Annual Report, let's go over some key points for assessing the risk of an emerging growth stock.

Sales Growth
For starters, consider this growth trend. XM Satellite Radio delivered staggering sales growth in 2004. Scroll down to Selected Consolidated Financial Data (p.28, or Item 6 on the Table of Contents), and you will see that revenues grew from $0 in 2000, when XM Satellite Radio became publicly-listed, to more than $244 million in 2004. With sales growth of 168% in 2004, XM appears to have successfully taken advantage of growth opportunities. Importantly, the pace of sales growth was steadily upward - absent of unexpected swings - giving investors some reason to be confident that successful sales growth would continue.

Still, investors should take care: while the company's sales-growth record over the five-year period was certainly impressive, there is no guarantee that the company will be able to maintain that rate of growth into the future. In fact, the pace of growth could very well decline as the company satisfies demand for its products.

Profitability
You need to determine whether revenue growth is profitable. Look further down at XM's Consolidated Statement of Operations (p. F-5). The net loss shows us that in 2004, XM lost a lot of money - more than $642 million. That's no surprise: the company spent heavily on sales and marketing and invested in new radio programming content to attract subscribers. If those investments pay off, earnings could materialize.

But savvy investors want a clearer indication that one day the company will produce earnings. A good place to look is the company's profit margins. There should be signs that profit margins are steadily getting better - even if that means the margins are simply getting less negative.

Net Profit Margins = Net Profits after Taxes / Sales

Investors should be somewhat reassured. Although the company's losses accelerated between 2002 and 2004, its net margins saw a dramatic improvement, moving from a whopping -2,174.3% to -188.6% over the time period. Judging by its margin performance trend, XM offered heartening signs that it is moving towards profitability.

Cash Generation or Cash Burn?
Cash flow is another serious issue for newer, unprofitable companies in rapidly growing industries. As it can take time for early-stage companies to generate cash from operations, their survival depends on effective cash management so that they have an adequate cash supply to meet expenses. Emerging growth companies can face years of living on their bank balances. If a company eats through cash too fast, it runs the risk of going out of business.

So, it is good practice to look at the company's cash flow from operation.You will find that figure on XM's Consolidated Statement of Cash Flows (p. F-6). Investors may be discouraged to learn that XM's payments exceeded its cash receipts by more than $85.6 million in 2004 (see "net cash used in operating activities"). On the other hand, that number is significantly less than the $245 million of cash consumed the year before. That could signal a move towards cash flow breakeven.

When analyzing companies like XM that are cash flow negative, it's also worthwhile checking their burn rate, the rate at which a company currently uses up its supply of cash over time.

You will see on XM's Consolidated Balance Sheet (p. F-4) that at end-2004 the company had more than $717 million in cash in the bank. Assuming that annual net cash used in operating activities of $85.6 million and investing activities of $36.3 million (found lower on the Consolidated Statement of Cash Flows) stay at the same level, then XM has nearly six years before it will run out of cash. In other words, XM has a comfortable cushion of cash that will tie it over until it starts to generate cash internally. Investors need not worry about XM being forced to seek additional funds to finance day-to-day operations.

Fair Value
The best way to curb risk is to invest in companies at a fair value. Because a lot of emerging growth stocks like XM have no earnings, investors have to cast aside the traditional price-to-earnings (P/E) ratio for coming up with a fair valuation. In the absence of a P/E ratio, you can calculate the price-to-sales ratio and compare that figure with other, similar companies.

To find XM' price-to-sales ratio, we look at its stock price on the day it filed its 2004 Form 10-K Annual Report, which was on Mar 4, 2005. On that day, the stock closed at $33.11 (see XM's trading quote that day on Investopedia's stock research resource). With 29.11 million shares outstanding, XM's market value was about $7 billion.

So, at the end of 2004, XM traded for more than 28 times its current sales ($7 billion market value divided by 2004 sales of $244 million). At first glance, that appears to be an awfully rich valuation - normally investors look for companies with price-to-sales ratios in the single digits or even lower. However, priced at 28 times sales, XM is still less expensive than its closest peer Sirius Satellite Radio (SIRI), which traded for more than 80 times sales at year-end 2004. New-media technology stocks are typically very pricey - so some investors might argue that the company's rapid rate of growth combined with its steady progress towards profitability justify the high price-to-sales ratio. Then again, a lot of others would steer clear of the stock at that price.

Another way to evaluate fair value is discounted cash flow analysis. It offers a more rigorous approach to valuing emerging growth stocks. The starting point is forecasting the company's free cash flows available to shareholders. These are earnings adjusted for expenses and income that are not in cash (such as depreciation) and adjusted for required investments and changes in working capital. The series of forecasted free cash flows is then brought to current values by discounting with the company's cost of equity or overall cost of capital.

The Bottom Line
Investing in early-stage growth stocks can be a bit of guessing game. These companies are offering new services and products, and in many cases they are creating new markets. It can be awfully difficult to know their prospects with much certainty. That said, there are ways to identify their risks. Analysis of sales revenues, profitability and cash generation can help distinguish winners from losers.


Read more: http://www.investopedia.com/articles/stocks/05/earlygrowth.asp#ixzz2KA9GZFz4

Investment Life Cycle versus Business Ownership Life Cycle

Using stock types, help you pinpoint where a company is in the corporate life cycle.

Savvy investors know about the corporate life cycle:

• Companies in their startup phase lose money.
• If they're successful, though, they enter a rapid growth period, where sales - and eventually profits - shoot upward. 
• Then, alas, comes the point when the company has exhausted all of the easy growth opportunities.  The low-hanging fruit has been picked.  The company enters a mature phase in which sales maybe growing, but at a much slower rate than before.
• Finally, in a company's dotage, it's all management can do to grow the company at all.  The company's either in stagnation or outright decline.  

Using stock types, help you pinpoint where a company is in the life cycle.




Let's look at semiconductors.
What is the key difference between chipmakers Intel INTC and National Semiconductor NSM?
Or between Broadcom BRCM and Rambus RMBS?


One of the babies of the industry is Rambus, a company that makes devices to speed up computer processing.  The company's sales have grown rapidly, though inconsistently.  Earnings have been spottier.  Rambus has actually lost money over the past 5 years in aggregate.  It is a great example of a speculative - growth company.

Moving up the maturity scale a notch, we find Broadcom, a company about 10 times the size of tiny Rambus.  The company specializes in chips that enable broadband data communication.  Broadcom's sales have grown  rapidly, and although it has had one money-losing year over the past five years ending in 1999, it's generally increased its earnings in line with sales.  That's the sign of an aggressive-growth company:  one that has managed to increase both sales and profits at a rapid clip.

Now we come to companies like industry leader Intel.  Not too long ago, Intel landed in the aggressive-growth group along with firms like Broadcom, but because of slowing growth, Intel has mellowed into a classic-growth company.  Despite the snags of late, Intel has a record of good sales growth and consistently positive earnings.  That's the mark of a classic-growth firm.  Don't expect them to grow sales by double digits every year, but do expect them to generate solid profits - and maybe even pay out a good dividend.  

Even more mature than Intel is Texas Instruments TXN.  The company was busy restructuring itself in the late 1990s and has been shrinking as a result.  The company's trailing three-year sales growth at the end of 1999 was negative, and earnings have bounced all over the place.  Texas Instruments merits a slow-growth tag because of its rather unspectacular record.

The trials at Texas Instruments, however, are nothing like those at chipmaker National Semiconductor.  The company's sales and cash flows have fallen, and the firm has lost money as a result.  The situation is bad enough to land National Semiconductor in the distressed stock type - the nether-zone in which we place firms with a history of serious operating problems.  These are typically companies that have run into growth problems, either because the market is saturated or because competitors have the upper hand.

Company Life Cycle

Broadly speaking, companies progress through a predictable series of phases called the company life cycle.

The life cycle starts with the startup phase, moves into the rapid growth phase, followed by the maturity phase, and finally the last phase is decline.

The duration of the individual stages varies widely across industries and differs between individual companies.

The phases differ in terms of characteristics related to profitability and financing needs.


Stages of the Company Lifecycle

The startup phase is the first phase in the company life cycle. Companies in this stage are typically losing money, developing products, and struggling to secure a position in the marketplace.

The next phase in the company life cycle is the rapid growth phase. In this phase the company begins to generate profits. This phase is also characterized by rapid expansion and an increased need for and dependence upon outside financing to sustain the rapid growth.

The third phase is maturity. In this phase growth and expansion slow and the need for outside sources of capital subsides. The company is generating enough profits and cash flows to invest in all available projects.

The final stage is decline. During this phase the company remains profitable but sales decline. The company has more cash than it needs for all available corporate projects.

Company Life Cycle Phases

1. Startup
2. Rapid Growth
3. Maturity
4. Decline

Source:
Higgins, Robert C. “Analysis for Financial Management”, McGraw-Hill Irwin, New York, NY, 2007.

http://www.wikicfo.com/Wiki/Basis%20Definition.ashx

Strategies and finance for all stages of the business life cycle

The business life cycle theory is very much alive and kicking. Most of us are well aware of the failure rate of starts-ups. Around the world, the statistics tell the same story – 50 per cent of privately owned businesses fail in the first year and 95 per within the first five years.

While a certain amount of attrition is inevitable, it is important to understand the life cycle of a business and where strategy and finance can have the greatest impact.

What life cycle are we talking about - business, industry or product? Well they all typically follow a pattern: start-up stage, growth, maturity and then decline. And all are important. The business life cycle tracks how a business starts, grows and eventually declines. Clearly, the start-up stage is a high-risk time and the causes for business failure can vary from a lack of capital, poor management or because it was just not a good business idea from the beginning. 

What are less understood are the reasons why later on in its life a business plateaus out, and stagnation occurs, with the result that the rates of growth experienced earlier in the cycle become unsustainable. Most evidence around this problem points to an implicit change in the objectives of the shareholder/owner/manager as they become stale and lose focus. Rather than being the driving force behind the business, the owner/manager becomes a handbrake, forgetting or simply unaware that continuous value innovation, monitoring and improvement lead to growth and success. 

Just like people, a business needs rejuvenation from time to time and this is typically achieved through a change of the CEO, a merger, a take-over or an insolvency event that can cut away the dead wood. 

 

So how do strategy and finance change over the different stages of the business life cycle?



A moment’s reflection on the table above shows that it is important to understand where we are in the business life cycle, as it determines what strategy we should follow. In addition, our reaction to a particular KPI can differ greatly depending on the life cycle stage of the business.

 

The industry life cycle follows the way aggregated businesses within an industry trend over time. There are no rules for defining an industry, but it is typically classified through one of the stages of the overall value chain, or the nature of the products the business sells. 

For example, a grape producer growing grapes for wine is simultaneously in the wine industry and the primary production industry. So the grape producer would need to observe what is happening with trends and issues in the manufacture, distribution, retailing and consumption of wine, in addition to the trends and issues impacting on primary producers.

While all industries do follow a life cycle, some move through it quicker than others. Agriculture as an industry is certainly changing. If one were to study the history of agriculture, human beings only started to trade when they had agricultural surpluses. Leap ahead to today and a return on investment is very difficult to achieve without the ability to mass produce. That’s the reason the ‘family farm’ is no longer a viable model and why agribusiness is now controlled by large corporate organizations. The change in the business model of a primary producer has shifted enormously as the industry has moved through its life cycle. 



Further observation as described in the table above shows it is important to understand where we are in the industry life cycle as it determines what strategy we should follow. Also our reaction to a particular Return on Investment KPI differs greatly depending on our stage in the cycle.

 

The product life cycle is somewhat different – it is certainly shorter than the other two, and can take a terminal turn at very short notice (i.e. the product can drop out of favor with consumers very quickly).

The interesting thing about product life cycles is that typically there is a lot of activity that happens before the product is released to the market, i.e. research, concept development, design, testing, manufacture and launch. In many respects this is the invisible part of the product life cycle – the more visible part is the product launch, early penetration, early adoption, mature and then decline. 

As the table above shows, the strategies to follow – and what should be measured and managed – can change significantly depending on the product’s position in its life cycle.

Importantly, all businesses, irrespective of whether they are smaller single businesses or business units within a large corporation, can learn a great deal from studying the life cycle theory. Having distinguished what stage your business is at, industry and product life cycles can help you to determine your strategic focus, and provide a greater understanding of some of the trends your financial KPIs reveal.

http://business-transition.com/article/strategies-and-finance-all-stages-business-life-cycle

Life Cycle of Company

Life Cycle of a Growth Stock (BBB)

What's Beyond for Bed Bath and Beyond?

Location: BlogsAsk Doug!      Posted by: Doug Gerlach 5/1/2007 3:17 PM It's certainly true that Bed Bath & Beyond's (BBBY) price hasn't shown any consistency in the past few years, bouncing between a low of $31.56 in March 2003 and a high of $46.00 in July 2005. While it's not uncommon for stock prices to get stuck in a rut, what's a bit unusual about Bed Bath & Beyond is that the stock's earnings and revenues have been getting continually larger. As you can see from the black price bars on the graph below, BBBY's stock price has stalled since 2003. So why hasn't the company's stock price risen along with sales and profits? One likely explanation is that the company is reaching a new stage in its company life cycle in which its EPS and Revenue growth rates will likely slow. BBBY's fiscal 2006 annual revenues were $6.6 billion, and opportunities for fast growth are harder to come by for a company of that size. Consider the following illustration of the typical life cycle of a company. Once a new company makes it through the initial startup stage and passes the break-even point, it can grow explosively, in excess of 30% or more a year. These fast-growing companies can be excellent investment opportunities, though often it's the momentum traders and short-term focused investors who make the markets for these stocks. These kinds of stocks are often richly valued, with PE Ratios that anticipate continuing growth at very high annualized rates, and, therefore, long-term, growth-oriented investors may not have many opportunities to buy them at reasonable prices. Ultimately, though, such rapid growth must ebb. It's simply impossible for a company to maintain such high growth on an indefinite basis. When investors begin to see that growth is slowing, they often jump ship, driving down the PE Ratio and causing the stock's price to stall. For BBBY, the signs of slowing growth actually began appearing several years ago. On the historical graph of revenues and earnings above, you can begin to see the slowdown most evidently in 2004, with annual high and low prices stalled in a range between $33 and $47. The average annual high and low PE Ratios have also been declining each year since 2002, too: the average high PE Ratio has fallen from 37.7 to 20.7 and the average low PE Ratio has fallen from 27.0 to 14.8. From a visual analysis of sales and earnings, it's not at all clear that the slowdown in growth and the falling prices and PE Ratios are so tightly connected. What's not apparent from the above graph is that the growth rates have been falling significantly for several years. Here is a graph of the historical growth rates for the past 1- to 9-year periods of the last decade. Now it's obvious that the growth of the past year is much, much lower than the 9-year annualized growth rate of the company for both EPS and Revenues. (Incidentally, this graph is from Investor's Toolkit 5.) In light of the slowing growth rates, you can see why some investors are a little reluctant to buy BBBY at the current situation. The company is in transition from being a 30% annual grower to one that grows at likely half that rate, and it can take the market several years to process the change as the company becomes a mature grower. BBBY's sheer size does brings new competitive pressures, and Wall Street's bulls and bears are happy to debate whether or not company management is up to the challenge. Even though margins fell from 15.8% to 14.1% in 2006, BBBY's pre-tax profit margins are excellent within the retail industry. The current trailing PE Ratio of 19.9 is right around my calculated signature PE for the company, indicating that the stock is reasonably valued right now assuming an annualized EPS growth no less than 15%. Of course, the assumption that BBBY's growth will stabilize somewhere between 15% and 20% annually is key to the attractiveness of the company's long-term prospects. Even if margins fall a bit and growth is at the lower end of the range, BBBY might still be a solid long-term core holding for a portfolio. Note: BBBY is currently rated a Buy up to $48 by the Investor Advisory Service. The comments above are Doug's alone, and do not represent the views of the independent analysts who cover BBBY for the IAS. http://webcache.googleusercontent.com/search?q=cache:http://www.stockcentral.com/tabid/159/EntryID/6/Default.aspx

Introductory Lectures to Business Cycles

Business Cycles, Part 0 of 4- Interest and Capital,
Prof. Krassimir Petrov

1:02:36 - 3 years ago

The theory of Interest, Production, and Capital is the foundation for understanding Economic Growth and Business Cycles.http://video.google.com/videoplay?docid=-6484061137769305763&hl=en&emb=1#docid=-5669706349089810530

http://video.google.com/videoplay?docid=3236390700554076825#docid=2786446863132957274

Business Cycles, Part 1 of 4 - Introduction, 
Prof. Krassimir Petrov

1:06:14 - 3 years ago

An introductory 65 min lecture describing the nature of business cycles. Explains business fluctuations, phases, periodicity, comovement, persistence, amplitude, cyclicality, and introduces major business cycle theories.

http://video.google.com/videoplay?docid=8415267688491832655#

Business Cycles, Part 2 of 4 - Business Cycle Indicators, Prof. Krassimir Petrov

1:02:32 - 3 years ago

The lecture explains the behavior of 18 different procyclical leading or lagging macroeconomic variables/indicators throughout the business cycle.

http://video.google.com/videoplay?docid=5546452117626581217#
Business Cycles, Part 3 of 4 - The Austrian Boom,

Prof. Krassimir Petrov

1:12:14 - 3 years ago

Explaining the Boom - what happens and why; characteristics of booms; why booms cannot last forever; why they inevitably turn to bust. The next part,part 4 is devoted to the "Bust".

http://video.google.com/videoplay?docid=-2382683217626362775&hl=en&emb=1#

BusinessCycles, Part 4 of 4 - The Austrian Bust, Prof. Krassimir Petrov

1:06:20 - 3 years ago

Crisis, Bust, Deflationary Depression, Stagflation, and other fundamental Austrian School concepts.

Life Cycle of a Growth Stock

The Life Cycle of a Mine and its Share Price

Business and Dividend Life Cycles

Business life cycles are most influenced by access to resources and capital. 

A company's success and development are also affected by a host of outside factors - competition from companies in the same industry, economic conditions, even changing consumer preferences.

There are 6 phases in a company's development that influence its dividend policy:

1. The Start-Up Phase:   In the start-up phase, someone invest cash for stock in the business to develop products, hire employees, pay for equipment, and rent space.  It is not unusual for a company to raise seed money from professional investors and enter the start-up phase with a hundred or more employees.  A small company needs to plow all profits back into growing and perfecting its business model to survive.

2.  The Early Growth Phase:  If the company launch is successful, it will enter the early growth phase.  As the demand for its products and services increases, sales and profits increase.  The company will need to reinvest all cash flow and profit to achieve competitive scale.

3.  The Late Stage Growth Phase:  In the late stage growth phase, the company continues to grow and may begin to pay a small dividend, usually 10 to 15% of earnings.  This is a clear signal to investors that the company has reached a level of stability in profits and cash flow necessary to support a dividend.

4.  The Expansion Phase:  If the company is well run, it will enter the expansion phase.  Its rate of growth may slow as competitors take some of the company's market share.  Companies at this stage generally increase their dividend payout ratio to approximately 30 to 40% of earnings.

5.  The Maturity Phase:  Companies can continue to expand even as they reach their maturity phase, but their growth rate usually slows measurably.   Well-run mature companies can continue to be a competitive force in their respective industries for decades or even several generations.  Many of the companies in this group are mature companies, a few over a century old.  It is during this stage that companies tend to increase their dividend payout ratios to 50 to 60% of earnings, which provides investors with generous dividend income.

6.  The Decline Phase:  In the later stages, many companies fail to innovate - to keep their competitive advantage.  These companies will enter the decline phase, and unless they reinvent themselves, they will eventually cease to exist.  In this phase, as sales and profits decline, they will eventually reduce or eliminate their dividend payouts. 

Beware of attempting to buy or hold the stock of a company in the final stages of its business life cycle.

Business and Dividend Life Cycles
Start Up

Growth Rate 20%
Dividend Payout Ratio 0%

Early Growth
Growth Rate 30%
Dividend Payout Ratio 0%

Late Stage Growth
Growth Rate 35%
Dividend Payout Ratio 15%

Expansion
Growth Rate 25%
Dividend Payout Ratio 30%

Maturity
Growth Rate 20%
Dividend Payout Ratio 55%

Decline
Growth Rate < 5% and declining
Dividend Payout Ratio < 20%


AT&T is a great example of a company currently in decline, possibly on its way to extinction. 

Beware of attempting to buy or hold the stock of a company in the final stages of its business life cycle.

At one time, AT&T was the most widely held stock in America.  The company paid its first dividend in 1893 and became known as the widows and orphans stock because it was such a consistent source of dividend payments for investors.  AT&T's history dates back to 1875.  The company's founder, Alexander Graham Bell, invented the telphone and together with several investors started the American Telephone and Telegraph Corporation.  As a telephone company, AT&T was so successful it achieved regulated monopoly status.  In 1984, the US Department of Justice broke the AT&T monopoly into eight companies:  seven regional operating "Bells" and AT&T.

For most of its history, AT&T had been largely insulated from market pressures and competitive forces.  After the break up, smaller and leaner communication companies stole AT&T's market share, first through price competition and later by becoming product innovators.  For the new AT&T to successfully compete in an unregulated environment, it would require a drastic change in corporate culture.  Over the past few years, operations and profits have continued to decline, and AT&T is now struggling to survive. 

AT&T's story of dominance and decline highlights the constant need for you to follow up your initial purchase analysis with a routine review to see if the companies you hold are performing as expected. 

• Each time you decide to continue to hold a stock, you are in fact making a new buying decision. 
• Understanding the business life cycle outlined above will enable you to identify companies that are about to emerge as great dividend payers, as well as help you to spot the mature companies headed down the road to extinction.