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

Product Life Cycle

Angel Investors and Venture Capital

http://www.privco.com/knowledge-bank/private-equity-and-venture-capital

Economic Cycle versus Stock Market Cycle

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32660842#

Sam Stovall's Sector Investing, 1996 states that different sectors are stronger at different points along the business cycle. The table below describes this theoretical model throughout the business cycle.

Stage:  Consumer Expectations:  Industrial Production:  Interest Rates:  Yield Curve:

Full Recession Reviving Bottoming Out Falling Normal

Early Recovery Rising Rising Bottoming Out Normal (Steep)

Full Recovery Declining Flat Rising Rapidly (Fed) Flattening Out

Early Recession Falling Sharply Falling Peaking Flat/Inverted

The graph below, courtesy of StockCharts.com , shows these relationships and the order the key sectors respond to the economic cycle. The Stock Market Cycle precedes the Economic Cycle as investors try to anticipate how the market will react to the changes to the economy.

http://www.marketoracle.co.uk/Article371.html

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

Product life cycle patterns (Rink & Swan 1979).

Turnaround and Restructuring

Zobrazit stránku: Česky

Companies often exhibit the symptoms of financial distress well before a crisis erupts. In many cases, a downward spiral is not inevitable. It can be arrested and reversed. Early detection and swift, decisive action are the keys to restoring performance and value. That is why timely and expert advice is critical.

Our turnaround and restructuring practice provides advisory and insolvency services to lenders, creditors, companies and individuals who are experiencing a wide range of difficulties, from weakening performance and reduced operating profit, to crisis marked by severe cash flow problems and the imminent threat of insolvency. 

We are able to rapidly identify problem areas, develop value-preserving and unique solutions, and then implement them swiftly and precisely. PwC is the world's largest provider of business recovery and insolvency services.

The Prague turnaround and restructuring team has many years of experience in major restructuring projects in the Czech Republic. We have provided our services to leading companies in the steel industry, the glass and porcelain industry, and the chemical industry. We focus on implementation with the aim of helping our client rather than on producing theoretical reports on different issues. This gives us depth and breadth that are unmatched in the market place.

http://www.pwc.com/cz/en/podnikove-poradenstvi/revitalizace-a-restrukturalizace

How investors can avoid another 'lost decade'

Gold has been the star performer of the decade 

By Emma Simon

12:01PM BST 18 Aug 2011

2 Comments

The past decade has been a grim one for investors, with stock markets failing to regain the peaks seen back at the turn of the Millennium, at the height of the dotcom boom.

For pension savers, Isa investors and those with long-term savings, the market movements over the past week have mirrored the peaks and troughs seen over the past decade – with a couple of years of strong gains disappearing as the bull run fell into another punishing and protracted fall.

This "lost decade" has coincided with a period when individuals are increasingly having to make their own long-term savings, be it for pensions, funding their children's university fees or helping them get a start on the housing ladder.

This has been a particular disaster for those fast heading towards retirement, who are simply running out of time to make up lost ground. At the same time they have been hit by a double whammy of lower interest rates – meaning "safer" assets such as cash are losing value in real terms – and falling annuity rates. As a result, over the past five years many have been forced to retire on far smaller pensions than they imagined.

However, it is not all doom and gloom. For all the talk of the "lost decade" there are a number of assets, sectors and funds that have delivered strong returns during this period.

RELATED ARTICLES

• The psychology of investment: caution or risk? 
  19 Aug 2011
• Time for fear or greed as markets gyrate? 
  18 Aug 2011
• Shield your portfolio from stock market falls 
  16 Aug 2011
• Fund of funds sales hit record £3.8bn 
  16 Aug 2011
• Should investors go east to escape a failing West? 
  07 Aug 2011

Below we look at where the smart money has gone in recent years, and assess each area's chances of outperforming in the decade ahead.

GOLD

This has been the star performer of the decade, rising in value by 606pc since the stock market peaked in 1999. Those canny enough to have bought a few gold bars as the stock market started to slip in 2000 are now sitting on substantial gains.

Other metals, such as copper, silver and platinum, have also risen in value, as have oil and agricultural commodities such as corn and coffee. Not surprisingly, funds that invest in gold and commodities have seen even more stellar gains: BlackRock Gold & General has risen by 768pc over the past 10 years, while JP Morgan Natural Resources is 610pc higher.

As long as equity markets remain in turmoil the price of gold is likely to remain high – but most experts warn that at some point there will be a sharp correction. Commodity prices, though, continue to be fuelled by demand from rapidly industrialising emerging markets, in particular China, India, Brazil and Russia.

EMERGING MARKETS

In times of market volatility share price falls can be more dramatic in these emerging economies. Over the "lost decade", though, investors have seen a positive return on their money – although much will depend of course on where and when you were invested.

Since the end of 1999 the MSCI Emerging Markets index has delivered a total return of 163pc, compared with a FTSE 100 return of just 6.72pc (this is positive only because of dividend payments) and a return of 4.78pc from the MSCI World index.

However, many funds investing in this area have done far better than the index. Henderson China Opportunities has risen by 313pc over the period. First State Global Emerging Markets, managed for most of the period by Angus Tulloch, is up by 320pc over the past 10 years, while the Indian Nifty index (its 50 biggest companies) has grown by 551pc over the past decade.

Given the demographics of the region and its potential for growth, most experts agree that it has the potential to deliver returns in future. However, markets can be volatile, so investors are often warned to bank gains after periods of strong growth, perhaps using profits to invest in other undervalued assets.

PROPERTY

Given that house prices are on the slide again, property might not feel like a particularly robust investment. But the figures show that over the past decade it has remained one of the top performing assets. Based on the Halifax Property Price Index, home owners have seen a return of 101pc on bricks and mortar since the end of 1999.

Of course there will be huge regional variations within these figures – and the vast majority of us borrow to buy our homes, so clearly have interest charges to factor in to any notional "return". And we still do need a roof over our heads: it's not as if we can cash it all in and go and live in an Isa. However, this doesn't detract from the fact that when it comes to long-term saving and retirement planning people shouldn't overlook their property.

FUNDS

Even though the UK stock market has not regained its previous highs, this doesn't mean that funds investing in British shares haven't made money over this period. Dividend income remains an important part of the total return on pensions and Isas. In addition, most fund managers won't slavishly follow an index but will be looking to invest in companies whose share price will rise faster than peers in a rising market, but won't fall like a stone when things head south.

Special situation funds, for example, try to find undervalued companies with the potential to deliver gains and good managers in this sector are among the top performers. Marlborough Special Situations has delivered a 289pc return over 10 years; Fidelity Special Situations has returned 101pc.

Another notable success story has been Neil Woodford's Invesco Perpetual High Income fund, one of the biggest and most popular unit trusts. This defensive fund, which concentrates on stocks that have the potential to deliver a rising dividend stream as well as capital growth, has returned 120pc over the past 10 years – hardly a lost decade for the thousands of private investors who have entrusted their long-term savings to this fund manager.

http://www.telegraph.co.uk/finance/personalfinance/investing/8698481/How-investors-can-avoid-another-lost-decade.html

Life Cycle of Family