2.5 Substantial or Expedient?
Posted by Mike Kaaks25 March 2019
When thinking about the issue of Shrinking to Greatness we were looking at both growth and efficiency. Let’s now focus on growth. The late 90’s and early 2000’s brought the mantra of Shareholder value, Total Shareholder Return, and Stretch targets. Listed businesses were seen as being there solely to deliver the first two of these, in no small part by achieving the third. Amongst other things it’s a window into one of the drivers of wealth concentration. Little else was talked about as the purpose for a business’ existence. There were few if any societal goals, other than environmental awareness and initiatives such as Fair Trade that were designed to push value back along the supply chain to primary producers in foreign lands who would then eliminate child labour and reduce poverty. You’ll detect a cynical tone.
Let’s dig into the matter of Stretch Targets. There is a motivation element to them that is outside the scope of what I’m asking you to reflect upon here. If I set you a higher target it is likely that you will achieve more. Although this might mean instead of selling 20 units and getting 100% of your target you sell 22 but get 85% of your target. Who will feel more motivated, the shareholder or the person doing the business?
The real concern with stretch targets is seen when we look over time. A new strategic cycle starts and we look for double digit growth as a pillar of the strategy. In year one great effort is put behind the new plan and we get there. In year two it is harder and we mortgage a little of the future to get to the result or at least close to it. Year three is a struggle. We don’t make it even though we mortgaged more of the future. In comes a new strategic plan (and likely a new CEO) and in year four we recalibrate (read write-off) the business and report poor a result, maybe even a loss. Then we start again. With an average over the four years well below the double digit target, we would have been better chasing a reasonable, achievable, sustainable target over the cycle.
Double digit growth is also fascinating from a mathematical perspective. If we achieve it at the low end – say 10%, it means we will double the size of the business in 7 years, and quadruple it in another 10. If our use of consumables grows at the same rate it means that in those first 7 years we will use more inputs than we have in our entire history to that point. It is better explained in the video at this link. (https://www.youtube.com/watch?v=u5iFESMAU58) It is part 1 of 8 videos, you only need to watch part one and about half of part two to get the point.
10% growth is just not sustainable.
And that’s only the internal view. How will our competitors react to such performance? What if we achieve it by acquisition – would we end up having to be bigger than the current size of our industry?
I hope I’ve made my point. The question for you to consider is what is the appropriate level of growth for your business? Are you for stretch targets or sustainable targets?
- Short term
- Mortgage the future
- Recalibrate the business
- Ahead of inflation
- Organic or Acquisitive
Double Digit growth compounds faster than you think!