Can a ‘last company standing’ strategy create real value?
What do almost all growth experts tell you? Go for growth markets! Make sure they are already fast growing, or have solid growth promiss because of new consumer trends, or a technology shift or even a regulatory change. But what if you are really good in a market with no or even negative growth?
Can you still create value in this case? Yes, but:
- To earn above average margins actually market leadership* is more important then market attractiveness, but you have to be a clear number 1
- Gaining share and consolidating in a no growth market is possible, many companies want to leave and invest in other markets, but you need patience and perseverance
- Cost leadership is paramount, as well as really undisputed product reliability – much more than in growing markets trust is the leading emotion
- Know your business cycles and secure ways to lessen volatility
- Consistantly work on cash flow growth, and do not underinvest, but know how to strategically retreat
- You should be able to finance other faster growing businesses from the cash flow
- Value creation comes from cash flow widening and lengthening the life cycle
* This is not only market share, but also cost, product and service leadership
What do my own experiences suggest
I have had the honor to be responsible for businesses in low/no growth markets. Top management does not like low/no growth markets, so we continuously needed to invest in testing new growth options like new geo’s, new chemistries, new applications. But at the same time we needed to focus on growing cash flow from a almost stagnanttop line. Using the drivers mentioned above we were (and my successors still are!) able to do so. I also learned that you need to invest extra in motivating your teams – as many have the feeling that the money earned by these businesses is spent on other – faster growing – but less profitable – businesses.
From a corporate perspective it his great to have a few of these businesses. Often they give strong financials and are surprisingly resilient to economic cycles. One challenge happens if the company wants to divest these businesses and is the relatively low valuation that is awarded by most investors as they value growth potential much higher then solid financial performance.
Especially now during and after Corona it will be crucial for companies to recognize and nurture and improve those long standing businesses that can keep you afloat during turbulent times.