Xx) How To Manage This Dilemma Of Investing For Growth

- most shareholders want regular, strong, consistent returns as expressed by dividends and share price increases but to invest for growth can mean a temporary decline in these returns.

Remember: current financial outcomes are results of past investment decisions.

"...Financial results measure how healthy the business was, not how healthy the business is..."

Clayton Christensen et al, 2003

Past financial data is not necessarily a good indicator for the future

Ways to handle this include

i) start early - start new growth businesses while the organisation is financially healthy, ie core businesses are performing well. Waiting until current business slows may mean that the resources are no longer available. Furthermore, need to be careful of the strategy of aiming for growth by acquisition. Usually the decision is driven by numbers, such as discounted cash flow projections, and an assessment of whether the business is undervalued or fixable or can yield cost savings through synergies with an existing business. These are not the best techniques for decision-making as they are based on historical evidence rather than a general strategy for creating and sustaining and organisation's growth (see earlier).

ii) start small - new growth opportunities should be launched as new small business units that are patient for growth

"...A decentralized company can maintain the values required to see and enthusiastically pursue disruptive innovations far longer than can a monolithic, centralized one, because the size of a disruptive venture must reach to make a difference to a small business unit......in the multi-business-unit there are more managers seeking disruptive growth opportunities, and more opportunities will look attractive to them......most of the companies that appear to have transformed themselves over the past 30 years or so - companies such as Hewlett-Packard, Johnson and Johnson, and General Electric, for example - have been composed of a large number of smaller, relatively autonomous business units. These corporations have not transformed themselves by transforming the business models of their existing business units into disruptive growth businesses. The transformation was achieved by creating new disruptive business units and by shutting down or selling off mature ones..."

Clayton Christensen et al, 2003

iii) demand early success - be impatient for profit. Generating profit quickly and limiting expenses does 2 things, ie

a) accelerates the emergent strategy process by forcing the venture to test assumptions as quickly as possible; with quick feedback on the success or otherwise of the venture

b) by becoming profitable, the venture protects itself from decision makers changing their minds, especially if core business is not performing well

 

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