Business Management

How to Sustain Growth and Profitability in Business

How to Sustain Growth and Profitability in Business

By Clara Nwachukwu

For several hours, many participants at the lecture on Driving Sustainable Business Growth on September 30, 2007, in Lagos struggled with suggestions and ideas on how to sustain growth and profitability in business.

The struggle was not restricted to a particular type of business, size of company, position in the company or even ownership.

One thing that cuts across all the participants was the determination to see their line of businesses succeed, and was open to suggestions.

The lecture was not the typical recipe or knowledge hand down, but an interactive one, where the participants made their own contributions, including contradicting the lecturer, Professor Bala Chakravarthy, a renowned international management consultant.

Judging from the lecture and discussions that ensued, it was evident that making a success of any type of business does not depend on theories or what had worked for others in the past, but on current realities based on the prevailing conditions for that line of business and/or operating environment. 

For Chakravarthy, a Shell Chair Professor, many factors come into play for one to sustain a business concern.

He notes that often, many managers tend to get carried away by their profitability and forget about putting in place machinery to sustain the growth.

According to him, sustaining profitable growth can be achieved by measuring performance over a period.

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To measure this successfully, citing examples of big establishments in the United States, he said one could assess performance like within a five year period based on the average for the industry sub-sector and return on invested capital.

While the big organisations often make such assessments in their statement of accounts, which are issued quarterly, half-yearly and annually, it is not so easy for the one-man businesses, which base their assessments mainly on the profits from particular items.

But such assessments, is the difference between the rise and fall of businesses.

While acknowledging the truth of Chakravarthy, many of the participants pointed out the peculiarity of the Nigerian environment, which is not particularly business-friendly. 

For instance, one of the participants said his company in the financial services sector, spent about N24m per annum on diesel alone to run generating sets, which could otherwise had increased returns on shareholders investments. This is compounded by poor infrastructure. 

Some of the participants noted that growing businesses in Nigeria, especially in the more structured organisations were not very easy because of the constant tension between the owners and the managers.

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While smaller business could easily take split-second decisions, thus, gaining ample time, the bigger ones often go through debates, sometimes, shareholders approval before taking a major decision.
This often acts as set backs, in view of the time lost.

The answer to such challenges, according to Chakravarthy is that business managers must have the courage to re-vision, pursue continuous renewal, look to mergers and acquisitions and alliances, not as strategies but as means to execute the strategies, personally sponsor growth projects and provide a supporting process.

Sometimes, also, he said some business managers rushed into some of these strategies, like in mergers and acquisition, which ended up crumbling rather than growing the businesses because the strategies by the partners were not properly aligned. 

Although he said the matter remained inconclusive, he stated, The predominant finding is that mergers and acquisitions do not create value for the acquiring company’s shareholders in over two-thirds of the cases. 

An example is a study done by the consulting firm KPMG International. It surveyed the 700 most expensive international merger and acquisition deals from 1996 to 1998; and concluded that only 17 per cent of these deals had added value to the combined company, while 30 per cent had had no impact whatsoever and as many as 53 per cent had actually destroyed value.

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On the other hand, he noted that some have made a success of mergers and acquisitions, saying, A recent study by the Boston Consulting Group analysed the long-term stock market performance of more than 700 large publicly held US companies over a 10-year period ending in 2002. It divided the sample firms into three clusters depending on their level of M&A activity. 

It found that the highly acquisitive group of companies had the highest median total shareholder return more than a full percentage point per year higher than the median TSR of companies that made few or no acquisitions.

As willing as some managers are to bring healthy ideas, management expert, Professor Pat Utomi, however, noted that the real challenge was not the lack of initiative to do as advised, but the fact that business owners resisted change.

According to him, Some egos depend on the status quo, they would not want to let go.�€ 

Putting the varied views in perspective, Chakravarthy advised that whatever strategy to be adopted to balance growth and profitability, targets must be set and such targets must be integrated progressively to exploit all potential synergies.

Punch

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