Invest in Growth, but do your Homework 27 Feb 2014

Invest in Growth, but do your Homework

A smart business is not a stagnant business because the road between a stagnant, but profitable business, and shrinking and unprofitable one is very short. Businesses need to focus on growing by finding and expanding their customer base. Idle firms are a ticking time bomb, the loss of a key customers or unforeseen disruptive industry event leaves too little time to react.

Investments carry risks, largely the loss of money and time, but not pursing them leads to complacency that leaves the firm vulnerable. Product life cycles have cycle in the title for a reason and do not last in perpetuity. That said, a new market or product offering requires some investigation and due diligence. A business needs an approach to investment. Firms that follow a methodology can increase the magnitude and number of successful investments and maintain a culture of steady growth versus complacency.

One way to grow is to enter new markets, geographic or tangential. It is important to assess the different opportunities and make informed strategic decisions. Management needs to include a few keys in any strategic investment process, including financial analysis, competitive analysis, business environment and other market research.

  • Competitive landscape: While at times jumping into a tangential market can make sense, it may turn out its much more competitive than expected. This usually translates to lower margins. Other times it is controlled by a few leaders and will require a significant sales and marketing push to gain market share. Identify this early on and build it into the forecasts.
  • Influential economic and external factors: A new geography or market may have different fundamental drives. For example in asphalt, the road business is driven by government spending levels, while the home driveway piece is from new home construction. Government spending tends to fall later in the economic cycle than housing. This is good if a firm is trying to smooth out their business but the fact that it’s a cycle needs accounted for in the sales forecast. Second, a new geography, especially if it’s a developing market, may follow a very different business cycle that has peaks and valleys bigger or smaller than the current businesses. On a small scale, one neighborhood may have very different demographic and socioeconomic conditions. Find the data and do the analysis, basing investments on appearance is too large a risk.
  • Customers: Identify who the major customers are or if it’s a highly fragmented market early on and start planning accordingly. Also, develop a good understanding of the sales process and sales cycle. A long or short sales cycle also needs accounted for, especially when forecasting working capital and payback periods.
  • Financial Analysis: The accountants and financial analysts are quick to model out an opportunity and make a decision based on ROI, payback period, or IRR. Making sure an investment meets the cost of capital, and is not just cash flow positive, is critical in analyzing new markets. However, that analysis needs supporting work on the size of the opportunity, different scenarios based on market penetration rates, the economic climate and other factors. Essentially, there is a long list of people that can conduct the financial analysis and get it right, but too many get the numbers wrong they are analyzing. Often, the forecasts used are far too optimistic and do not take into account external factors like macroeconomic risk. Solid market research like that discussed above and performed by a skilled firm like Research Optimus can improve this forecast and provide key insights.

The competitive environment, sales process, customer breakdown, and economic cycle all important to understand and market research covers a significant portion of due diligence. A business, especially a small one, may not have time to conduct thorough investigation. A market research firm like Research Optimus can complement internal efforts or act as a substitute.

– Research Optimus

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