30 Aug 2019

Do Your Homework before Growth Investing

Organizations are interested in growth investing that will give them the highest returns. Managers use ROI to see which investment opportunities would be the most profitable for the company as a part of investment strategies. However, before deciding on anything, a proper market research is a crucial step.

Market Research – An Important Step Before Growth Investing

One needs to perform thorough market research and financial statement analysis. This is so that one has a clear picture of what other players in the market are doing.

Financial Analysis

A vital part of the market research process needs to be a thorough financial analysis of the market to evaluate the economic health of the territory. Investing in a business is a big commitment, and one will want to evaluate the long-term viability of the country’s economy before setting up the company infrastructure. Along with this, stock analysis and financial statement analysis of the company is a vital step. 

Competitive landscape

When one first decides to start up a company in a location, one first needs to look at the other players who are already in that space. Survey the landscape and see who the business’ potential competitors are.

Competitor analysis

Once the company’s competitors have been determined, analyze them in a more in-depth manner. Perform a S.W.O.T analysis on these various players. In this process, the following are determined:

  • The strengths and weaknesses 
  • The opportunities that they may have in the market and
  • The threats that they are facing – that the new business could capitalize on.

Influential Economic and External Factors

If investment strategies were merely a matter of giving money to a certain company, this process would be relatively simple. However, macro-economic and other external factors can cause the investment to fail despite how solid it seemed.

Customers

Before investing in a product and service in a specific region, one must first look at the customers in the region. Would they be able to afford your product? Are they even interested in buying the product? These are vital questions that need to be answered before any investments are made.

Sales Process

The lifeline for a business is sales as, without a regular inflow of cash into the business, the organization will not succeed. During the market research process, it is necessary to analyze how other businesses successfully sell to their customers so that you can adopt similar practices in your business.

Unfortunately, while the monetary return is relatively easy to measure, the intangible value – such as customer and employee loyalty, or reduction in risk – that is gained from the investment is much more difficult to quantify.  It is often these intangibles that determine the success or failure of a business. However, according to 2018 statistics by Gallup, only 15% of employees worldwide are truly engaged in their jobs.

Megatrends Driving a Higher Price in the Economy

The world is experiencing several megatrends, which – according to EY – are “large, transformative global forces that define the future by having far-reaching impacts on businesses, economies, industries, societies, and individuals.

Here is a list of these megatrends, as well as the impact that they are having on business and the global economy.

Demographic Shifts

The world’s population is undergoing changes in growth patterns. For example, Western Countries and China are seeing that their population is stabilizing. However, Africa and the rest of Asia is experiencing a significant increase in population. It has been said that megacities will develop in these areas which will give homes to upwards of 50 million people. 

Rise of New Global Powers

The BRIC countries and other emerging markets are being converted from production-oriented economies into consumption-oriented ones. The amount of trade between these economies is increasing, and they are becoming exporters of, among other things, talent.

Data-Driven Technology Advancements

Technological advancements are responsible for developing new industries, which could have a massive impact on the world’s manufacturing sector, as new manufacturing capabilities will need to be developed. 

As a result, the lines between traditional industries are becoming blurred. New competitors will emerge in industries that were not thought possible.

Figure: Dramatic Increase in Handheld Computing Power
Figure: Dramatic Increase in Handheld Computing Power

Climate Change 

Resource scarcity, as well as the impact of climate change, are becoming pressing concerns for the greater economic community. While the demand for energy will increase by as much as 50% by 2030, by the same date the amount of available water will drop by 14%. This means that the need for sustainable and renewable energy sources – such as solar power – has become ever-the-more urgent.

Despite this dire situation, global powers have come together to attempt to remedy this situation. In 2013, more than 96,000 electric and hybrid cars were sold in the United States.  Again, in the US, in 2013, Coca-Cola teamed up with the US Department of Agriculture (USDA) to protect the watersheds in North America.

Climate change and the scarcity of resources is a very real concern. However, it is only through partnerships between leading industry players that there will be any hope of this being addressed.

 With a population of 8.3 billion people by 2030, we’ll need 50% more energy, 40% more water , and 35% more food
With a population of 8.3 billion people by 2030, we’ll need 50% more energy, 40% more water , and 35% more food

Resource Constraints

As was mentioned in the paragraph above, critical resource constraints are starting to be experienced. More powerful Western Nations will look to Africa and the Middle East to replenish their dwindling supplies of scarce resources. As a result, African and Middle Eastern countries may find that their security is compromised. 

Investment Strategies and Long-Term Benefits

Investing to Enter New Markets

Before investing in a new market, one needs to conduct thorough competitor research. In other words, it is necessary to look at which other players are in the market they would like to enter. Find out what the competitors’ business is if this business is similar and how strong of a foothold in the market that business has.

The worst thing to do when venturing into a new market is for the organization to be perceived as a ‘me-too’ product and service, because, in the minds of the customers, they will immediately see that the offering as a player that is already in the space. Thus, the consumers will start shopping around based on price as opposed to quality if they are not able to distinguish any differences between you and the product and service that they were already using.

Investing in New and Upcoming Technology

There are several organizations which have taken traditional business models and, using technology, have reinvented them to give customers a better experience while achieving the same outcome. Here are a few notable companies:

Meltwater takes data from various sources – such as social media – and aggregates it into data that customers can take actionable insights from.

Crunchbase Pro provides a platform for users to learn about investments, news, and industry trends. The organization also provides innovative tools to users, which are not available on free-to-use software.

The segment provides customers to over 200 data marketing analytics and data warehouse tools.

Investing in the Business Expansion 

Investing in expanding one’s business is not as simple as just pushing more money at it. Before you do this, you need to look at the macro-economic factors present in the economy, because if these factors are not favorable, no matter what one does, the probabilities of success are not great. 

Examples of these factors include:

  • Interest rates
  • Taxes
  • Inflation
  • Currency exchange rates
  • Consumer discretionary income
  • Savings rates
  • Consumer confidence levels
  • Unemployment rate
  • Recession
  • Depression

Capital Investment

The capital investment that you made in the business needs to be adequate for what needs to be achieved. However, it is necessary to be reasonable. If there is a more affordable solution which achieves the same outcome, rather go for this one and reduce the capital investment. If the company needs more investment later as part of the business’ growth strategies, there will be the required funds available which the investor will be able to provide.

Investment in Human Capital

“Our people are our greatest assets.” This is especially true of the knowledge economy that we find ourselves in today, as without people to drive innovation, thought and creative-thinking, disruptive technology would not have been able to come to fruition.

Investment in Your Customer Base

For a business to grow, it needs to have a loyal customer base who keep buying. If the customer base dries up, and not replaced soon after, the business has very little chance of succeeding. Thus, when one builds the company, make sure that there is a definitive strategy in place for building a base of customers.

Investing in Risk Reduction

The Small Business Association (SBA) has released figures which show that 30% of new businesses fail after two years. 50% fail after the first five years, and 66% fail after the first ten years. These are massive risks and, as such, it is necessary to invest in measures – such as keyman insurance – to assist in reducing the business’ risk.

Indirect/Unmeasured Value vs. Longer-Term Value

When making investment research, companies need to be mindful of the value that a particular investment will add to the organization. Here are several ways that business can consider both indirect – or unmeasured – value as well as the longer-term value.

 Set Different Hurdle Rates for Different Investments

It is not possible to expect all investment strategies to give the investor a payback in the same periods. Big companies, such as Intel, have realized this. For example, they expect some energy-efficiency projects to have a payback period of four years, while green building projects are expected to have a seven-year payback.

Use a Portfolio Approach

Sometimes, companies – especially large ones – have many investment opportunities. To keep track of these and to make sure that they all receive equal consideration, it is a good idea to classify these into portfolios. For example, Diversey – which is a cleaning products company – uses this method to enable them to fund 90 projects at once.

Set Aside Funds

Large companies, such as Johnson and Johnson, set aside funds for certain investments which need to be made regularly. This ensures that these investments are made and are not overlooked simply because there are no available funds.

The competitive environment, sales process, customer breakdown, as well as the economic cycle, are extremely important to understand. Market research looks at due diligence and hiring the right market research partner will make a significant difference in ensuring that this part of the business is kept in check. 

Research Optimus, with decades of mastery in market research and financial analysis help companies to do a thorough market research before taking a plunge.

Contact us to know more about our market research and financial analysis services.

– Research Optimus

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