Planning for the pace of change
Sue Prestney's March article
If the world seems to be going faster each year that’s because many things actually are changing more rapidly than they used to.
For example, it has been estimated that product lifecycles have reduced from 15-20 years to 2-3 years since the Second World War. Ever-evolving technology and design combine to make products obsolete or out-moded faster than ever before. You just have to watch the race to market by Apple and Samsung, as they continually change product functionality and style, to see this happening.
Shorter product lifecycles can also mean shorter business lifecycles. Business owners have to continually develop new products or find strategies to extend the lifecycle of existing products if they are to remain in business. One of the reasons apps are important to mobile phone producers is that they give customers a reason to continue to buy the handsets, prolonging the product life. For some products new uses can be found, such as bi-carbonate of soda which is now used largely as a deodoriser after being superseded by new baking products. Other products may find new markets, a strategy used successfully by the cigarette industry.
For many businesses the traditional seven stages of the business lifecycle (seed, start up, growth, established, expansion, mature and exit) now have to be compressed into a much shorter time frame. Such businesses are less able to gradually build up to the established stage by reinvestment of retained profits over a number of years. As a result, substantial premises, large permanent workforces, and in-house support departments may no longer be feasible. The business lifecycle may be simply too short to allow such infrastructure to be constructed and deconstructed economically. In addition, products have to get to market faster and maximum returns have to be extracted before the end of their lifecycle. On-line trading is one solution – it obviates the need for expensive premises and a traditional sales force and allows access to global markets without a physical presence overseas. Outsourcing solves the problem of having to maintain internal departments, such as warehousing and distribution, as specialist businesses can so effectively provide these services.
However for many businesses e-commerce has resulted in profit margins that are continually squeezed by competition and savvy consumers with unprecedented access to product and market information. On-line trading may save the business in infrastructure costs but the customers expect these cost savings to be passed to them. For many businesses it has, of necessity, become a volume game.
The advantage of on-line business is that you can, through a website, build huge trading capacity much more quickly than a traditional business but that still requires a substantial investment, and with short product lifecycles, it needs to be fully and quickly installed before competitors absorb the market. However, while the traditional business model has been radically changed in recent years, the major financiers are still generally lending along traditional lines. Most have still not come up with alternative security arrangements to those they apply to bricks and mortar businesses. As a result we still have a ‘disconnect’ between traditional financing and on-line businesses which require early-stage funding to hit the ground running. Crowd funding is one way that some businesses are now sourcing investors. It uses the internet and social media to raise funds for a project or business, providing an avenue to a large of number of sponsors who may individually contribute relatively small sums but can combine to produce a substantial pool of capital. (The danger with this form of fund raising is that it may appear to circumvent the usual regulations relating to public capital raising. Last year ASIC issued guidance on crowd funding and warned that Australian businesses using or facilitating this means of funding still had to comply with the relevant regulations, including those relating to prospectuses and licensing.) The emergence of crowd funding provides an example of how the new business model and new technology can change the way all businesses are conducted, including very traditional service providers.
Service providers and trading businesses alike need to acknowledge that for many of them, shorter product life cycles will result in shorter business lives. There will be more businesses for which the exit phase will be closure, rather than sale, not as a result of failure but simply because their products or services have reached the end of their lifecycle and the business has no other means of extending its life. For businesses that move quickly to the mature stage this form of exit may be part of the business plan from the outset but for others it may come as an unpleasant surprise. It is vital that businesses plan for this form of exit which necessitates considerably different decisions than a business that can extend the saleable stage of its lifecycle. Decisions in relation to leases and other contractual commitments, and the permanency and attrition of staff, will be vastly different for a closure scenario, where ongoing lease costs and staff redundancies can erode accumulated profits, than for an ongoing business that needs to be passed intact to a new owner.
The current environment of fast and continual change impacts almost every aspect of business operations and businesses need to continually assess and plan for not only the lifecycle of their products but that of their entire business. Never before have business plans been more vital.
Sue Prestney | EXECUTIVE CHAIRMAN MGI AUSTRALASIA
[email protected]
March 2013
Article written by Sue Prestney for 'Charter', the magazine of the Institute of Chartered Accountants in Australia
Sue Prestney is a Senior Partner with MGI Melbourne and current Chairman of MGI Australasia.
Article reprinted with the permission of the Institute of Chartered Accountants in Australia, www.icaa.com.au