Secrets Of The Supergrowth League

Supergrowth companies are the unsung heroes of industry, creating wealth, jobs and new products in their drive for expansion.

This article summarises the conclusions of a 15-year study of 200 high-growth medium-size companies over the period 1979-80 to 1994-95. It involved 15 researchers in the UK and two in Germany interviewing chief executives and writing about 100 case studies.

The research was supported by grants from Price Waterhouse and the Anglo-German Foundation. The German research study was carried out by Professor Dietger Hahn and Dr Ulrich Grab of the University of Giessen, Institut fur Unternehmensplanung.

The resulting book (Supergrowth companies: entrepreneurs in action by John Harrison and Bernard Taylor, Butterworth-Heinemann, Oxford, 1996) is the first longitudinal study of UK high-growth medium-size companies.

 

We defined medium-size in 1980 as those with a turnover of 10m - 100m. In 1990 we raised the benchmark to 20m-200m. To justify the label high growth we required that companies should have grown by at least 20 per cent per year over a five-year period.

We included all kinds of independent companies, whether privately or publicly owned, on the London Stock Exchange or one of the mini markets. But excluded two sectors property and financial services, where some of the profits are made by deals rather than by regular trading. We also excluded companies in turnround and recovery and those that had grown mainly by acquisition.

We had 176 companies in the original sample and found that on average they had grown by around 40 per cent a year over five years from, say, 10m-100m to 50m-500m in sales and from 1m- 10m to 5m-50m in profits.

Reasons for the study

These supergrowth companies are the vanguard of UK business. They succeed because they innovate. They break new ground, open up new markets, launch new types of products and services, introduce new forms of organisation and more cost-effective ways of operating.

They create wealth and jobs. The 200 companies we analysed probably generated 50,000 to 100,000 jobs and 3bn-4bn of capital over a 10-year period. The impact they have on the national economy and on local communities is quite out of proportion to their numbers. While large companies, banks and government departments are closing operations and shedding thousands of jobs, these companies are setting up new businesses and taking on new people.

The importance of this mid-size, high-growth sector was recognised in the US in the early 1980s by the establishment of the American Business Conference (ABC). It brought together the leaders of mid-size companies that had grown at least 15 per cent annually for the past five years.

Mid-size is a relative term that varies with the size of the market. The Americans define mid-size as $25m to $ 1bn turnover about 15,000 companies in the US, less than 1 per cent of all businesses. McKinsey researchers found that in a five-year period, from 1978-1983, these mid-size companies had increased their workforce on average by 10 per cent a year while over the same period the Fortune 500 had lost 3m jobs.

Researchers in Germany, too, have discovered the importance of Mittelstand companies. (See page 4) They found that the more successful companies had kept their businesses simple and uncomplicated with narrow product ranges, target customer groups and a few preferred suppliers.

The lessons

A big benefit from studying high-growth, mid-size companies is that they can provide examples of best practice for other entrepreneurs who wish to grow their companies.

Lesson No 1: Find a market niche you can defend.

Successful medium-size businesses do not confront established brands in their key markets. Instead they invent new products and services and open up new market segments. They also create barriers to entry in the form of patents, distribution licences or supply agreements with large customers.

Alan J Brazier of Vax International invented Vax, a vacuum cleaner that would not only clean but also wash and dry carpets and floors. After years of frustration he established his own factory, put together the funds for a television advertising campaign and in two years, from 1985 to 1987, established Vax as the number one cleaner in its segment with a market share of 67 per cent. When Hoover launched a similar product, Brazier took it to court for infringing his patents and won a seven-figure settlement.

Lesson No 2: Compete in areas that require speed, flexibility and customer service.

In our study, the leaders of UK supergrowth companies cited flexibility to adapt to changing customer needs as the most important factor in their success.

Also, when asked to compare their companies performance with their competitors, they thought their companies main competitive advantages were in customer service and management organisation usually referring to a star-shaped organisation composed of a small central team and an array of business unit teams that could communicate easily and take decisions quickly.

Lesson No 3: Diversify into related products and adjacent markets.

After establishing a position in a niche market, the supergrowth companys second priority is to diversify quickly into related market niches in order not to become over-dependent on one product, one customer or the economy of a small region.

Peter J Wood, an intrapreneur who operates within the Royal Bank of Scotland, pioneered the telephone selling of motor insurance policies in the UK and his company, Direct Line Insurance, quickly became the market leader, selling more than 2m motor policies a year. By 1994 the business was making 110m profit on gross premiums of 685m. In 10 years his staff had grown from a nucleus of 30 people to 3,000 in 1994. But competitors were not idle. Wood knew that they would attack his core business and he moved quickly to offer the same target customer group a range of related financial services in household insurance, mortgages and home banking.

As Lord Weinstock is reported to have said: A niche becomes a grave. Having established a new product in a market niche, the entrepreneur is quickly surrounded by competitors offering similar products, often at a cheaper price. The only answer is to keep innovating.

Lesson No 4: Leave the industry before the window of opportunity closes.

Supergrowth companies thrive as new industries merge and grow. At the embryo stage, they succeed by introducing new products and services, opening up new channels of distribution, pioneering novel production methods and experimenting with innovative management approaches.

During the growth phase they expand geographically from regional to national and later to international coverage. They offer a wider product range and serve different customer groups.

The embryo and growth phases may take five to 10 years. For the medium-size company, these times are exciting and highly profitable. But, in due course, industries mature, innovations are copied, large international competitors arrive and, in the UK and the US where there is an active market in companies, medium-size companies are quickly acquired, merged and consolidated into large groups.

When the industry begins to consolidate, the leader of an emerging business has to decide whether he or she wants the company to become a significant player which usually means losing control of the business or sell the company and possibly start a different business.

Charles M Fisher, chairman and chief executive of Sharpe Fisher, is a UK family businessman who saw that his industry was consolidating and moved out just in time. Founded in 1912, Sharpe Fisher was a builders merchant based in Cheltenham but by the 1980s its star business was its DIY store operation Sandfords, which accounted for almost half group profits. Charles Fisher and his management team examined the prospects for Sandfords and decided that as a family business they would not be able to compete with the buying power and the marketing strengths of fast-growing national multiples such as B&Q and Texas. They sold Sandfords at its peak for 40m to Ladbrokes Texas chain.

Since then, from 1991-95, the company under Charles Fisher has used the money to expand its original chain of builders merchants from six to 23 by acquiring private companies at recession-reduced prices. The chain is concentrated in a band between Sussex and Wales. Despite the severe recession in the construction industry, profits have more than doubled, and earnings per share have increased five-fold.

The international dimension

Comparisons with supergrowth companies outside the UK are very revealing. Most UK supergrowth companies are publicly owned and professionally managed most of their founders are professional entrepreneurs, managers trained in large companies such as Ford, IBM and ICI. In the main they are selling services, which means some find it difficult to trade overseas.

When they do, they like to acquire a company in the same niche or, like Body Shop and Kwik Fit, they sell through franchises.

The companies usually have a limited life because they are acquired by large companies. They are not often supported by government loans, though some have used bank loans, often to their cost.

They usually, sensibly, rely on retained earnings and equity capital. With rare exceptions they do not expect technological support from universities, and they find that large UK companies, except for some retail multiples such as Marks and Spencer, do not yet understand the Japanese idea of customer-supplier partnerships.

German mid-size companies are more often family owned and family managed. They are well integrated into their communities, funded by the regional banks and are sponsors of local activities such as football teams. They frequently work closely with universities and research institutes.

A large proportion of them are in manufacturing and have long-term relationships with big customers such as Siemens Nixdorf, BMW and Daimler-Benz. Many of these companies are big exporters and normally sell through agents around the world.

US supergrowth companies grow much bigger than their UK counterparts and they stay independent longer. They also have more funds available. Their home market is bigger than the European Union and they can tap into vast technological resources in universities and the defence industries.

There are also many more supergrowth companies in the US, partly because entrepreneurship and small business is a favourite course in most American business schools.

However, in each country these mid-size, high-growth companies are a powerful force for innovation and growth, attracting investment, introducing new technologies, opening up new markets, and creating wealth and employment.

They succeed by identifying, and often creating, a new market niche, responding imaginatively to customers requirements, expanding quickly into related product-markets and innovating continually.

(Indented text from Small Quoted Companies, The Director, April 1996)