Founder and partner with Cardiff-based Gambit Corporate Finance, Frank Holmes on maximising the potential of growth opportunities
THE recession has left a deep scar on the British economy while the financial world remains addicted to growth.
According to the Bank of England, the total loss in real output relative to the economy’s pre-crisis trend amounts to 12% of GDP.
A key question for policymakers is how much of this loss is cyclical and how much is permanent.
Since the end of the First World War, Britain’s long-term trend growth rate has been remarkably stable, at a pace of just under 2.5% per year. Despite the Great Depression, a number of economic crises and another world war, this trend has remained intact.
So, has the 2008-09 recession finally broken this trend? It is certainly possible to identify factors which could affect economic output on a permanent or semi-permanent basis.
First, higher unemployment could become persistent, because of the impact of long-term unemployment on employability.
Second, the reduced availability of credit and the increase in lending costs have the effect of curtailing investment, resulting in the economy being less capital-intensive than it otherwise would have been.
Third, the economic crisis has also resulted in a shift in the sectoral composition of the economy, with a move away from financial services (which was a big contributor to overall GDP in the years preceding the crash), although the City of London has shown significant growth in recent months. On a positive, manufacturing is performing.
Moreover, while the above three factors are likely to have a longer-lasting effect than “typical” business cycle fluctuations, they too can be reversed over time; labour supply growth is likely to increase again if the recovery is sustained and borrowing costs will decline at some stage.
What about businesses? Must they always seek growth too? Should companies try to get better, not bigger?
If competition is weak in your sector, your business may grow without difficulty and without having to deliver particularly stellar performance. Where competition is intense, managing growth is much harder.
Closer attention to detail is required to spot genuine growth opportunities. It is more about focusing time and resources on faster-growing segments where companies have the capabilities, funds and market insights needed for profitable growth.
Management should resist simplifying their analysis of markets and develop a microscopic perspective on trends, future growth rates and market structures.
Misguided opinion holds that companies, like us mortals, pass through a fixed life cycle.
They begin with the haphazard existence of a start-up, scale the business up during corporate adolescence, mature into dull, reliable middle age, and lapse into inevitable decline, more often without a succession plan or “will”.
The life-cycle analogy is intuitively appealing, but it obscures an important insight. Companies do not pass through life cycles; opportunities do. Most businesses, particularly large corporates, oversee a broad range of opportunities arrayed across the stages in the life cycle, but lack a disciplined process for evaluating and selecting which one to back.
Growth requires versatile management and systems able to move as opportunities arise.
Equally, companies must extinguish under-performing units to free up resources for the most rewarding opportunities. Formal budgeting processes are useless unless management has the courage to make difficult calls.
Many companies injected discipline into their resource allocation processes and cut costs during the recession, and therefore maintaining this strict behaviour will be critical to their growth prospects during the next economic upturn.
The UK’s long-term economic trend of 2.5% year on year growth has survived many world crises and will probably survive this one too.