The Growth Curve

All businesses grow in exactly the same way, following a series of, often disconnected, s-curves like those in the figure opposite. At least the good ones do, most businesses just get stuck at the top of one of these curves, not sure of what to do next and then bumble along for a while until they fade away. The “dying curve” opposite is usually much more prolonged. If a business isn’t growing it is dying and most businesses are not growing.

Growth always stops because the world changes and it is how a business adapts to these changes that dictates just how well they can transform themselves and start the next stage of growth. Technology business are dealing with this all the time and in Dell we see a once very successful business struggling to reposition itself as personal computers, which brought it such great success, are going out of favour and being replaced with other electronic interfaces to the “network”.

There is talk, once again, of Dell “going private” at a time when it is some way into a major change programme to reduce its reliance on PC manufacturing, where its supply chain dominance allowed it to generate superior returns for the last two decades, and move into Enterprise Solution and Services, which last year accounted for something like 34% of its $14 Bn quarterly revenues, but some 50% of its margin. Dell’s PC shipments fell by 21% in the fourth quarter compared to a year ago.

In striking contrast to its rather deliberate organic growth of the early years, Dell’s balance sheet strength has allowed it to acquire a wide array of businesses in order to enable it to make this arguably somewhat overdue transition. Although the business famously started in 1984, when Michael Dell was still at college, it was 1999 before it made its first acquisition. Since 2006, the first year that Dell’s growth fell behind the PC industry as a whole, and the year before Michael Dell resumed the role of CEO once again, it has acquired more businesses than I can reliably count, but at least ten, with others still in the pipeline.

Whilst Dell is clearly taking action it has all been a little too late to satisfy stock market pundits and their investors. With a low share price and many years to go yet before we see if this transition leads to a unified and wholesome winner, rather than a muddle of poorly coordinated businesses, going private may be a smart investment. The problem is that it would be a very big deal, by anyone’s standards, and is there really any enthusiasm for sinking that much cash into a business whose core competitive advantage, that of logistic superiority, has been rather overtaken by time and events? I’m not convinced that many will fancy taking on quite such a big risk, so I won’t be holding my breath for talk of Dell’s stock price to disappear from the pages of the financial press, as it continues to wrestle with the continuing mismatch of shareholder and pundits’ expectations and its likely results.

Mark

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