UK: THE BUSINESS OF FAST GROWTH - THE SECRETS OF HYPERGROWTH.

UK: THE BUSINESS OF FAST GROWTH - THE SECRETS OF HYPERGROWTH. - Though some companies grow more quickly than others, few meet the criteria for hypergrowth. But do those that double turnover every three years really provide a good model for the more slugg

by David Smith.
Last Updated: 31 Aug 2010

Though some companies grow more quickly than others, few meet the criteria for hypergrowth. But do those that double turnover every three years really provide a good model for the more sluggish?

Of all the beasts in the corporate jungle, the most fascinating is the one that emerges from nowhere, grows at a phenomenal rate and, before too long, is challenging some of the bigger animals. Hypergrowth companies are known in America as fast-growth tigers or threshold companies, and sometimes in Britain as baby sharks.

Like champion athletes, they fascinate precisely because their performance is so extraordinary. Mere mortals can be forgiven a touch of Schadenfreude if they see one of these apparently superior beings fall flat on their faces. But they are no less relevant for that and they raise interesting questions.

What are the lessons that firms with more prosaic performance records can learn from the management strategy and techniques of the hypergrowth companies? And is it the case that there is a 'tortoise and the hare' element to the experience of hypergrowth companies vis-a-vis the rest? In other words, do such companies, after a period of rapid expansion, either burn themselves out, bump up against financial or market ceilings, or come to the attention of larger firms as takeover targets?

Coopers & Lybrand, in a recent study of hypergrowth companies in Britain, defined them as firms which had achieved an increase in both turnover and employment of 100% over the latest three years. From a sample of 501 successful medium-sized, or 'middle market' companies, 26 fell into the hypergrowth category, although there were 78 companies in all which met a less demanding 'supergrowth' definition (turnover up by 60% or more over the latest three years), and 39 in all which were defined as supergrowth on the basis of a 60%-plus rise in employment over three years.

The 26 hypergrowth companies tended to be young, with half under 10 years old. Most, around 70%, were private, with current turnover typically ranging from £13 million to £50 million a year (although by their nature, some could be expected to expand rapidly out of this range). The vast majority served a single market, or supplied one type of product or service. In four-fifths of cases, this market was identified by the companies themselves as a niche market, either ignored by or underexploited by larger players. Although there were hypergrowth companies in both manufacturing (fast-moving consumer goods, textiles and clothing, computers and electronics), they were proportionately more likely to be in service industries, notably transport, professional services and financial services.

Ann Todd and Professor Bernard Taylor of the Henley Management College, who looked at rapidly growing companies over a longer time-frame, 1980-90, found that the 'baby sharks' in their sample recorded profit and turnover growth of over 20% a year, with the majority recording growth of over 40% annually.

Todd and Taylor's baby sharks, like the Coopers & Lybrand companies, were often niche players, taking advantage of recently established technologies. But relatively few were in what could be described as pure high-technology markets, in other words, products or processes at the forefront of technology. Such markets often had prohibitively high entry barriers, particularly relating to the level of investment required and, in the case of untried technologies, substantial risks of failure.

They give two examples. Owners Abroad, now re-named First Choice, developed a chain of niche travel agents selling holidays on relatively high margins, by taking advantage of computer technology and proprietary software which enabled economies of scale to be achieved of a kind previously only available to the travel industry heavyweights. Indeed, it is a measure of its growth - away from its original time-share business - that it had to change its name. Another successful niche market player was Iceland Frozen Foods, which set up a nationwide chain of low-overhead specialist food retailers.

Specialist Computer Holdings (SCH), under the chairmanship of Peter Rigby, is an example of a current hypergrowth company. Founded in 1975 by Rigby, who at the time was working for Honeywell, and based in Tyseley, Birmingham, it is a computer sales and service group involved in the integration and distribution of personal computer systems, mainframe computer bureau services and computer training. Its shift into very rapid growth has come with a move into mail order computer sales and the Byte chain of computer superstores - a network of seven such stores expanded to 17 during 1995.

SCH's turnover rose from £95 million in the 1993 financial year to £229 million in 1995. It is on target for a turnover of more than £350 million in the current financial year, ending on 31 March 1996. At the same time, group employment has risen from 500 to more than 850. Most of the company's expansion has been organic, although it has also made acquisitions, at a rate of roughly one a year. 'There is only one way to take the business - forward,' says Rigby. 'You can't stand still, or be half-hearted or complacent. You have to be forward-thinking.' Both the Todd & Taylor and Coopers & Lybrand studies distill a number of common factors which typify the strategies followed by successful hypergrowth companies. According to Simon Greenstreet of Coopers & Lybrand, Specialist Computer Holdings is an embodiment of most of these factors. Thus, the company has improved the time to market for new products and services, vital in the rapidly-changing computer market. At the same time, it has kept tight control over stocks. SCH has reduced its risk by maintaining a close relationship and collaborating on marketing with its suppliers, which include IBM, Microsoft, Novell and the other industry giants, who regard the company as an important source of information on developments in the UK market.

According to Rigby: 'There are literally hundreds of organisations like Intel or Microsoft who assemble, develop and manufacture computer equipment and who need capable, credible organisations to re-sell technology; my company is very much a model of what they want.' Thus, it has avoided confrontation with larger players, which can mean death for the hypergrowth company. SCH uses available technology effectively in its own distribution operations and benchmarks its performance against a range of yardsticks for the industry.

SCH has deliberately recruited managers with expertise outside the computer industry, notably with its expansion into the retail market. It operates an active employee incentive programme, with both share option and employee share ownership schemes. The company's borrowings are low, most of its growth having been funded by the reinvestment of profits.

But can hypergrowth ever be a realistic long-run proposition? One year on from the point at which they were identified as hypergrowth, Coopers & Lybrand's 26 companies are still going strong, and most expect to achieve performance at or near the hypergrowth level for the foreseeable future, although this could be dismissed as predictable optimism.

A study by McKinsey & Co of fast-growth 'tiger' companies, however, found that rapid growth was sustainable. Indeed, it concluded: 'For the tigers, fast growth fuels itself. Multiple reinforcing feedback loops conspire to create a "virtuous circle", unleashing a momentum that competitors are powerless to stop.' But research by both 3i and the Cranfield European Enterprise Centre suggests that the population of companies achieving hypergrowth is unstable between two time periods. In other words, companies are always moving in and out of the hypergrowth performance league, and relatively few are likely to sustain such performance over prolonged periods. This fits the popular image of hypergrowth companies - that their success is in exploiting a particular market niche or product advantage. Once the competition arrives, or the niche is fully exploited, the scope for continued rapid growth becomes that much more difficult. If this coincides with the typical problems of fast-growth businesses - loss of control of the finances, perhaps a falling-out between the original partners, or just a loss of impetus - the chances of sustained hypergrowth begin to look slim.

Taylor offers a middle ground between the two competing views on the sustainability of what is, on any definition, extraordinary business performance. He and Todd established a data-base of 176 high-growth, medium-sized companies, on the basis of their performance over the period 1980-5.

In the following five years, 52% of the sample continued to record rapid growth in profitability and turnover, of at least 20% and in most cases more than 40%, annually. A further 9% of the sample continued to grow, but at more modest rates, while 13% experienced 'stagnation and decline' and 26% were no longer in existence (as a result of poor performance, and not because their good records had led to their acquisition).

'When we started we were looking very much at the problems of growth and the strategies needed to secure rapid growth in terms of products, markets, finance and so on,' Taylor says. 'But we found that the problem of growth comes down to the people. If you're growing at 40% or so every year, you are effectively creating a new business every three years. The management problems that this creates for the original entrepreneurs is enormous. Either they make their mind up to adapt to a much larger operation, by taking on new management. Or, in many cases, they decide to be taken over.' This is the point, adds Taylor, when hypergrowth is likely to come to an end. 'Large companies find it difficult to innovate, so they pick up smaller innovative companies,' he says. 'This process of concentration is going on all the time.' The problem is that the smaller, innovative company often ceases to be innovative once part of a larger organisation. It is a familiar story. The spur that drove on the original creators of the business is often lost once they have sold out, however powerful the contracts binding them to the business. Acquisition is often more effective as a means of snuffing out a younger, aggressive and more innovative competitor than of giving the larger firm an infusion of innovative sparkle.

It is from their relationship with large companies that medium-sized hypergrowth companies derive both their strength but also, ultimately, their vulnerability. The Coopers & Lybrand research found that hypergrowth companies tended to have a higher proportion of large company customers than their middle-market peers, and that this could be a source of problems, for example in slow payment. At the same time, they had a proportionately bigger number of big company suppliers. The danger for hypergrowth middle-sized businesses is that they will be squeezed when they begin to become a serious threat. Either that or they get taken over by one of their bigger customers, suppliers or competitors and lose the edge that made them special in the first place.

There are, however, exceptions that prove every rule. Sonix, run by Bob Jones, a down-to-earth Welshman, was founded in July 1992, and specialises in internetworking products, which enable telephone networks to send and access computer information. Set up with cash from Jones himself, Schroder Ventures and Greylock, a Boston-based investor, it achieved a turnover of £5 million in its first year, which had trebled to £15 million by 1994-5, and is projected at £24 million for 1995-6. A short time ago Sonix reached the crossroads referred to by Taylor. It was aiming for a stock-market listing in 1996 when an offer came along from 3Com, a California-based computer networking company with an annual turnover of $800 million (£530 million), to acquire the company for $70 million (£46 million). Jones and his shareholders accepted, and his firm is now known as 3Com-Sonix.

Jones insists, however, that what made his business a hypergrowth company has not been lost as a result of the takeover. 'In some cases the motivation does go but I would like to think that this is not so for us,' he says. 'We genuinely enjoy the business that we are in, and that is a very powerful motivation.' Staying hypergrowth does not mean keeping the firm's American owner at arm's length: 'When we started out on the deal we were going to be completely independent. But, at our instigation, we are becoming more integrated. 3Com is an integrated company with a worldwide sales force. Quite recently we have transferred our own salesforce to them.' Far from slowing the growth of the business, the takeover has enabled Sonix to exploit new opportunities, particularly in North America, Japan, and the rest of the Far East, although one marginal shift in strategy has been to seek to get more out of existing products, rather than develop new products at what Jones describes as the previous 'frantic' pace.

Jones is sceptical about whether the ingredients that made his business a hypergrowth one can be reproduced as a blueprint for other companies to follow. 'To a large extent it is instinctive,' he says. 'I've always tried to do things on a team basis. The balance of the business is extremely important. You have to do things like discovering that marketing is as important as engineering. But I like to believe that we set our own agenda.' Even so, Simon Greenstreet of Coopers & Lybrand is seeking to develop the lessons of hypergrowth within the context of government policy. He has just begun an 18-month secondment in Michael Heseltine's competitiveness unit, whose aim is to lift the rate of growth of British business as a whole. And he remains confident that his 26 hypergrowth companies can go on setting standards that all other businesses should aspire to.

'It is absolutely clear that some companies can sustain these growth rates over the longterm,' he says. 'If the motivation is there, and if they can make the transition from entrepreneurial managers to team players, very rapid growth rates in profitability are sustainable.' If he is right, and if the lessons of hypergrowth can be passed on to other businesses, perhaps these fascinating animals will become less of a rarity in the corporate jungle.

Ten of the Fastest Growing British Companies 1980-90

Company Sector Profit Turnover

% growth* % growth*

Amstrad Manufacturing 1,841 4,087

Economist Newspaper Services 2,188 436

Liberty Retail 1,493 410

Owners Abroad Services 1,878 2,083

Oxford Instruments Manufacturing 1,561 841

Securiguard Services 7,876 63

Spring Ram Manufacturing 183 12,281

Tunstall Group Manufacturing 6,074 1,870

Whatman Manufacturing 1,929 338

Yule Catto Conglomerate 1,001 677

*growth after 10 years

Source: Todd

McKinsey's Analysis - The accelerators that fuel the tigers

McKinsey's tigers, which include Microsoft, Apple Newton and Midland Bank's (now HSBC) First Direct subsidiary, have successfully tapped into a range of growth 'accelerators' which fall into three main categories.

The business web accelerator - so-called because a web of partners evolve their products alongside, and are dependent upon, the company's product. A classic example is Microsoft Windows.

Market power accelerators arise from the establishment of a dominant market position. Again Windows fits this criterion, as does First Direct in becoming the dominant player in the UK home banking market.

The third category of accelerators is learning-based, arising from improved knowledge of, and indeed anticipation of, customer needs, or the ability to use the experience of one market to penetrate another.

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