The main features of the growth stage are –
- Overall business risk associated with the product is reducing.
- Company increases its market share by expanding sales volume.
- Venture capitalist investors will be keen to realize their capital gains.
- Financial risk is low as the source of funding is growth equity investments. High retention ratio of existing profit levels for funding the growth. Rights issues, Bonus issues and share splits are carried out in this stage. The company is listed on the stock exchange or Equity funding can be raised by private placement (without inviting the public to invest in the company) Many private equity institutions have portfolios including pre-IPO companies, which have raised private funding as a second stage of their development prior to flotation.
- Dividend policy tends to be a nominal payout ratio where P/E ratio is still high because of the low earnings per share ratio. In a growth company the P/E ratio usually is over 20. The dividend yield is very low as a large portion of earnings is retained for reinvestment.
- Share price is growing but still highly volatile.
- Entry barriers are constructed during the rapid growth period by development of strong branding with advantages of economies of scale i.e. learning curve cost reductions.
- The standard deviations for most high growth companies are very large, due to the commonly violent swings in returns experienced during the periods used in the calculations.
- Most high growth businesses are more affected by changes in external environment factors than many more mature, well established companies.
- Sales are rapidly increased during this stage as customer loyalty is shown. As the owner gets a feel for the market they introduce new products and take the slower selling products off the shelf. The main costs during this phase seem to be advertising.
Above mentioned situations are observed in the growth stage of the life cycle by Bender and Ward. The model surely is helpful to understand the most probable ways a firm may act in this stage. But we are not 100% sure. This approach is the attachment to rational analysis. The uncertainty factor is not considered in this model. The possibilities are numerous. By introducing new products, developing existing products and seeking new markets businesses seek to prolong the growth period. Yet the corporate world is highly unpredictable and volatile. It is never a smooth run through the life cycle. While in the growth stage, the company might suddenly go to the decline stage and might bounce back to the growth stage. It is highly difficult to predict the life cycle. Accordingly strategies can be formed and executed. The concept is useful to a certain extent, as a company has to go through any of the stages of the life cycle sooner or later. Even though companies don’t go through the stages in the sequence given. But it is useful for the top management to identify stages and act accordingly to succeed. Bender and Ward (2002)
Maturity Stage
This is the stage at which sales reach their highest level before they start to fall. At this stage business risk and financial risk are medium. Funding is made through retained profit and debt. Dividends are high, future growth prospects are low, P/E ratio is medium, profit is high, and share price is stable. The main features of the Maturity stage are
- High but relatively stable sales at reasonable profit margins. Relatively good market share.
- Business risk has reduced. The critical business risks remaining relate to the duration of this stable, maturity stage and whether the company can maintain its strong market share, on a financially attractive basis, throughout this period.
- There is a positive cash reserve which enables the debt to be both serviced and repaid. Reduction in business risk enables the financial risk to be increased through the introduction of debt financing. The main source of funding in this stage is retained earnings plus debt.
- In the dividend policy the dividend payout ratio is increased. Due to debt financing the company can pay much higher dividends.
- The lower growth prospects are reflected in a lower P/E ratio.
- The EPS is high and increasing slightly due to efficiency gains. The share price is stable in real terms with low volatility.
- The company life cycle can itself be extended by having an appropriate portfolio of products within the business, so that the company can continue to grow even though any particular product has moved into its maturity stage.
- The business risk associated with a mature mature business is reduced to the medium range, which implies that investors should be prepared to accept a lower return. Such a lower return will only be accepted if the required change in shareholders expectations is positively managed by the company.
- Profits will be less volatile but they cannot be expected to continue to grow dramatically unless improvements in efficiency. Bender and Ward (2002)
About the Company – Amazon.com
Amazon.com, a Fortune 500 company based in Seattle, opened on the World Wide Web in July 1995 and today offers earth's biggest selection. Amazon.com seeks to be earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and activities to offer its customers the lowest possible prices.
Amazon.com and other sellers list millions of unique new and used items in categories. Amazon.com offers its customers a wide range of other items besides entertainment products. June 6, 2003-Amazon.com launched two new stores, Software and Computer & Video Games. These new stores mark the first expansion of Amazon.ca’s product offering beyond books, music, videos and DVDs, allowing customers to now also find and discover a broad selection of software and computer and video games titles, as well as video game consoles and accessories, at Amazon.ca. In addition to making it simple for customers to shop a wide range of hot new releases and hard-to-find titles from the comfort of their home or office, these new stores feature the same low prices customers have come to expect from Amazon.ca.
Amazon.com has a mission statement that says their mission is to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible.1 based on the quality and size of Amazon.com, it would be correct to say that their strategic direction would be to provide the same quality shopping experience and customer service for multiple goods and services beyond books to ensure continued growth. And in doing so, Amazon.com still maintains their founding commitment to customer service and the delivery of an educational and inspiring shopping experience. Amazon.com has many qualities that keep them at the top of the e-retailing business. The first of their core competencies is being the leader in e-retailing. They are able to obtain this status by having superior knowledge of e-retailing. Low cost structure, a real time ordering system and being more global round out Amazon.com’s core competencies that make them the number one choice among online customers.
Findings and Comparative analysis
Sales are the most important indicators of the performance of the company. It is not the sole indicator but surely is the most important one. The Sales graph above shows growth in sales from a period of Launch to growth. Accordingly we can see that the sales kept on growing. The rate of growth kept changing but it never decreased than the previous year. So it doesn’t exemplify the Porter’s Bulge, but it surely represents the Bender and ward model. Sales are rapidly increased during the later part of the growth stage. The Company still is in the Growth stage. The company still is growing. The projected sales are even higher so we can confirm that the company has not yet entered the Maturity stage. ‘Amazon.com’ has outperformed its competitors and is number one in its field of business.
If we decide to judge the Bender and Ward model by the Profit indicators, then we can see that the model has no practical application. According to the above graph we can see that the company bared losses for the first eight years. The losses were huge. These losses were due to servicing huge debts and high promotional expenses. The company started making profit in year 2003. The profits after 2003 are inconsistent. According to the graph it looks like the Porter’s Bulge, except the bulge is on the other side of the axis.
According to the model the company pays low dividend in the growth stage, but in this case the company has never paid any dividend. For the first eight years it didn’t even make any profit so the option of paying dividends is gone. But even when it has started making profits it still isn’t paying any dividends. All the profits are retained in the company.
According to Bender and Ward model, there is no debt raised in the Start up and growth stage and the company’s funding is only through Venture capitalists and equity issues. But in the case of ‘Amazon.com’ the company has raised debt right from the second year of launch. The company kept raising debt throughout the Start up and growth stage. We can see the amount of debt raised as it keeps increasing. Because of this the model doesn’t prove correct.
The model states that financial risk is low in the growth stage, but in the case of ‘Amazon.com’ the financial risk is raising throughout the growth stage due to increase in borrowings every year. So here again the model is proving to be wrong. As borrowings exist in the start up phase also which according to the model should not be, shows that the model isn’t perfect.
The model states that in the growth stage the P/E ratio (Share price / Earnings per share) is always above 20. According to the data we have we can see that the P/E ratio is above 20. Actually the P/E ratio is very high, which has gone up to 680. Here the P/E ratio in the model and the company shows similarities. But the P/E ratio of Amazon.com is way too high.
The model says that share prices are growing but are highly volatile. Here we can see that the share prices have gone up and are highly volatile. The growth in share price appears to be less but that is due to Share splits. The share splits were done a couple of times during the first few years of the company. Accordingly the investors have benefited from the increase in share prices. But according to me Share prices are not important in proving the Bender and Ward model as share prices will always be volatile and are not a right measure of explaining the model.
The model also states that there is high retention ratio of existing profit levels for funding the growth. Well this is seen in ‘Amazon.com’. The Company has retained all its profits to fund the growth.
According to the model, the overall business risk associated with the product is reducing in the growth stage, but this is not the case in ‘Amazon.com’. The business risk is increasing due to competitor’s strategies and introduction of new companies. More and more businesses want to come online. Amazon’s major competitors are Barnes & Noble, Wal-Mart, and e-Bay. Each is offering products and services through the Internet user, which Amazon and e-Bay are completely online business while Barnes & Noble and Wal-Mart are the combination of ‘brick and mortar’ and virtual.
The model states that in the start up stage source of funds are Venture capitalists and in the growth stage the Venture Capitalists are keen to realize their investment. But in the case of ‘Amazon.com’ there were no venture capitalists. Here also the Bender and Ward proves to be incorrect. The source of funds for ‘Amazon.com’ is common stock issue, preferred stock and debt. Amazon.com completed its initial public offering in May 1997 and its common stock is listed on the NASDAQ National Market under the symbol "AMZN".
Comparing the data collected to the maturity stage we get to see that business risk has not reduced, sales have not stabilized, there are no huge cash reserves, dividend is still not paid, P/E ratio is still very high, the share price is not stable, EPS is not high and profits are growing. Here we can see that the company if in the maturity stage doesn’t represent the model.atall.
Conclusion
According to our findings we have compared ten main points from Bender and Ward model to actual practices in a company which is ‘Amazon.com’. We have found that the model has less practical application. From the ten points the model is proved right in four points. So we can say that the model has 40% application. But the most important measure of the model that is ‘Sales’ proves that the model is perfect. But it can always be argued that in the world of business there can be infinite number of outcomes of company life cycle. So there can never be a perfect model of company life cycle. We can still use the Bender and Ward model as an average of a number of outcomes. Because a start up company will grow or may go to decline directly. If it grows then it has to mature or decline and if the company matures then some day it will decline. We just can’t say how long a company will stay in a particular stage of the life cycle. The period may be too long or too short or any duration. So the Bender and Ward model is useful for understanding the phases of company life cycle.
References
Bender R. and Ward K. (2002) Corporate Financial Strategy 2nd Edition Butterworth Heinemann
Amazon Investors relations Press releases? 2003<
www.oreillynet.com/pub/a/mediakit/pressrelease/20010131.html
by
vishcometrue (student)
