Sustaining Growth: Performance lifecycles and why you need to understand them

Any activity that impacts on the performance of a business has a lifecycle. Launches, investments, promotions and price changes (both up and down) are obvious examples. Understanding the size and duration of these cycles, and how they overlay with each other, is as essential for improving your performance as it is for planning your M&A.

Why you need to know about this

Understanding the performance lifecycle is particularly important in three situations:

1. Preparing for a transaction – e.g. IPO, disposal, fundraising, M&A
2. Entering a new cycle – e.g. post-acquisition, market downturn or recovery
3. Managing a steady cash flow

In each situation, the ideal performance curve will be different. For instance, in M&A a vendor requires impacts to come together, boosting performance for a specified period, whilst an acquirer needs to quickly understand what lifecycles are at work in its acquisition, and which levers will give the required short and medium-term results.

Ignoring lifecycles can lead to an internal “boom and bust” pattern, drive a dependency on short-term activity, and lead to a continuing spiral of promotional intensity. These charts illustrate why. The first shows a typical revenue curve driven by different types of activity. The second shows the year-on-year impact they drive in like-for-likes.

In this example, there are three concurrent lifecycles: a new range is launched, an older range is deeply discounted to clear volume and a major promotion is deployed to deliver cash in year 1. Whilst the combination gives consistent growth for 18 months, a dramatic crash in like-for-likes will occur from Q3 of year 2. If major activity is not planned, short-term actions (most likely, promotions) will become inevitable.

 Unsurprisingly, a fear of creating these lifecycles in the first place is quite common. Many people, business leaders as well as managers, avoid using rapid growth levers as it makes future comparisons more difficult. Understanding lifecycles is key to alleviating this fear and unlocking a higher sustainable growth rate.

Three steps to understanding your lifecycles

1. Isolate: A performance lifecycle is not a market cycle. Just measuring headline performance often tells you more about the market and the weather than it does about the impact of your activities. A lifecycle is measured by isolating the impact of a planned activity on the business and requires the use of analytical techniques like control sets or de-seasonalised sales to remove other effects.
2. Evaluate: Evaluating an isolated impact gives a more accurate ROI. It allows you to understand whether combining activities (e.g. refitting a store and changing prices at the same time) increases, or reduces the overall benefit. It allows you to forecast future and underlying growth patterns more effectively, and, most importantly, to prioritise which types of activity to deploy.
3. Track and adjust: Lifecycles change with competition, and competition changes with time. The more intense the competitor activity, the shorter the lifecycle. For instance, investments in city-centre outlets usually have shorter lifecycles because the large competitive set means there are more frequent investments in the area. However, with many operators rationing capital spend in the economic downturn, now is probably the best time to invest in these types of outlet, as the lifecycle will be longer than it has been in years.

Four steps to unlocking their potential

1. Pull together any historical information you have on what activities have gone into the business, where and when.
2. Isolate the lifecycles for your biggest growth levers: typically they will be around price, promotion, product and service launches, new stores and investments, and major staff changes (essentially the 5 Ps of marketing)
3. Use your lifecycles to:
   1. Prioritise your growth levers
   2. Understand where you are on the curves, improve your forecasting and avoid nasty surprises
   3. Plan, track and deliver the appropriate performance curve
4. Expand your fact base using trials. Understand the lifecycle of higher-risk activities, like price increases and the removal of discounts, before you have to do them.

 

For more information on using lifecycle analysis to drive business performance, call Martyn Drake on  07768 424147  or e-mail martyn@binleydrake.com