Monday, April 12, 2010

Corporate Life Cycles and Investor Relations

I’ve written before on some of the relationships between marketing and investor relations and I’m at it again today. In marketing there is a well-known graph known as the Product Lifecycle Curve, which I’ve set out below.

The graph points out how products are first brought to market and purchased by early adopters, then go through a phase (if they are lucky) of rapid takeoff and growth. Once the product has achieved wide spread acceptance, the growth cycle slows down, and after a period of maturity, decline inevitably sets in. The speed at which all of this occurs depends in large part on the nature of the industry and the aggressiveness of competitors. Tech gadgets, for example, have much shorter product life cycles than say, breakfast cereals.

The interesting thing about the product lifecycle is that it has applicability to a number of other things, corporate lifecycles included. Stop thinking about products and substitute corporate development and the graph doesn’t change. Where this is of interest to investor relations professionals is in the type of investors each phase of the cycle attracts. Set out below is the same graph with investor segments sketched in.

One of the interesting things about the graph is that as you move on the life cycle line from left to right, the price/earnings ratio that investors are willing to pay for a stock declines. This is because investors perceive that the rate at which future earnings will accrue to the company is slowing and they are therefore willing to pay less for that future stream of lessened earnings.

Companies often struggle with this, particularly at the inflection points between stages. Company executives will say, “We’re a growth company – look at our record. The market is undervaluing us.” Investors, on the other hand, will look forward and say, “Nope, you’re a mature company. Your big gains are over and we’re not going to pay a premium for a company that is going to grow at the rate of the market.” Many an antagonistic relationship has been fostered based on this differing view of the world.

There’s more that can be said about this (and I will in later posts), but if I don’t run out now and buy an iPad, I will lose my status as an early adopter…

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