FINANCE

CHAPTER# 9
MANAGING THE TRANSITION TO MATURITY

Many companies don't realize that their main product will eventually stop growing
and enter a maturity phase, requiring different management. Instead of spending a
lot of money trying to keep growth rates high, they should focus on maintaining
current sales profitably. This often means changing management styles and
possibly bringing in new leaders better suited for managing a mature business.

As products mature, their sales growth slows down, which is different from the
longer life cycles of brands or companies. Sometimes, it's better to transfer a strong
brand to a new product that's still growing instead of trying to reposition it for a
mature product. This helps extend the brand's life and justifies the cost of
developing it.

In mature markets, competition increases, and customers become more

knowledgeable, often unwilling to pay extra for certain features. Companies might
need to reposition their products to emphasize value for money, which may require
price reductions and cost savings by removing the original brand image.

A company can extend its overall life cycle by having a diverse range of products
at different stages. However, it's important not to mistakenly treat a growing
product as mature, especially during economic downturns that temporarily slow
sales. Proper market segmentation can help identify which parts of the market are
still growing and which have matured, allowing tailored strategies for each
segment.

As a company moves from growth to maturity, shareholders' expectations also

need to be managed. Initially, returns come from rising share prices as the
company overcomes startup risks. In maturity, the focus shifts to stable profits and
cash flows, with reduced business risks. Investors will accept lower returns if the
company manages their expectations effectively during this transition.

ADDING VALUE THROUGH FINANCIAL STRATEGY

When a company matures, its risks decrease because its cash flows become more
predictable and stable. This means the company's risk profile (beta factor) usually
moves closer to the market average (a beta of one).

As product demand stabilizes, it relies less on new customers or increased usage

from existing customers, making it more influenced by overall economic changes.
For mature companies, the cost of equity capital (return expected by shareholders)
becomes more consistent and closer to the overall market return. Companies need
to show shareholders their lower risk to avoid a drop in share price.

One way to show this lower risk is by delivering steady financial results.
Additionally, as companies mature, shareholders' returns shift from capital gains
(increased share value) to dividends. Mature companies focus on efficiency
improvements rather than big sales growth, reinvesting profits to maintain market
share and productive capacity.

Mature companies often generate significant cash due to high profitability and
reduced need for growth investments. They also face higher tax liabilities, making
debt financing more attractive due to potential tax benefits. The stable cash flows
from mature businesses reduce the costs and risks associated with debt, making it
feasible for them to service and repay loans.

As business risk decreases, companies can increase financial risk by taking on

debt, which can enhance shareholder value. However, management must adjust to
handling higher financial risks. Some management teams resist this change for
comfort, but companies with inefficient capital structures may become takeover
targets.
In summary, as a company matures, it should focus on maintaining stable profits,
shifting shareholder returns from capital gains to dividends, and potentially
increasing debt to optimize its financial structure and enhance shareholder value.
DEVELOPING A DIVIDEND POLICY
As a company matures and has more cash, it might start paying higher dividends to
shareholders. This tells shareholders that the company doesn't expect as much
growth in the future. In the early stages, returns mostly came from growth, but now
dividends become more important. The company can afford to pay these dividends
from its stable profits, while still meeting its investment needs with less retained
earnings and some debt.

When transitioning from high growth to maturity, the company's price-to-earnings

(P/E) ratio might drop as the market adjusts its expectations. Managing this
transition well is crucial because if shareholders expect too much growth for too
long, the share price might rise too high and then crash when the market corrects
its expectations, possibly leading to a takeover.

Whether paying dividends or reinvesting profits is better for shareholders depends

on the return on reinvestment. Early on, there are many profitable reinvestment
opportunities, but as the company matures, these opportunities decline, so retaining
profits without good use can destroy value.

Increasing dividends can increase shareholder value, especially if the company

can't reinvest profits effectively. For instance, STAR plc expects an 18.75% return
on reinvestment, which is higher than the 15.8% return shareholders expect. But if
STAR paid no dividends, shareholders would expect higher future growth, even
though attractive reinvestment opportunities are limited.

Changing dividend policies affects how risky shareholders perceive the company.
High retention rates suggest growth but come with higher risks. Mature companies
usually pay higher dividends, reducing perceived risk. Balancing the dividend
policy with the company's growth stage helps maintain shareholder value.

If STAR plc paid all profits as dividends, no future growth would be expected,
lowering the share price. Conversely, if a low-growth company like DOG Inc
retained too much profit, it would destroy value. Increasing the dividend payout
ratio could raise the share price by stopping value destruction.

In summary, managing dividend policy is crucial as a company moves from

growth to maturity. A low payout ratio is good during growth, but a high payout
ratio, nearing 100%, is better as the company declines, based on available
reinvestment opportunities.

Mature Firm

 A mature firm is a company that is well-established in its industry, with a

well-known product and loyal customer following.
 Mature firms typically face steady competition and exhibit slow and
steady growth.
 Mature companies also tend to pay dividends and can boost profits
through cost cuts and efficiency improvements

Characteristics of Mature Firms

a) Steady-to-Slow Revenue Growth

Mature companies often experience a slowdown in sales growth because
they've already built a large customer base and can't attract many new
customers. This can be frustrating for management, who need to shift
their focus from rapid growth strategies to maintaining steady,
sustainable growth and profitability.
b) Earnings Through Cost Effectiveness
Mature companies are usually large, with extensive operations like
factories and distribution networks. During slow economic times, they
can cut costs to boost profits, even if revenue growth is slow. Because
these companies are so large, even small cost cuts can significantly
impact their earnings. This ability to reduce overhead and operating costs
helps them improve profits despite modest revenue gains.
c) Cash and Dividends
Mature companies often have a lot of saved-up profits called retained
earnings, similar to a savings account. They use this money to invest in
new equipment, pay off debts, or even give cash rewards, called
dividends, to shareholders. Companies that regularly pay dividends are
usually mature, stable, and successful.
d) Efficiency
Mature organizations are well-structured with effective planning and data
management systems. They use enterprise-wide data tracking to enhance
efficiency, control costs, and boost sales. With large customer bases, they
can offer new products through cross-selling. Managers report on various
 aspects, and the company plans for different scenarios by analyzing data
to make informed decisions.
Examples
Well-known mature companies include IBM, Walmart, Procter &
Gamble, Johnson & Johnson, Intel, and Xerox.

What Is a Mature Industry

A mature industry is one that has moved beyond the emerging and growth phase.
A mature industry is an industry that has passed the introduction stage, growth
stage, and shake out stage, but has not yet reached the declining stage. The
companies in a mature industry are older, larger, and stable. Mature industries
start with many companies, experience a shakeout phase as some companies fail,
those that last seek growth, economies of scale, and market share. A company
becomes mature when it is firmly established and will not experience significant
growth.

What Are Examples of Mature Industries?

Examples of mature industries include the tobacco industry, the automotive

industry, though this is changing with self-driving cars and electric vehicles, and
the petroleum industry.

Nokia is considered a favorite example whenever the concept of product life cycle
is discussed.