The corporate life cycle: maturity

The third instalment in our series examines the established business
Commercial awareness
Business analysis

Mature companies are long-standing and have a tried-and-tested business model with a sustainable competitive advantage. This advantage might come in the form of powerful brand ownership (Coca-Cola), a specialised retail format (McDonald's), or cutting edge patents (Pfizer). A mature corporation will see significant profits generated from such assets, resulting in a relatively stable cash flow. Barriers to entry, which include brand awareness and intellectual property, make erosion of any significant advantage by competitors a long-term and difficult process.

What does it mean to be a mature business?

Mature companies are defined not by their physical size, but by their stability and the growth rate of their revenues. Usually that revenue growth is in line with the growth of the economy.

These businesses tend to have fewer internal investment opportunities that promise a return higher than the cost of the capital they need. Clayton Christensen, a Harvard Business School professor, estimates that mature companies attempting to enter new business areas fail 90 per cent of the time, with unsuccessful projects bringing significant write-off costs. Just look at Tesco's US venture Fresh & Easy, which suffered heavy annual losses and $150 million (£110 million) of disposal costs.

As a result, mature companies tend to engage more in inorganic growth to fuel innovation. That means acquiring start-ups or middle-sized companies. In 2013, web giant Google purchased 18 companies and by the end of January 2014 it had an additional four on its books.

Why do investors like mature companies?

As a result of excess profits, mature companies tend to build up cash balances, which they release to investors in the form of dividends. Steady dividend returns tend to attract risk-averse investors such as pension funds, as dividends tend to be a more predictable source of income than investing in the shares of new companies and waiting for their value to rise (capital gain), despite the potentially limited revenue growth of mature companies. Individual investors tend to favour mature companies too. For example, in the past Warren Buffett made significant investments into Coca-Cola, Goldman Sachs, and Procter & Gamble.

What challenges do mature companies in the UK face?

Globalisation and the rapid expansion of new technologies now means mature companies are more likely than ever to lose their competitive advantages. Kodak, which at the height of its power had a market value of $28 billion and 140,000 employees, no longer exists due to the digital revolution in photography. Comet, Woolworths, and Blockbuster, names once synonymous with the British high street, are now just Wikipedia pages; Blackberry and Nokia are shadows of their former selves.

That's because a mature company finds it difficult to transform and change the course of its strategy while cash is still flowing. This is partly due to complacency and a lack of urgency to take action, and partly because making good strategic choices beyond known business models is hard, as it forces the company to make difficult choices between unknown options. That's why mature companies need to be open to innovation, flexible, and have R&D (research and development) and M&A (mergers and acquisitions) functions to ensure constant growth and vigilance.

*Case study: *Starbucks

Starbucks is a US coffeehouse chain headquartered in Seattle with branches across the globe.

Starbucks, a coffeehouse chain company, is one of the most well-known brands in the world. A stalwart of the high street, the company serves Italian-style coffee alongside a range of food items. The scale of the company's operations is astounding; in 2013, it had 3 billion customer visits across 19,000 stores in 62 countries. Its now iconic take-away green coffee cups have become a signpost of popular culture, featuring in movies such as The Devil Wears Prada and Sex and the City: The Movie. The company has a very engaged customer base, too - every change in its logo or offering is widely commented on, and many customers find it difficult to get rid of their daily Starbucks habit.

Modest beginnings

Starbucks began in 1971 when three academics opened a coffee store in Seattle. In 1981, they were joined by salesman Howard Schultz who became enamoured with Italian coffee culture, and saw potential to introduce this style of coffee drinking to the US. As chief executive, Schultz placed a lot of emphasis on training baristas in the art of making coffee, sourcing the highest quality beans, ensuring friendly customer service and using stylish décor. This attention to detail fuelled the company's growth - the company rapidly expanded to 500 outlets and in 1992 floated on the US NASDAQ stock exchange. As the company saturated its local market, it sought growth internationally, quickly opening new outlets abroad.

Difficulties along the way

In 2009, Starbucks recorded its first ever decline in year-on-year revenues. Howard Schultz, who left the company in 2000, returned in 2008 after seeing what he called the "commoditisation of the Starbucks experience". In pursuit of growth through additional store openings, the company had forsaken barista training, innovation and other quality-control efforts such as smell-free breakfast sandwiches or ensuring that floors and tables were clean. Store managers had been given so little information that they didn't know whether their outlets were profitable or losing money. Inventory control was haphazard with stores running out of items because Starbucks' supply operation was a mess. All of these problems were occurring alongside rising costs.

Schultz, seeing the undesirable direction of the company, slammed the brakes on growth and improved cleanliness, service, and operations at existing stores. He closed 900 stores, laid off workers, and cut annual costs by close to $600 million. Sandwiches were banned until they could be re-engineered not to overwhelm the coffee aroma. Store managers got laptops and access to performance information. Soon after the changes were implemented the company returned to steady growth.

Advantages of being a corporation

Starbucks' size and age give it a clear advantage in brand awareness. "People gravitate towards coffee brands they know, particularly in travel settings such as at airports or in foreign countries," says Helene Mills, Associate Director at specialist retail and consumer consultancy Pragma Consulting. This allows Starbucks to capture key consumers such as the jet-setting businessman and the homesick tourist in overseas markets. Consumers know what they're getting with Starbucks and this sense of safety may encourage them to choose Starbucks over a local independent coffee shop.

Challenges facing Starbucks in the future

Over the last decade Starbucks has faced intensified competition. Other coffeehouse chains such as Costa or Caffè Nero, traditional food establishments diversifying into coffee such as Pret A Manger or McDonald's, as well as independent coffee shops, are all fighting for a share of the recession-resilient coffee market. Helene notes that coffee is "one of those little luxuries that people refuse to let go during economic downturns - a bit like lipstick". However, she thinks that Starbucks has so far underperformed in comparison with its competitors in areas such as brand evolution, food offering, and convenience.

The coffee market is very brand-driven - people are conscious that the colour of their coffee cup can speak for them, and can quickly become bored and tired of a brand if no innovation is seen. Helene thinks that Starbucks can sometimes be seen as a "formulaic brand of the 1990s" and "a bit bland". She also adds that the brand has been damaged by the recent corporation tax scandal.

Starbucks has also found it difficult to add attractive food propositions to their coffee shops. Although the chain has improved over time, adding a range of salads and protein-based "bistro boxes", its food offering is still not as palatable as some of its competitors. This is partly due to Starbucks' sheer size and legacy of retail outlets; it would be hard to add ovens to 19,000 stores and train staff adequately in oven usage to provide freshly baked goods.

Finally, Starbucks could do more to innovate across different customer touchpoints. Although the company has diversified into instant coffee, coffee pods, and supermarket retail, it has lagged behind Costa in introducing new formats such as self-service station points. Helene advises Starbucks "to figure out who their most engaged consumers are and work out what they can do differently beyond coffee and their sandwiches".

As Starbucks saturates international markets, it's increasingly looking for growth in new drink categories. As a mature company it does this through acquiring brands rather than innovating internally: in 2011 it jumped into the juice market with the acquisition of bottled juice company Evolution Fresh, while in 2013 it entered the tea market by acquiring Teavana, a speciality tea retailer.