5 Year Annivesary Of Steinhoff
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Khaya Sithole – Independent Analyst talks about The various topics covered in the case study – Steinhoff’s business vision and fast-expanding operation over the years, and the company’s approach to governance and leadership – provide some important business lessons for small entrepreneurial concerns and large corporates alike.
Lesson #1: Be true to your strategic vision and ‘stick to the knitting’
Strategy theory suggests (ref: 1) that strategy development over time is more about making wise choices initially and deepening one’s competitive position than going too broad and trying to be all things to everyone.
Although the diversity of the Steinhoff businesses might give some people the impression that the company lacks a core identity and has chased acquisitions in a somewhat random fashion, the company’s long-term vision has always been to control its various value chains, thereby moderating costs, keeping competitors at bay and striving for ever-higher levels of efficiency and market share.
This is an important element in its fundamental strategy of sourcing and manufacturing goods in low-cost countries and selling them to value-conscious buyers in more lucrative markets.
Former Steinhoff chairman Christo Wiese and the company’s executives appear at a parliamentary hearing into the Steinhoff scandal on January 31, 2018 in Cape Town, South Africa. Replying to questions, Wiese said, detecting fraud within a company was hugely difficult for board members‚ especially if the CEO was allegedly involved. (Netwerk24 / Adrian de Kock)
Although Steinhoff’s operation is today very geographically dispersed and it has progressed from being primarily a furniture supplier to a more holistic supplier of ‘lifestyle’ products, the company has not deviated too far from its fundamental business strategy and target market. In making the strategic choice to expand its product and service offerings but operate as a vertically integrated business, Steinhoff acknowledges that benefits can be derived from moving almost seamlessly into ‘adjacent market space’ using its pre-eminent position in related value chains.
Whereas a horizontal integration approach would require a business to operate alongside myriad other businesses in a ‘value chain neighbourhood’, with a vertical integration approach Steinhoff effectively ‘owns the neighbourhood’.
Lesson #2: Growth does not equate to profit or success
Organisations that deliver consistently strong performance over extended periods of time invariably practise a controlled growth strategy in which future expansion and investments are carefully planned and executed. (ref: 2) The hallmark of truly great companies is that they have the discipline to hold back and moderate their growth plans so as not to experience resource constraints and fatigue, or end up in financial difficulties during lean times when the cash they accumulated during bumper years is all but exhausted.
Steinhoff’s extremely rapid acquisition drive, particularly in more recent years, was clearly unsustainable. The nature of its investments (large, new regions and new product lines) signalled a high-risk approach which should have raised more questions from shareholders and the board about the company’s ability to sustain all the new acquisitions and ensure their profitability.
Although strong growth always seems impressive, it does not equal cash flow or profits. Such was the case with Steinhoff whose frenetic investment activity concealed highly complex business structures, high levels of debt and less-than-stellar performance within the Steinhoff group. The management team, and Markus Jooste in particular, painted a picture of a fast-growing and practically invincible corporate giant which was too good to be true, and this should have set off alarm bells among different stakeholder groups.
Lesson #3: Strong governance is not just about financial and regulatory compliance; it is a mindset
Most organisations extol
Lesson #1: Be true to your strategic vision and ‘stick to the knitting’
Strategy theory suggests (ref: 1) that strategy development over time is more about making wise choices initially and deepening one’s competitive position than going too broad and trying to be all things to everyone.
Although the diversity of the Steinhoff businesses might give some people the impression that the company lacks a core identity and has chased acquisitions in a somewhat random fashion, the company’s long-term vision has always been to control its various value chains, thereby moderating costs, keeping competitors at bay and striving for ever-higher levels of efficiency and market share.
This is an important element in its fundamental strategy of sourcing and manufacturing goods in low-cost countries and selling them to value-conscious buyers in more lucrative markets.
Former Steinhoff chairman Christo Wiese and the company’s executives appear at a parliamentary hearing into the Steinhoff scandal on January 31, 2018 in Cape Town, South Africa. Replying to questions, Wiese said, detecting fraud within a company was hugely difficult for board members‚ especially if the CEO was allegedly involved. (Netwerk24 / Adrian de Kock)
Although Steinhoff’s operation is today very geographically dispersed and it has progressed from being primarily a furniture supplier to a more holistic supplier of ‘lifestyle’ products, the company has not deviated too far from its fundamental business strategy and target market. In making the strategic choice to expand its product and service offerings but operate as a vertically integrated business, Steinhoff acknowledges that benefits can be derived from moving almost seamlessly into ‘adjacent market space’ using its pre-eminent position in related value chains.
Whereas a horizontal integration approach would require a business to operate alongside myriad other businesses in a ‘value chain neighbourhood’, with a vertical integration approach Steinhoff effectively ‘owns the neighbourhood’.
Lesson #2: Growth does not equate to profit or success
Organisations that deliver consistently strong performance over extended periods of time invariably practise a controlled growth strategy in which future expansion and investments are carefully planned and executed. (ref: 2) The hallmark of truly great companies is that they have the discipline to hold back and moderate their growth plans so as not to experience resource constraints and fatigue, or end up in financial difficulties during lean times when the cash they accumulated during bumper years is all but exhausted.
Steinhoff’s extremely rapid acquisition drive, particularly in more recent years, was clearly unsustainable. The nature of its investments (large, new regions and new product lines) signalled a high-risk approach which should have raised more questions from shareholders and the board about the company’s ability to sustain all the new acquisitions and ensure their profitability.
Although strong growth always seems impressive, it does not equal cash flow or profits. Such was the case with Steinhoff whose frenetic investment activity concealed highly complex business structures, high levels of debt and less-than-stellar performance within the Steinhoff group. The management team, and Markus Jooste in particular, painted a picture of a fast-growing and practically invincible corporate giant which was too good to be true, and this should have set off alarm bells among different stakeholder groups.
Lesson #3: Strong governance is not just about financial and regulatory compliance; it is a mindset
Most organisations extol
