Running a business with booming demand (much of it funded through the public purse), and a big lead in market share and accessibility to consumers should be a license to print money.
That was certainly the logic behind the strong growth of stock market darling ABC Learning over the past few years down here in Australia. This firm modernised, aggregated and expanded a previously mum-and-dad (excuse the pun) business – childcare. They eventually ran more than 1200 childcare centres in Australia (upwards of 20% of the market), and another 800 or so in New Zealand, the US and the UK. Alas, it is has all gone very badly in the past 6 months or so for the firm and its founder. As of yesterday (November 6, 2008), they have gone into receivership (comparable to US-style Chapter 11).
So what went right and wrong?
In terms of the external environment in which this firm (let’s use Porter’s Five Forces) operated it looked like a great scenario:
– desperate buyers in the form of working parents often starved of local alternatives and increasingly subsidised by a complicit government
– low-paid employees with limited bargaining power
– a substantial first-mover advantage from securing properties in prime locations (creating a barrier to entry at the local level) and developing arrangements to supply services to corporate clients
– few relevant substitutes (stay-at-home parenting, nannies or grandparents)
– limited industry rivalry due to considerable market share advantage and the localised nature of competition.
So what wrong?
Here we see the issue of inadequate internal resources and capabilities. The systems and routines don’t appear to have been in place to adequately assess the merits of new properties and business lines (the firm had diversified into early primary education and also toys). General mangerial nous seems to have been scarce (it is a much bigger task running 1200 centres and 16000 employees than the 40 centres when the firm first went public). The financial management now looks incompetent (if not downright fraudulent). The international expansion was bold, but here also it may be that the firm underestimated the complexity of engaging in very different institutional environments, and mismanaged the huge financial risks of high borrowing in multiple currencies.
All in all, it turns out babysitting ain’t as easy it looks.