Figure 6.1 presents a summary of key drivers of revenue growth. Revenue growth arises from two sources: growth resulting from internal activities and growth resulting from acquisitions. Growth resulting from internal ac- tivities is often referred to as organic growth. Growth resulting from acqui- sitions will have very different drivers and economic characteristics from organic growth. The economics of acquired growth are covered in detail in Chapter 12, on the economics of mergers and acquisitions (M&A). We will focus on organic growth for the remainder of this chapter. Organic growth may result from growth in the overall size of the market, by gaining share from competitors within the market, or by entering new markets.
Market
Whether chosen by luck or as a result of great strategic thinking, the market(s) that a company serves will be a key driver in determining potential sales growth. Some markets are mature and will grow at slow rates. Others are dri- ven by external forces that will result in high growth rates for a number of
93
years. In markets with high growth rates, even marginal competitors may thrive as all market participants are raised by the incoming “tide.”
Competitive Position
Within a market, the competitive environment and the competitive posi- tion of a particular company will determine its ability to grow by increas- ing market share. A number of factors will determine a company’s competitive position, including innovation, customer satisfaction and ser- vice, cost and pricing, and the number and size of competitors. Analysis of competitive position should be performed from a customer’s perspective.
What are the key decision criteria that drive a customer’s purchase evalua- tion and decision? Analysis of competitive position is a relative concept; it is the performance of a company on key factors relative to other firms of- fering similar products or services.
Innovation Innovation can be a leading source of competitive position. In- novation should be considered in broad terms and not simply limited to product performance. In addition to product innovation, firms such as Dell
94 LINKING PERFORMANCE AND VALUE
FIGURE 6.1 Drill-Down Illustration: Revenue Growth Drivers
Shareholder Value
Revenue Growth
Current Markets Served Potential Markets
Market Share
Drivers: Market Acquisition Process
Pricing Competition Innovation Customer Satisfaction
Competitor Growth Lost Orders ASP/Discounts
Market Share R&D Productivity
Market Size and Growth Pricing
Product Mix
Competitor Actions New Product Size
Growth Attractiveness
Covered in Chapter 12 Strategy
Organic Growth Aquired Growth
Metrics: Key Assumptions Revenue Planning:
Revenue growth is generally the most important driver of stock performance over the long term.
have differentiated themselves by radically changing the customer fulfill- ment and supply chain processes to redefine the business model within an industry. Innovations in marketing or packaging can also produce a signifi- cant advantage leading to revenue gains.
Customer Satisfaction Customer satisfaction plays a vital role in revenue growth in three ways. First, customer satisfaction will always be a key fac- tor in retaining existing customers. Second, customers that are satisfied with a supplier’s performance are likely to offer additional opportunities to that supplier. Third, a strong reputation for customer satisfaction and un- derlying performance may also lead to opportunities with new customers.
Most markets are small worlds with key customer personnel changing companies. Satisfied customers will often pull a high-performing vendor along with them.
Customer Service Many companies compete by providing outstanding service beyond the traditional customer satisfaction areas such as delivery and quality performance. Working with customers to solve their problems and participating in joint development programs are both examples of in- vestments that build long-term customer loyalty.
Cost or Pricing Advantages Price is nearly always a key factor in a cus- tomer’s procurement decision. The price of a product or service will be dri- ven by the cost of the product, profit targets, and market forces.
The cost of a product or service includes direct and indirect costs.
Prices are often set by marking up or adding a profit margin to the cost to achieve a targeted level of profitability or return on invested capital (ROIC). The actual price will have to be set in the context of market forces, including price-performance comparisons to competitor products.
Suppliers can attain a cost advantage in a number of ways, including achieving economies of scale, process efficiencies, or improvements in qual- ity. Most sophisticated customers look at the total life cycle cost of a pro- curement decision, of which the product selling price is one component.
Other elements of life cycle cost may include installation and training, ser- vice, maintenance, and operating and disposal costs. Suppliers that can demonstrate a lower life cycle cost can achieve an advantage over competi- tors, even if the product price component is more expensive.
Competitor Attributes and Actions The performance of competitors in the areas that are important to customers will have a big impact on a com- pany’s ability to grow or even maintain sales. It is not meaningful to pro- ject or evaluate revenue projections without a view of competitor
intentions, tendencies, and actions. What is the competitor’s strategy? How will its financial performance impact its performance in the market? If the competitor has other related businesses, how does that impact its ability to serve this market? What new product or service will the competitor intro- duce? How will the competitor respond to the introduction of a new prod- uct? Do competitors define the market differently? What new competitors may enter the market?
Many revenue projections are prepared without fully considering the answers to these questions. Revenue from new products is assumed to gain market share, without reflecting the competitor response. Again, the value in planning is not found in the precise quantitative values on the spread- sheet, but rather in the evolution in thinking as a result of the planning process.
Entering New Markets: Opportunities to Broaden or Migrate to Other Segments
Many companies have been successful at growing over extended periods of time. In addition to growing with their primary market and gaining share within that market, companies have found ways to expand the size of the market they serve by moving into adjacent markets. Dell, for example, leveraged its competencies in distribution and supply chain management to expand its market from personal computers to other consumer electronics.