Sustained and Profitable Double-Digit Growth Michael Treacy April, 2006 Michael Treacy GEN3...

Sustained and ProfitableDouble-Digit Growth

Michael Treacy

April, 2006

Michael TreacyGEN3 Partners, [email protected]

2Copyright Treacy & Company, 2006

Indian’s best known companies are growing spectacularly

1998 1999 2000 2001 2002 2003 2004

$3B

$1B

$2B

$4B

59.8% C

ompound A

verage R

evenue Gro

wth

2005

$5B

$6B Infosys Revenue History


The BSE Sensitive Index has reached record highs

65% CAGR


India’s economy has averaged 6.8% growth since 1994and more than 8% growth most recently


TRIPLE

Indian


Can your firm grow at double-digit rates?

Market Opportunity

Market Opportunity

• The demand isn’t there

Operational Capacity

Operational Capacity

• We couldn’t add that much capacity

Management

Discipline

Management

Discipline

• I don’t have the management system to grow

Most companies only see barriers to growthMost companies only see barriers to growth

Financial CapacityFinancial Capacity

• We couldn’t afford the cash costs

Competitor ResistanceCompetitor Resistance

• We’d start World War III


Diverse companies are achieving even stronger growth

• H&R Block (27.2%)

• Lowes (21.2%)

• Medtronic (17.0%)

• Johnson Controls (13.9%)

EmergingStars

EmergingStars

• Wal*Mart (15.6%)

• Harley Davidson (18.4%)

• Starbucks (25.9%)

• Southwest (11.3%)

GrowthCelebrities

GrowthCelebrities

• Mohawk (12.4%)

• Paychex (19.0%)

• Oshkosh Truck (20.6%)

• Biomet (13.8%)

Little KnownSuccesses

Little KnownSuccesses


Key Findings

Why should customers do business with you?

Why should customers do business with you?

• Commit to superior customer value in everything you do


ResultsExpertise

Price

Hassle-Free

Uniquely BetterProduct

Why should customers do business with you?Why should customers do business with you?

Unmatched Customer Value

Products“What we

sell”

Service“How we do business”

Costs Benefits


Operational ExcellenceOperational Excellence Customer IntimacyCustomer Intimacy

Product LeadershipProduct Leadership

“Best Total Cost” “Best Total Solution”

“Best Product”

Leadership and Threshold Customer Value

OperationalCompetence

Customer Responsive

Product Differentiation

Copyright Treacy & Company, 2006

Value Leadership is built on Operating Model innovations

Component Supplier

Component Supplier

Raw Material

AssemblyFinished Goods DistributorDistributor DealerDealer

Traditional PC Manufacturer

AssemblyAssembly

Dell

Component Supplier

Component Supplier

Sell Direct

Build to Order

IntegrateSuppliers


10 20 30 40 50 60 70 80 90 100 110

10

20

30

40

50

60

70

80

90

100

110

Labor Productivity

GD

P p

er C

apit

a

USA (1996)

India (2000)

Russia (1999)

Brazil (1997)

Poland (1999)

South Korea (1997)

Japan (2000)

United Kingdom (1998)

France (1996)

Germany (1996)

Source: Economist Magazine, OECD, McKinsey


Operational ExcellenceOperational Excellence Customer IntimacyCustomer Intimacy

Product LeadershipProduct Leadership

“Best Total Cost” “Best Total Solution”

“Best Product”

Leadership and Threshold Customer Value

OperationalCompetence

Customer Responsive

Product Differentiation


Customer Intimacy – The architecture of a total solution

Basic Products & Services(the things we’re all good at doing)

What every-one offers

“Why we’re highly qualified”

BusinessProblems

Why do you need us as a partner?

“Our point of view on how to solve customer problems”

Enabling Programs

(things that drive client performance)

How do we drive results for you?

“Our programs that creatively address root

causes of your problems”


CommodityProducer

CommodityProducer

MarketingAsserter

MarketingAsserter

FeaturesImprover

FeaturesImprover

BreakthroughDriver

BreakthroughDriver

Fast CycleInnovator

Fast CycleInnovator

Incrementally better product

Improved!! (not really)

Cheap and easy

Accelerating innovation

Redefining the product

Procter & GambleKellogg’sStore Brand Nokia Genentech

Example Consumer Goods Company

incremental routine & minornone fundamental breakthrough

Typical level of product innovation

Product/Service Innovation is Intensifying in many markets


1

10

100

1000

10,000

Num

ber

of I

deas

1 2 3 4 5 6 7

Stage of New Product Development Process

3000 Raw Ideas (Unwritten)

300 Ideas Submitted

125 Small Projects

9 Early Stage Devel.

4 Major Devel.

1.7 Launches

1 Success

Source: G. Stevens and J. Burley, “3000 Raw Ideas = 1 Commercial Success!” Research•Technology Management, 40(3): 16-27, May-June, 1997

Product Innovation is an inefficient and ineffective process


Key Findings


• Focus on five, and only five, sources of revenue growth


Share Gain

Share Gain

• The toughest way to grow – to win, someone else must lose • Use better value to take business directly from competitors

There are only five sources of revenue growth

Base Retention

Base Retention

• To grow we first have to stop shrinking• Exploit the advantages of incumbency

Market Positioning

Market Positioning

• Half of success is showing up where growth is going to happen• Find the new growth segments before anyone else

Adjacent Markets

Adjacent Markets

• Attack neighboring markets• But, only when immediate and practical advantage is in hand

New Lines of Business

New Lines of Business

• Acquire in unrelated markets• But, only when management has superior investment skill


Key Findings



• Manage a portfolio of growth opportunities


How might your business grow 20% per year?One illustration

0.0

10.0

20.0

Per

cen

tag

e R

even

ue

Gro

wth

switc

h clie

nts

in-li

ne ac

quisiti

ons

3%2%

ShareGain

inte

rnal

innova

tions

adja

cent a

cquis

itions

3%

4%

AdjacentMarkets

reta

in c

lient b

ase

0%

BaseRetention

new L

OB acq

uisiti

ons

0% 0%

New LinesOf Business

transf

ormat

ional

innova

tion

shift

to g

rowth

seg

men

ts

mar

ket s

egm

ent a

cquis

itions

3%5%

Market Position


Key Findings



• Manage a portfolio of growth opportunities

• Build the management discipline to grow


Culture

Leadership

Recruitment & Development

Deployment Incentives

Are our people focused on the right measures of performance that will drive growth?

Do we have our best talent in the roles where they will have the biggest impact?

Do we have enough talent to “fund” our growth initiatives?

Do our shared attitudes and beliefs about risk

taking and collaboration support our growth

ambitions?

People processes are key enablers of growth


Build the management discipline to grow

• Talent Management

– Recruiting, development, deployment, and retention built for where we’re going, not where we’ve been

• Innovation Management

– management that allows us to identify, create, test, refine, and deliver improvements in customer value quickly and effectively

• Performance Management

– Management control built on actionable revenue information and root cause analysis of performance shortfalls


Better information is needed to manage growth

Prior Period Revenue $7,689.0

Revenue Lost to Churn (9.0) -0.1%

Base Retention Revenue $7,680.0 99.9%

Share Gain Revenue (0.1) 0.0%

Market Positioning Revenue 9.7 0.1%

Adjacent Market Revenue 7.5 0.1%

New Line of Business Revenue 4.5 0.1%

Current Period Revenue $8,721.0 13.4%


Everyone should use a Sources of Revenue Statement

Prior Period Revenue $7,689.0

Revenue Lost to Churn (1,692.0) -22.0%

Base Retention Revenue $5,997.0 78.0%

Share Gain Revenue 1,647.0 21.4%

Market Expansion Revenue 1,076.0 14.0%

Adjacent Market Revenue 0.0 0.0%

New Line of Business Revenue 0.0 0.0%

Current Period Revenue $8,721.0 113.4%


Performance complexity grows along three dimensions

Structured Unstructured

ExtendedEnterprise

Individual

SmallGroup

Enterprise

ExtendedTeam

Stable

Chaotic

Degree of Work Complexity

Sco

pe

of

Org

aniz

atio

n C

om

ple

xity

Degree of E

nvironmental C

omplexity


Performance complexity grows along three dimensions

Structured Unstructured

ExtendedEnterprise

Individual Stable

Chaotic

Degree of Work Complexity

Sco

pe

of

Org

aniz

atio

n C

om

ple

xity

Degree of E

nvironmental C

omplexity

System of Effe

ctive A

daptation

Sys

tem

of

Eff

ecti

ve A

lign

men

t

System of Effective Routine


Conclusions

• Growth opportunities abound

• The challenge of growth isn’t in the marketplace – it’s in the management team

• Growth demands a management discipline - just like cost control

• Engage the whole management team in the challenge of growth

• Certain principles underlie all forms of growth:

– Your choice of markets shapes your fate.

– New revenue only comes from customers

– The best management team beats the best strategy every time

Sustained and ProfitableDouble-Digit Growth

Michael Treacy

January, 2006

Michael TreacyGEN3 Partners, [email protected]

Triple

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