Michael Treacy. Chief Strategist GEN3 Partners, Inc.

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2 Michael Treacy Chief Strategist GEN3 Partners, Inc.

3 Double-Digit Growth Michael Treacy GEN3 Partners, Inc. October, 2003

4 A Short Quiz Since 1997, which has grown faster, Intel or inflation? After spending $100 billion on acquisitions, were AT&T s revenues (a) higher, (b) about the same, or (c) lower? In 1997, Proctor & Gamble s CEO declared they d double the business in 7 years. Based on actual growth rates, how many more years do they have to go? 2 years, 12 years, or 25 years? Is Caterpillar now the #2 or #3 maker of farm equipment? IBM has grown service revenues at double-digit rates. True or false?

5 Could my business grow at double-digit rates? Most companies only see barriers to growth Market Opportunity Competitor Resistance Operational Capacity Financial Capacity Management Capacity The demand isn t there unless I m in high tech... and the high tech market isn t what it once was We d start World War III if we tried to grow at that pace. Things would get really ugly in our industry. We couldn t begin to add that much capacity to the business in a single year. The wheels would fall off We couldn t afford the cash costs of that kind of growth I don t have the team that could manage that much growth

6 But many firms are achieving steady double-digit growth Growth Celebrities Emerging Stars Little Known Successes Wal*Mart (15.6%) Harley Davidson (18.4%) Starbucks (25.9%) Southwest (11.3%) H&R Block (27.2%) Lowes (21.2%) Medtronics (17.0%) Johnson Controls (13.9%) Mohawk (12.4%) Paychex (19.0%) Oshkosh Truck (20.6%) Biomet (13.8%)

7 What Does it Take to Grow at Double- Digit Rates? Key Question How It s Answered Value Leadership Why will customers do business with us? Deliver superior customer value Growth Strategy How are we going to achieve fast growth? Create a comprehensive growth strategy Growth Execution How do we reach those customers and gain their business? Manage an effective sales system

8 Formal study of 130 companies 80 fast growing companies The Study consistent double-digit growth from , or Average growth rate from greater than 12 percent 50 high profile, slow growing firms drawn from Fortune 500 list Explored two questions: What distinguishes the strategies of high growth firms? What distinguishes the management capabilities of high growth firms?

9 Key Findings Commit to superior customer value in everything you do Choose your value discipline Better value year after year Why should customers do business with you? Is your value proposition significantly better than it it was five years ago?

10 Key Findings Commit to superior customer value in everything you do Choose your value discipline Better value year after year Focus on five growth disciplines

11 Base Retention There are only five sources of revenue growth Keeping more of your current customers To grow we first have to stop shrinking Share Gain Use better value to take business directly from competitors The toughest way to grow to win, someone else must lose Market Positioning Half of success is showing up where growth is going to happen Find the new growth segments before anyone else Adjacent Markets New Lines of Business Attack neighboring markets But, only when immediate and practical advantage is in hand Acquire in unrelated markets But, only when management has superior investment skill

12 Key Findings Commit to superior customer value in everything you do Choose your value discipline Better value year after year Focus on five growth disciplines Manage a portfolio of growth opportunities Hedge the risks of any one growth tactic by investing in many initiatives Decompose the challenge of double digit growth into several smaller bites Balance organic and acquired growth initiatives

13 How might your business grow 20% per year? One illustration Base Retention 0% 3% Share Gain 2% Market Expansion 5% Adjacent Market Penetration switch clients Percentage Revenue Growth In-line acquisitions Internal innovations Adjacent acquisitions 10/28/2003 retertertertert 13 3% 3% 4% New Lines Of Business 0% 0% retain client base new rev from current clients new clients to the offer Transformational innovation new LOB acquisitions

14 Key Findings Commit to superior customer value in everything you do Choose your value discipline Better value year after year Focus on five growth disciplines Manage a portfolio of growth opportunities Hedge the risks of any one growth tactic by investing in many initiatives Decompose the challenge of double digit growth into several smaller bites Balance organic and acquired growth initiatives Build the management capacity to grow Management systems for managing a growth portfolio Operating capabilities for executing the five growth disciplines

15 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, % Share Gain Revenue (0.1) 0.0% Market Positioning Revenue % Adjacent Market Revenue % New Line of Business Revenue % Current Period Revenue $8, %

16 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, % Share Gain Revenue 1, % Market Expansion Revenue 1, % Adjacent Market Revenue % New Line of Business Revenue % Current Period Revenue $8, %

17 Conclusions Growth opportunities abound Break down the problem into manageable components Engage the whole management team in different elements of the growth portfolio Certain principles underlie all forms of growth: Your choice of markets shapes your fate. New revenue only comes from customers and they respond to one thing superior customer value The greater part of growth is built not on superior plans, but on superior management capacity

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