Accelerating Revenue Growth
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The document discusses five principles for achieving sustainable double-digit revenue growth in any industry: 1. Improve customer base retention by enhancing customer satisfaction and value while reducing costs. 2. Focus on gaining market share by targeting vulnerable competitors and winning over their customers. 3. Identify and focus on the fastest growing market segments. 4. Expand into adjacent markets that have similar but not identical customer and cost attributes. 5. Invade new lines of business, though this carries the most risk due to lack of synergies with existing businesses. The document provides examples of how these principles were successfully applied to dramatically increase revenue and market share at Encoda Systems, restoring profitability within 17 months through
Accelerating Revenue Growth
- 1. Accelerating Revenue Growth Five Winning Principles for Achieving Sustainable Double-Digit Revenue Growth in Any Industry By Steven A. L’Heureux slheureux@rocketmail.com +1 (949) 422-1437
- 2. Special Report Accelerating Revenue Growth Page 2 The Challenge: Driving Double-Digit Growth in a Slow Growth Market Achieving high growth in a strong market is relatively easy; a rising tide raises all ships. But how do you wring double-digit growth out of a market that’s growing at only a single digit rate? Only one of the six major market segments within the Media and Entertainment industry is expected to top 10% CAGR (Compounded Annual Growth Rate) between 2006 – 2011 according to recent research published by PricewaterhouseCoopers. Driving double-digit revenue growth in the media technology market is going to be extremely challenging over the next few years. 2006 2011 CAGR Internet Access & Advertising $177 Billion $332 Billion 13.4% TV Networks (Broadcast & Cable) $172 Billion $228 Billion 5.8% TV Distribution $161 Billion $251 Billion 9.3% Sports (Gate & Media Rights Fees) $96 Billion $124 Billion 5.2% Filmed Entertainment (All Outlets) $81 Billion $103 Billion 4.9% Video Games (Consoles/Games/Online) $32 Billion $49 Billion 9.1% So why be concerned? Should you just accept a brief period of slow growth as part of the normal business cycle? Of course, the answer is an emphatic, “No”! Michael Treacy wrote in his book entitled Double-Digit Growth, “Growth is the oxygen of business, the key to business life or death. Growing enterprises thrive; shrinking companies vanish”. Fine, so revenue growth is good, we can all agree with that basic premise. But, how does one go about making growth happen in a challenging market? Based on his eight years of research, Treacy identified five key disciplines for driving double-digit growth: (1) Improve customer base retention, (2) Focus on market share gain, (3) Show up where growth is going to happen, (4) Penetrate adjacent markets, (5) Invade new lines of business. The key to a successful growth strategy is to develop initiatives across multiple disciplines, thus creating a broad portfolio of plans. However, having the intellectual understanding of what to do to grow your business is one thing; having the talent within your organization to execute is quite another. This special report documents how these disciplines were applied by the author with great success at Encoda Systems’ broadcast automation division, a troubled business that was struggling with four years of declining revenue and seven-figure EBITDA losses. The turnaround results were stunning. Within 17 months, revenue jumped 145% and EBITDA increased 240%, restoring profitability. Skillfully applying the principles outlined in this report can have the same profound impact on your business as well. “Within 17 months, revenue jumped 145% and EBITDA increased 240%…Skillfully applying the principles outlined in this report can have the same profound impact on your business as well.”
- 3. Special Report Accelerating Revenue Growth Page 3 Principle 1: Improve Customer Base Retention Having spent my entire career selling complex technology solutions, I can attest that the easiest sale is to an existing satisfied customer. Why? If you’ve served your customers well, the established trust relationship affords you a decided advantage over your competition for winning future business. Having sold to a customer previously, you know the various players involved in the buying process: who has buying influence, who are the important recommenders, who are the key users of your product/services and who will make the final decision. If you’ve done your job particularly well, you’ll also have an internal champion to advise you and tilt the playing field even further to your advantage. Simply put, the deck is stacked heavily in your favor if your organization is methodically collecting, documenting and leveraging this critical customer information for future use. Note, the key phrase in the previous paragraph is, ‘if you serve your customers well’. To retain your customer base and reap the resulting financial rewards, in addition to staying close to your customer, you must also continually improve your value proposition and make switching to a competitor costly. Frankly, this was the strength of Encoda’s automation business prior to my arrival as the new President. In 2003, 93% of Encoda’s revenue came from existing customers. The customer base was tiny, but extremely loyal despite Encoda’s aging and highly proprietary technology. Customers were reluctant to switch away from Encoda because there were few ready alternatives. Since its inception, Encoda had dedicated a significant portion of its software development resources to customer requested custom functionality. Each time Encoda agreed to deliver a customized software feature for an individual customer, that customer became further entangled in the business relationship, ultimately making switching extremely difficult. Encoda also demonstrated unmatched flexibility with respect to after-sale support and product maintenance. Support contracts were highly customized, often incorporating expensive concessions that most competitors simply wouldn’t or couldn’t match. The challenge was to retain the outstanding customer loyalty enjoyed by Encoda, but do it more cost effectively so the company could quickly return to profitability. Four key programs were implemented: 1. A vast array of custom support contracts were replaced with a three-tier customer support program built upon value-based pricing. This dramatically reduced costs and increased revenue per customer. “While selling to an existing customer may be the easiest sale you’ll ever make, winning an account from a competitor will most likely be the toughest revenue you’ll ever earn.”
- 4. Special Report Accelerating Revenue Growth Page 4 2. A global customer relationship management system (CRM) was deployed to capture and more effectively leverage customer information. Key customer support metrics were established and monitored. For the first time, Encoda could now methodically measure and continually improve customer satisfaction using hard data from the CRM system as its yardstick. 3. ‘One-off’ software releases tailored to individual customers, and the associated support costs, were eliminated by training the sales force to be more skilled at negotiating away ‘custom’ feature requests. A senior product manager and the VP of technical services were assigned key gate keepers as part of a rigorous new process for managing the product roadmap. New features that did make the general product release were aggressively marketed to Encoda’s entire customer base at ‘value-based’ pricing levels. 4. Product installation efficiency and quality were improved by implementing a more sophisticated system test and assembly operation as well as establishing a dedicated SQA function leveraging state-of-the-art tools and methodologies. By measuring and continually improving customer satisfaction as well as providing high value services and product enhancements to its customer base, Encoda continued to enjoy a near perfect customer retention rate while shifting away from its most unprofitable practices. These changes generated 84 percent revenue growth just from within the existing customer base. Furthermore, the processes and controls implemented not only reduced service support costs and helped dramatically improved profitability; they also served as a vital foundation for cost effectively scaling the business as the company’s growth accelerated. Question: Is there more your company can be doing to retain its customer base while maximizing the revenue and profit potential it represents? Principle 2: Focus on Market Share Gain This principle is all about stealing market share away from competitors. While selling to an existing customer may be the easiest sale you’ll ever make, winning an account from a competitor will most likely be the toughest revenue you’ll ever earn. In business to business high technology sales, to convert competitive users typically requires both a substantially better value proposition and a complacent competitor. Therefore, the first step in growing market share is to identify a vulnerable competitor. Encoda had plenty of options, the National Association of Broadcasters (NAB) supplier directory lists 88 companies engaged in television/newsroom automation. Of that list, six companies had a sufficient market share that justified targeting; and one, Harris Corp., was especially vulnerable. 0 5 10 15 20 $10,300,000 $18,900,000 USDollars Millions 2003 2004 Customer Base Revenue Increased $8.6 Million
- 5. Special Report Accelerating Revenue Growth Page 5 Harris had acquired Louth, the granddaddy of all broadcast automation companies, when most master control facilities still managed only one or perhaps a few broadcast channels. After the acquisition, Harris continued Louth’s tradition of competing on the merits of their impressive library of device control utilities. However, Harris had done an especially poor job of keeping its technology current with the emerging trend of multi-channel digital operations. The plan was to target Harris’ largest automation customers with Encoda’s highly scalable D-Series solution. An aggressive marketing campaign including sales team incentives, marketing communication messages and product promotions was launched specifically to exploit Harris’ weaknesses. As President of the division, I personally traveled around the world visiting Harris customers making the Encoda pitch. The resulting program was a huge success. Encoda won over a significant number of Harris customers, including Harris’ flagship accounts in both North America and Japan. Encoda’s market share grew from 10% to 25% of the total market in less than two years, according to Broadcast Projects International, Ltd. (BPI), a leading UK based industry research firm. Question: What market share gain is your company enjoying by attracting new customers from competitors? Principle 3: Show up Where Growth is going to Happen This principle is all about market segmentation and positioning – classic marketing stuff. The key to successful market positioning is to identify and stake out the new hot segments in your industry before your competitors. There are leading indicators of new fast-growth market segments you can sometimes spy, such as shifts in customer buying criteria. However, to consistently spot positioning opportunities, your company must have a systematic approach to managing the segmentation process and possess broad industry expertise beyond your own markets. Classic market segmentation was once considered the exclusive domain of consumer marketing, but it has also been applied in commercial technology markets with great effect. At both Odetics Broadcast and Encoda Systems, we executed detailed market segment quantification and financial modeling to determine product development, positioning and pricing strategy. Some of the key elements of the market segment analysis included: size of market, market segment trend (growing/flat/declining), market functional requirements, market requirement fit with existing product functionality/roadmap, competitive landscape, anticipated margins, access to market (existing or potential sales channel), consistency with company vision, other market upsides and risks. 0% 50% 100% 2003 2004 Market Share Increased 15 points 25% Share 10% Share
- 6. Special Report Accelerating Revenue Growth Page 6 Applying a rigorous market segmentation methodology at both Odetics Broadcast and Encoda Systems resulted in dramatically improved business performance over a very short period of time. For example, at Odetics Broadcast, gross margins skyrocketed (22% to 56%), software revenues jumped 21% and a $5.4 million annual EBITDA loss was erased. At Encoda Systems, a similar market analysis process pointed to focusing on the DTH (Direct To Home) market segment. While industry wide television growth projections were essentially flat, research conducted by Euroconsult, an International consulting firm specialized in satellite communications and broadcasting, showed that the DTH segment was expected to grow from approximately 5,000 channels worldwide in 2001 to over 41,000 channels by 2010. Gaining the critical first mover advantage and effectively executing a targeted marketing campaign, Encoda dominated the fast growth DTH segment resulting in an astounding new customer revenue growth of 10X. Question: What level of market segment analysis has been done for your business and what contribution has it made to your company’s top-line growth? Principle 4: Penetrate Adjacent Markets Market adjacency is all about creating growth by expanding your total addressable market (TAM). But it’s a subtle concept, so perhaps the best way to begin a discussion of this principle is with a definition of an adjacent market. Markets are characterized by a commonality in key attributes such as product needs, customers, cost structure and competitors. Slight variations in one or more of the characteristics create market segments within the same market. Significant differences in some, but not all market attributes creates separate, but adjacent markets. For a broadcast master control room automation company like Encoda, pursuing Direct to Home (DTH) master control automation opportunities was a market segmentation strategy. Encoda’s decision to pursue network monitoring solutions incorporating sophisticated transport stream and service path analysis tools, as described later in this section, represents an adjacent market strategy. While the customers and cost structure were similar to the automation market, the product needs and competitors in the network monitoring market were dramatically different. “An adjacent market strategy is a high risk move because it potentially takes your company outside its core competencies and comfort zone.” $- $5 $10 $770,000 $8,100,000 USDollars Millions 2003 2004 New Customer Revenue Increased $7.3 Million
- 7. Special Report Accelerating Revenue Growth Page 7 An adjacent market strategy is a high risk move because it potentially takes your company outside its core competencies and comfort zone. As Treacy points out in his book, “Adjacent growth is a challenging business. Many companies have failed in their attempts to conquer neighboring markets”. So why take the risk? There are two principle motivations for pursuing an adjacent market strategy: (1) you’re caught in a stagnant market and need to break out or (2) you’re enjoying great success and want to leverage your superior operating model. Encoda had executed the growth strategies described earlier in this report brilliantly, driving the company to a 25% share of an essentially flat market. However, continued share expansion in the core automation market was going to become increasingly challenging. Pursuing an adjacent market strategy was the next logical step in the company’s quest for sustainable double-digit growth. Once you’ve decided to pursue an adjacent market strategy, you need to identify potential opportunities and begin an evaluation process. As a starting point in your process, Treacy offers three key questions for assessing adjacent markets: (1) is it a promising market, (2) can you win in this market, and (3) can you create exceptional value for both your customers and investors? The market segmentation analysis criteria outlined in the previous principle can also aid in evaluating adjacent markets. You also must carefully consider the likely competitive response before entering an adjacent market. Entrenched competitors should be expected to fight vigorously to protect their turf and push out any new entrants. Once a high potential adjacent market is identified, you should also explore the make versus buy alternatives. Based on our analysis at Encoda, we selected two adjacent markets in the broadcasting space to pursue: network monitoring and digital asset management. We elected to build the monitoring solution organically, and introduced it as the VeriStream product at the 2004 IBC tradeshow in Amsterdam. In July of 2004, Encoda acquired Arkemedia Technologies, an asset management company based in the UK. Combined, these two new adjacent market opportunities would shift Encoda automation from a stagnant $100 million total addressable market to a rapidly expanding total addressable market four times larger than its core automation market. Both businesses initiated via our adjacent market strategy were exceeding expectations and had begun contributing revenue growth when Encoda was itself acquired by Harris in November, 2004. Question: What are your fastest growing adjacent markets and how can you exploit them to your company’s advantage? 0 100 200 300 400 500 USDollars Millions Total Addressable Market Increases from $100 to $400 Million Monitoring D.A.M. Automation
- 8. Special Report Accelerating Revenue Growth Page 8 Principle 5: Invade New Lines of Business The ‘Invading new line of business’ growth strategy is about seeking new opportunities in markets that share nothing in common with your currently served markets. Odetics, Inc., the parent company of Odetics Broadcast, provides a good example. While I was with the company, Odetics owned businesses in television broadcast, home security, municipal traffic management, IT infrastructure technology and a US government contractor. There was absolutely no synergy or sharing of resources among businesses. Entering new markets typically provides little opportunity to leverage the core competencies of your existing businesses; thus the risk associated with this type of growth strategy is off the charts. As a result, this strategy is normally the path of last resort for all but those organizations that make a living out of acquiring businesses. In fact, successfully executing a new line of business growth strategy is more of an investment exercise than a management challenge. Companies that successfully grow new lines of business have deep expertise in: (1) selecting and valuing businesses, (2) deal structure and financing, and (3) exerting financial, managerial and strategic control over the new business. So given the risks associated with this strategy, why do companies pursue this growth path? Danaher, a diverse industrial company, leverages this fifth growth principle with great success. Textronix, acquired by Danaher in November of 2007, is the latest addition to its impressive collection of companies. In fiscal 2007, Danaher generated $11 billion in sales, a 16.5% increase over the previous fiscal year, and delivered $1.12 earnings per share (EPS) from operations, a 19% increase over the previous fiscal year. Generally regarded as one of the best managed companies in the world, Danaher acquires for the long haul, infusing its management philosophy and operational methodologies into each newly acquired business. Built upon the concept of Kaizen or continuous improvement, Danaher relies on a proven and repeatable business process called the ‘Danaher Business System’ (DBS) designed to unlock significant incremental shareholder value in its newly acquired businesses. Danaher’s website describes it well, “Success at Danaher doesn't happen by accident. We have a proven system for achieving it. We call it the Danaher Business System (DBS), and it drives every aspect of our culture and performance. We use DBS to guide what we do, measure how well we execute, and create options for doing even better -- including improving DBS itself.” As Danaher shareholders surely would attest, when executed well, a company growth strategy of entering entirely new markets can pay-off handsomely. Question: Does your company have the necessary ‘investment mentality’ to successfully execute a new market growth strategy? “...successfully executing a new line of business growth strategy is more of an investment exercise than a management challenge.”
- 9. Special Report Accelerating Revenue Growth Page 9 Conclusion: Leadership is the Key Within 17 months, Encoda’s Automation division rose from the crowded ranks of second-tier competitors to market share leadership. This growth was achieved despite a flagship product built upon highly proprietary and aging technology. With double-digit revenue growth providing the resources to aggressively invest in the product portfolio; Encoda developed a powerful next generation, standards- based broadcast automation solution. This new flagship product advantageously positioned the company to capture even greater market share from its competitors and drive a new cycle of double- digit growth. However, sound methodologies alone can’t deliver high performance results. It also requires leaders with high personal standards, that model the behavior necessary to drive outstanding results and that can cultivate a shared passion for excellence throughout an organization. To duplicate the results described in this report, you should seek out and promote individuals that are comfortable with risk taking, setting aggressive goals and leading in the face of uncertainty. Together, sound methodologies and strong leadership can combine to drive accelerated revenue growth in any market or industry. About the Author: Mr. Steven L’Heureux is a results-oriented, technology-savvy global business executive with a history of driving double-digit growth and turning around underperforming technology organizations. He possesses deep expertise in every facet of turning around and growing a business: strategic planning; global team building; market, technology, and financial analysis; multi-channel sales and marketing; leadership of multi- site worldwide operations; as well as mergers and acquisitions. Steven’s C-level and operations leadership experience is augmented by a strong background in sales and marketing, ensuring a customer focus that translates to winning growth strategies and rapid revenue gains. An accomplished global leader, he has lived and worked overseas and conducted business in Europe, Asia Pac, Middle East, and Latin America. Steven graduated magna cum laude (high honors) with a Bachelor of Arts degree in Economics from the University of Wisconsin-Whitewater. Contact Information: Steven L’Heureux Mobile: +1 949-422-1437 Email: slheureux@rocketmail.com LinkedIn profile: www.linkedin.com/in/slheureux Note: You are welcome to copy and distribute this special report as often as you wish; it is only requested that you please include the author’s information page when doing so. Thank you.