“Organic Growth-A value Creation Engine”

July 13, 2011 § Leave a comment

By George Daniels

Creating an effective organic revenue generator within a business entity adds greatly to the value of the business whether it is in the multiples/evaluations for an acquisition target or the contributor to earnings per share. This has never been truer than now where we are coming out of a deep recession. During the recession much effort has been put into “rightsizing” and improving operational efficiencies, but at the same time many of the products and services have aged within their individual life cycles which were already becoming shorter. Thus, there is a greater need to replenish the pipe line with new products and services or expand into new markets in order to organically grow and increase the value of the entity. This is particularly true with private equity firms where holding times have extended to five to ten years on numerous acquisitions.

Effective “Organic Growth Engines” are not the everyday staple in business today, but those that have them do exceptionally well. Just look at one of the premier players today, Apple. It was just a little over a decade ago that they languished with flat revenues and stock price. Today their “organic growth engine” (new products and new markets) has propelled them to revenues and a stock price which have increased more than tenfold!

For those entities wanting to create value this is a model and strategy worth considering.

It is the famous Peter Drucker who may have said it best:

Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation.”

“Marketing and innovation produce results; all the rest are costs…”

There are numerous CEO’s that turn around finanicially ailing entities, but it is the next steps in which CEO experience is in short supply.

Getting the house in order is tough, but it is more difficult to decide what you want to be (the new products and markets and customers) and then even harder to define and execute getting there. If it were easy all companies would be successful and have longevity.

After spending time studying “the successful” companies only to find many do not exist anymore, The Plexius Group studied hundreds of companies to find why they fail. In the failing companies the poor portfolio management and the related decisions and execution were primary reasons for failure. Also important were poor operations not just in their efficiency, but in their misalignment with the portfolio needs. It is not just about lean or six-sigma! It is critical that your resources, no matter how efficient, are aimed at the products and services that support today and will also define your future.

Self funded organic growth is the diamond in the rough for business success, value creation, and longevity.

The Plexius Group’s recommended approach begins with improving business effectiveness to generate cash. This enables and reduces the risks of the new product introduction and marketing which is the driver of the “Organic Growth Engine”.

We provide unique methods to improve your marketing and the release and management of innovation and then execution of the development process.

If your firm is looking to improve its “Organic Growth Engine”  begin the dialogue by contacting george@plexiusgroup.com .


The Arbitrage Impact of Lifecycle Analysis

April 1, 2011 § Leave a comment

By Doug Brockway and George Daniels

Buyers and sellers of assets agree on a price at the time of the transaction but each is hoping, expecting and planning that the actual value is better than the price paid.  To this end, accurately understanding the value of an asset is key to success in buying and selling.

Value calculations are based on historical performance as well as projected future revenues and profits.  Plexius uses lifecycle diagnosis and analysis to quickly and deeply inform on the accuracy of that view and whether, at the current price, it actually represents good value.

One way to illustrate the power of lifecycle analysis is to look at Apple, Inc.  Today, Apple is the second largest company in the world, when measured by market value, behind only Exxon/Mobil.  In 2000 Apple was a successful company, to be sure, but since then their success has been explosive.

What has occurred in the last decade is a multi-pronged relentless assault on both the corporate and the consumer markets.  Apple has not only introduced a series of products on a near-maniacally consistent pace of new products every year, but products seemingly aimed at one market spawn products in entirely different markets and then merge back together or feedback on each other with increasingly positive revenue.

The IPOD Case

The iPod family provides a telling illustration.  Introduced in October of 2003, over the next five years there were seven major releases of the iPod itself.[1] Each new product provided a combination of new features that drew existing and new customers back into the stores.  Memory would increase to handle more songs.  The user interface would change or the look of the device itself.  By the fifth release images and video were added and eventually the “standard” iPod was replaced by the iPod Touch which looks like and has all the features of an iPhone without the phone.  To date there have been two releases of the Touch.

In the 7 years of this analysis there have been 6 new products or branches on the iPod tree.  There were two versions of the iPod Mini, five of the iPod Nano, and three of the iPod Shuffle, all compact, stylish players.  There was an interim iPod Photo which added the ability to take and display pictures, subsumed into the standard iPod in release five.

The regularity of the releases is striking.  On average, across the family, there is a new release of a product every 1.2 years.  If you remove the iPod Shuffle, which averages 1.6 years/release from that analysis, Apple, in each branch of that family tree, adds a new release once a year.

Apple’s success includes many factors.  Two of them are deeply insightful understanding of markets and marketing combined with a product introduction juggernaut that both defines new markets and effectively cripples less nimble competitors.  Everything about Apple is organized around the ability to look beyond the current product and, while realizing the rewards of a successful current product actively designing, developing and delivering its replacement without waiting for the lifecycle curve to turn downwards towards commoditization.

– Plexius’ Reinforcing Innovation Model –

As a standalone product the iPod was successful.  It protected its revenue steam and expanded its market and dominated its market.  But, it was the iPod (and iTunes) piled on by the iPhone (and the App Store) then piled again with the iPad, that revolutionized Apples revenue growth in the 2007 to 2010 time window growing from $37 million to $65 million.  It is difficult to recall such a compounding of product and market innovation in so short a period.  How would you have valued Apple in 2005 if all you saw was historical performance without examining the development pipe line? The stock market price was from $30 and $70 during 2005.  Apple is now trading at $350 per share.

If you are thinking of buying a company that has a very successful line of products but for which there are relatively few replacement products in the pipeline ready to replace the current offerings at their peaks then the future cash flows of that company must be discounted.  However dominant the products are they will soon fall prey to commoditization and competitors.  The prices you are able to charge customers will go down, the marketing costs needed to maintain share and volume will go up and funds for reinvestment will be compressed.  Expect a squeeze.

Conversely, if you are thinking of selling a company that has a good set of products but each of them has replacement products in line and in the course of delivery ready to not only replace your installed base but that of your competitors you should hold out for a very good bid.  Expect a premium.

The information needed to reasonably estimate life-cycle positions for a company and its competitors offerings can be obtained through an examination of readily available data. The value of such insights to the buyer or the seller is priceless.   By having that information you are in a position to arbitrage, to your advantage, any acquisition or sale of an asset.  “To the [best informed] go the spoils.”

Doug Brockway and George Daniels are Principals with The Plexius Group

Taking Care in Pricing Care

January 17, 2011 § 5 Comments

Pricing is a difficult skill at any time and in any market.  Determining how much of costs to recover, by offering or by service, within the limits of market demand requires a comprehensive understanding of a myriad of factors and forces including; market dynamics, competitive drivers, internal direct and indirect actual costs, the appropriate allocation of indirect costs, and calculations regarding gross sales projections.

If you’re running a hospital in today’s newly regulated, capital intensive and competitive environment proper pricing can make the difference between success and failure.  The new health care regimen requires that health insurers reimburse reasonably for services rendered.  They cannot allow some hospitals to demand high prices for standard services while others are receiving a lower price.  From a reimburser’s perspective all prices must be “efficient.”

Currently hospitals are quoting quite different prices for the same or similar services, a practice that cannot survive.  A recent investigation in the Massachusetts market by the Boston Business Journal uncovered wide ranges in prices for CT Scans, Weight Loss Surgery, Angioplasty and C-Sections.

Source:  Boston Business Journal, Dec. 3-9, 2010

As seen, pricing varies widely in these local hospitals.  There is a 100% variance in CT Scans[1].  Leaving out the CT-Scan as an outlier, the most expensive option for a service tends to be 40% more costly on average than its lowest priced competitor.  This leads price conscious insurance companies to make choices.  In one case a local care group, Partners HealthCare, is being written out of certain insurer programs due to pricing levels.

One key requirement for pricing success is branding selection and clarity.  For example, some time back a well known large Boston hospital looked into defining its brand.  As the story goes they were inconsistent in how they wanted to be perceived by their customers.  It should be obvious that the operational needs of, say, psychiatry are more about communication and social skills while that of heart surgery are more weighted toward technical surgical and procedural skills.  It is difficult at best to be good at one thing but impossible to excel at everything.  In our example the skills and market reputation favored technical offerings but their pricing favored social skills and the result was that the beds were full but not with patients requiring the offerings at which they excelled.  This negatively affected their costs, effectiveness and severely impacted profitability.  This hospital has since re-focused on its brand clarity, priced its services to attract patients that match its skills, and seen strong success as a result.

Pricing discrepancies like those shown above are often the result of utilizing a limited ‘cost plus’ pricing model that does not give full consideration to:

  • Your true cost of service
  • The purpose of the service relative to your Brand and its archetype strategy
  • The competitive environment
  • Patient alternatives
  • The perceived value of your services
  • Aligned product/service portfolio profit models

For example, hospitals might consider if their CT Scan service is supportive of heart surgery, is a standalone product, or is supportive of a radiology service strategy?  Each alternative necessarily supports different cost structures, pricing and purpose strategies which cannot be intertwined without potentially unfavorable consequences.

The Plexius Group does not propose pricing strategy as a cure all but we do believe there are opportunities to fundamentally improve business prospects by aligning skills, branding, market clarity and pricing.  Hospitals should examine how to best position and price their services to compete effectively and profitably in the local market.

George Daniels, Randy Atkin and Doug Brockway contributed to this post.  Their contact information can be found at http://www.plexiusgroup.com/contact_us.html.

[1] We know of a New Hampshire hospital asking $2,500 for a CT Scan

Revenue Enhancement Through Life-cycle Analysis

September 15, 2010 § Leave a comment

by George Daniels

Much of what passes for revenue projections amounts to steering a boat by looking at the wake.  Managers examine past sales and transactions and using that as a basis project that the future sales will increase by a fixed, usually quite achievable, percentage rate.  Their goal is to project growth without promising the world.  If the future is reasonably like the past, which in the short term it can be, this can suffice.  However, for managers with a world view that extends beyond the current bonus cycle this approach guarantees projections that cannot be achieved and which entail or require the use of resources for the wrong challenges in the wrong markets at the wrong time.

Managers who are “in it for the short and the long haul” make projections in alignment with the natural market life-cycle phases; from initiation, through growth, to obsolescence.  They evaluate each product or market’s specific prospects for growth or decline based on both internal and external measures of market, product, and technology life-cycle positions.  These companies enhance the profitability and the market share by aligning the product cycle with the most probable customers relative to their buying profile.

Are they early adopters of new technology or not? Early adopters are focused on technology more than price i.e. more probable to buy and at higher prices (higher margins). Maintaining this group while capturing the later stage adopters maximizes your market share opportunity. You never get early adopters later.  They’re already looking for the products and services in the cycle that comes next.

By properly managing through a life-cycle analysis companies are less likely to be early or late to that upcoming market. They can optimize the revenue stream and forecasting by projecting smaller volumes of high margin product early and properly projecting and leveraging the change to high volumes and lower margins.

Over time products tend to be commoditized (reduced price). Understanding and predicting the timing of this transition is critical. It tells you when your costs must have been reduced to maintain margin (dollars are reduced in revenue and profit). It tells you the timing of price impact on your revenue forecasting. This transition point is critical to your investment and resource allocation decisions when comparing the position within the life cycle. By knowing internal and external cycles and their individual Growth/Maturity Transitions, companies make wiser and more economically sound and less risky decisions on were to invest monies and precious resources.

The net result is an improvement in knowledge, decisions and forecasting/budgeting. It enables companies to organically grow by synchronizing the current product with at least two future, properly timed introductions.  For want of a better term this enables out-negotiating or out-arbitraging the competition and improves the profitability and market share of products over their lives.  It’s a practical solution that generates lasting results.

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