This article is the fifth in a series on what causes a firm’s value to increase
What do you think is the root cause of why some firms can enjoy year after year profitable revenue growth and other cannot? My answer: blow up your functional organization structure to become a Process Driven Company. Wow – you might be saying, “what about marketing and selling? customer service? new product development? human resources? Firms like Hewlett Packard, Siemens Lighting, Danaher and others have been honing Process Driven Skills for a long time.
This article will discuss the lifeblood of any company – revenue growth that is profitable from internally developed products and services. Apple and Medtronic have had a remarkable run over time of profitable revenue growth and huge increases in their valuation. What distinguishes those firms who can perform this way year after year versus those who are flashes in the pan?
Revenue is simply Price times Quantity Sold. Normally firms have to lower prices to sell more quantity of products or services. But sometimes firms, like Apple, are in the admirable position to charge premium prices with large quantities sold. What causes this?
A quick primer: Revenue growth and growth in profits from operations are the two most important drivers of firm valuation. Operating profits that grow faster than the growth in revenue contribute to huge increases in firm valuation. Investments in assets to allow the growth to happen are also part of the picture. Here, we want the growth in assets to be smaller than the growth of revenue and growth of operating profit to increase firm valuation. This simply means your firm is making wise asset bets that pay off with great revenue and operating profit growth.
But the simplicity of the math obscures what is really behind your firm enjoying yearly profitable revenue growth.
As stated above, my answer is actually an organization structure solution -become a true process oriented company. Michael Hammer published his now famous book in 1993 titled Reengineering the Corporation: A Manifesto for Business Revolution that called for firms to overlay Processes on their current organization structure.
Processes are work flows that cut across functional organization structures to nullify the overwhelming evidence that functional groups can develop their own “silo dysfunctions”. In functional organization structures we group like-skills together, like marketing, sales, manufacturing, procurement and R&D, etc. so that they can become experts. But over time these expert groups can take on a life of their own and actually become one of the huge barriers we have discussed in previous articles. Examples of processes that cut across functional areas are:
- Design and Development Process – integrates R&D, sales, new product development, manufacturing
- Growth Initiatives Process – integrates business development, marketing, sales, manufacturing, procurement, customer service
- Time to Profit Process – integrates transfer from the Design and Development process, customer qualification, sales promotion to first dollar of profit
- Order Fulfillment Process – integrates sales, forecasting, procurement, scheduling and manufacturing and outbound logistics
The absolute magic about processes is that their cycle times can be measured and their speed can be greatly improved. Process Champions can be assigned who are charged with getting their process cycle times to world class levels by working with the functional heads to remove barriers. For example, a business unit of Danaher found that it took just 23 minutes to produce a key part but it waited 18 days to move through to the next step! The wait time was cut to two days with fairly simple process analysis. Firms find that when they embrace process disciplines, improvements can be found all over the company.
Next, firms who enjoy consistent yearly profitable revenue growth set out a Profitable Revenue Growth Roadmap, sometimes traversing decades. This roadmap is a guide to a journey, not a flash of foresight now that dictates what will happen in the future with certainty. A tool I developed to help with this is the 4Bs chart: Getting Better, Getting Bigger, Getting Broader and finally Getting Bolder. Firms usually chart their roadmap in the order written, although many variations can occur. Each of the 4Bs in turn has four ideas for growth for a total of 16 moves. I would be glad to send readers a PowerPoint presentation on this. Please just email me.
Here are two key insights for your firm:
- Move along the 4Bs chess board applying your current world class processes to other opportunities where they can be most easily transferred and
- Know which world class Processes you need before moving to a new segment of the 4Bs roadmap. If you have not developed world class processes yet, you have early warning that you must do this.
The process revolution and a profitable revenue growth roadmap are huge “root cause” leverage points that multiply benefits all over your firm to enjoy yearly profitable revenue growth and increasing the value of your firm.
Next Up: Enterprise Wide Risk Management
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is on the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at firstname.lastname@example.org