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Praise for BLUEPRINT TO A BILLION
"A wonderful, well thought out analysis of entrepreneurship andleadership of a growth company."—Howard Lester, Chairman, Williams-Sonoma, Inc.
"If you dream about growing your business to a billion, this isa fascinating down-to-earth study that you must read. Apply theseven essential principles to your business and you are off andrunning. Learn about strategy, growth, leadership, team building,and a whole lot more."—Joe Scarlett, Chairman of the Board, Tractor SupplyCompany
"Blueprint to a Billion is a well-researched and thoughtfullywritten book that quantifies the growth pattern of America'shighest growth companies."—Professor John Quelch, Senior Associate Dean, HarvardBusiness School
"Eighty percent of the top-performing stocks in the last twentyyears were small entrepreneurial companies that had an IPO in theprior eight years. Blueprint to a Billion tells you the seven keythings these innovators did in common to become America's greatestgrowth companies."—William J. O'Neil, Chairman and Founder Investor's BusinessDaily, www.investors.com
"Thomson has written a masterful work that will catalyze,empower, inspire, motivate, and illuminate entrepreneurs,investors, and policymakers. The world needs this book and willprofit from it in manifold ways."—David M. Darst, Managing Director, Individual Investor GroupChief Investment Strategist, Morgan Stanley
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About the Author
DAVID G. THOMSON has been leading business growth for twenty yearsin general management and executive sales/marketing at NortelNetworks and Hewlett-Packard. He also served as an associateprincipal during his five years at McKinsey & Company. Thomsongraduated with an electrical engineering degree from the Universityof Waterloo and an MBA from the University of Western Ontario. Heresides with his family in Overland Park, Kansas.
Read an Excerpt
Blueprint to a Billion
By David G. Thomson
John Wiley & SonsISBN: 0-471-74747-5
Chapter OneThe Blueprint Thesis
A Different Approach to Growth
The odds are one in 50 that an idea becomes a business, one in 20 that a funded business sees an initial public offering (IPO) and, finally, one in 20 that a public company achieves $1 billion revenue. The odds of turning an idea into a billion-dollar business, then, are one in 20,000! A long shot. Nevertheless, we chase this dream. We want to be among the few winners.
Why do so many want to take this chance ... one in 20,000? Do we think we are better than most and can make it? What if we just took a small company public and built it to a $1 billion revenue? Then the odds are better ... one in 400. Are there enough years in our lives to keep trying in order to learn or be lucky? How many times do we have to try to become a winner?
The Blueprint to a Billion Growth Pattern
In short, what does it take to become a billion-dollar company? I realized that the answer would not come from soft subjects such as organization or leadership theory, or from an examination of divisions or operating units in larger companies. It would come from a quantitative and fact-based analysis of America's fastest growing companies.
Furthermore, the analysis had to hinge on what is often overlooked: revenue performance. Every company can invest, even over-invest, to grow. However, not everycompany can create revenue growth. How many times have you heard a CEO announcing quarterly results stating that earnings did not meet expectations because of a revenue shortfall, yet expenditures met or exceeded budget?
My research began by looking for all of the American companies that grew to $1 billion revenue since going public after 1980. I identified 387 companies out of 7,454. These 387 U.S. companies will be referred to as the Blueprint Companies.
The Blueprint Companies have a simple but definable characteristic: They not only grew fast, they exhibited exponential revenue growth. Exponential is super-compounding. It describes companies that can double revenue every year, for example. Growth rates may slow as revenue approaches $1 billion, but these companies still grew at an exponential rate. The non-$1 billion companies had random, linear, or no growth (see Figure 1.1).
This book focuses on these 387 companies and that part of their growth up to the $1 billion revenue mark. The success pattern beyond this point is not explored in order to concentrate on this key benchmark.
When the Blueprint Companies were compared to the remaining 5,048 companies that went public since 1980 and are still active in 2005 (2,019 of these companies have since gone out of business), I was amazed at the impact such a few companies have achieved (see Figure 1.2).
The disproportionate success of the Blueprint Companies makes it apparent that they are the heart of America's innovation and growth. These companies are the best-in-class set from which this study draws from. This highly disproportionate ratio suggests that unless their different approach is utilized, the odds were-and are-higher for business teams to be part of the 95 percent than the 5 percent. Do you think you can change your odds by understanding the success pattern of this select set of companies? I did.
No wonder Warren Buffett likes to invest in companies that he knows, companies he can relate to as a customer. Look around and you will find Blueprint Companies everywhere. Their products enhance our everyday lives. They are at the top of their markets. When was the last time you used Microsoft software; used the Internet (which rides on Cisco equipment); searched the Web using Google; sipped a Starbucks latte; shopped on eBay or Amazon.com; purchased products at Williams-Sonoma, Staples, or Home Depot; watched movies from Time Warner; took medicine made by Amgen, Genentech, or MedImmune; used financial services from Charles Schwab; or rode your Harley-Davidson motorcycle? Do you depend on Express Scripts, UnitedHealth Group, or HCA for your health plan?
How could a company selling coffee transform itself into an enterprise that is the 372nd largest company in the United States today? Why could Charles Schwab create exponential revenue growth when others in the same industry, with the same opportunities and resources, could not? How could a little company that made motorcycles become one of the fastest growing firms in America?
This book identifies the common essentials exhibited across Blueprint Companies in all industries, it is not about the lessons learned from one or even a few successful companies within one industry. Here we want to discover the roadmap to $1 billion revenue, not $1 billion market value.
The research for this book was driven by the desire to know the answers to the what questions such as, "What role did customers play in shaping an exponential growth company?" "What was the investment profile for creating exponential growth-overinvest to grow or become cash flow positive early and scale?" I wanted answers that could be applied to the top and bottom lines in order to achieve exponential growth.
Significant Insights about Blueprint Companies
By first looking at the financial patterns of Blueprint Companies and defining the actions required to create their financial impact, I found that it is possible to reverse engineer the behaviors and skills required. This eliminated the behaviors and actions that were not relevant. As a result, this revealed a set of significant insights that truly created impact.
The common revenue pattern across the Blueprint Companies is a unique pattern that only these kinds of companies demonstrate. Like a rocket, these companies need to be on the right flight trajectory and have the speed to break the pull of gravity-to escape being a mediocre, low-orbiting projectile.
Looking at the revenue curves, I identified three discernible patterns as shown in Figure 1.3.
The exponential revenue growth curves have three parts: (1) a variable runway; (2) an inflection point where revenue breaks out into an exponential trajectory; and (3) variable growth rates to $1 billion revenue. Regarding the variable runway, the companies on the left side of Figure 1.3 have a discernibly shorter runway than those on the right side. They have a common inflection point. In some cases, the companies on the left had a similar growth rate as the companies on the right-just the timing was different.
When researchers study business trends, they typically start their analysis at the company's founding year, or at the year of IPO. The Blueprint models are anchored at the inflection point-the point where the business demonstrates its breakout to exponential revenue growth. Why? The pattern for starting a company is different from the pattern as it scales to $1 billion revenue. Second, the inflection point marks the moment when the business was fully formed as a system-when it had a pipeline of customers, a product or service that was being shipped, and an organization capable of the functions to sustain ongoing growth. Third, as mentioned above, I identified potential common patterns in the exponential growth rates after the inflection point, even though timing was different.
Utilizing this different approach to analyzing growth, I set out to discover the insights of Blueprint Companies.
Insight: Growth to $1 Billion Revenue Has Two Distinct Parts
The first significant counterintuitive insight was the timeframe and trajectory of Blueprint Company revenue growth (see Figure 1.4). By centering the revenue curves at the inflection point, also known as year 0 in normalized time, I found that revenue growth has two distinct parts: the time to the inflection point was highly variable from the founding year to the inflection point, which was then followed by three trajectories to $1 billion revenue that centered on a four-, six-, or twelve-year trajectory. Since the nature of the curves had fairly consistent exponential revenue growth, this creates a unique opportunity to benchmark growth trajectories.
One might naturally assume that the time to the inflection point is correlated with the trajectory that the business follows to $1 billion revenue. Not true. For example, Google went from its founding to the inflection in two years and went up the front side of the four-year trajectory to become one of the fastest growing companies. In contrast, Cisco took seven years to get to the inflection point before going up the four-year trajectory. In an extreme example of a lengthy timeline to the inflection point, Fifth Third Bancorp had its beginnings in the middle of the 19th century. The company passed through the inflection point in the late 1980s to ascend on the back side of the 12-year trajectory to achieve $1 billion in 1994.
With this insight, I started to look at companies at the inflection point. My own business skills fit best with companies from the inflection point to $1 billion revenue versus ones coming from the garage to the inflection. This was a key understanding on the journey to find where my own quantitative skills, combined with 20 years of business experience, could best be utilized. So, where should you focus?
Insight: Blueprint Companies Can Grow in Any Sector
You might believe, as I did, that exponential growth occurs in high-innovation economic sectors such as Information Technology (IT). Given the meteoric rise of Google, eBay, Microsoft, and Cisco, it is not hard to understand why people believe that the most rapid growth in recent years has been in high-tech firms. But is this really the case?
Contrary to popular perceptions, Information Technology accounted for only 18 percent of the Blueprint Companies as shown in Figure 1.5. The Consumer Discretionary sector-that is, retails stores, Internet retail, and the like-actually outrank the tech sector. You know the names because you, your family, and your friends shop at them every day: Staples, Home Depot, AutoZone, Williams-Sonoma, and Best Buy to name a few. What did this mean? America has generated more growth companies in the service sector than many thought.
Insight: The Disproportionate Value of Blueprint Companies
The top 100 of the 387 Blueprint Companies accounted for half of the value created by this set. One billion dollars in revenue provides management with the opportunity to create shareholder returns extraordinaire. Yet while some Blueprint Companies were highly prized by the market at a billion dollars, others were not.
To identify these companies, I determined the year they achieved $1 billion revenue. By normalizing their market caps to 2004 dollars, the Blueprint Companies were ranked resulting in the ranking of the top 100 shown in Figure 1.6. (Appendix A lists the top 100 Blueprint Companies.)
I was somewhat surprised by where companies ranked on the list as well as such a definitive curve of disproportionate market value created across Blueprint Companies. The very top companies were predominantly technology or biotechnology companies. Microsoft was the number-one Blueprint Company with a normalized market value of $42 billion, followed by Amgen, eBay, Veritas, and Google. At the tail of this chart, companies that achieved $1 billion revenue had market values of $300 million. The median, or the market value of the 193rd company, was $1.8 billion. A secondary insight was the varied mixture of companies by vintage; early 1990s companies such as Cisco, as well as new companies such as eBay, had similar superior market values when normalized.
These Blueprint Companies show up as the most highly valued companies on our stock exchanges. If you look on the NASDAQ 100 Index, over 60 percent are Blueprint Companies.
The top 100 Blueprint Companies account for half the market value of all 387 Blueprint Companies-an unbelievable impact from such a few companies.
Why does the Information Technology sector have the cachet it does when it comes to investors? Because it has generated the most value for shareholders (see Figure 1.7). Consumer Discretionary fell in comparison to Information Technology. For a sector (consumer) with 50 percent more Blueprint Companies than Information Technology, you can only conclude that IT companies were valued significantly more than their counterparts in the Consumer sector.
Is there an interesting play for the future to bring technology to the industries in the Consumer Discretionary sector? To get the best of both: high probability with higher market capitalization? Are you wondering what the smartest investors might have to say about this observation? (If you are looking for this answer, you will enjoy the interview with private equity investor Roger McNamee in Chapter 10.)
Insight: The 7 Essentials to Achieve Exponential Growth
During my tenure as a consultant at McKinsey & Company, I learned that business dynamics can identify the underlying interlinked forces that lead to exponential growth. While it is impossible to model the particular business dynamics for each Blueprint Company, I could determine the dynamic essentials that seemed common to most of them. I call these the 7 Essentials. These are the essentials necessary to create exponential growth. Despite the diversity of companies and industries, I found these common essentials across the total set of companies and industries that I examined.
To prove that these seven common essentials are unique to Blueprint Companies, I compared companies in the same industry-one set drawn from the Blueprint list, the other from a group of companies that had the same opportunities but had failed to grow at an exponential rate.
As I presented the Blueprint to CEO roundtables, investors, and management teams, they challenged me to simplify the insights. The insights could not to be too simple, however, for while they might be more easily understood, they might not be convincing. In actual fact, the 7 Essentials are aligned to create financial impact in what I call The Essentials Triangle™ framework (see Figure 1.8). The inbound side requires a Big Idea or value proposition. To create exponential revenue growth from the Big Idea, there are three essentials required. To capture the opportunity for exponential returns, there are three more essentials required. The framework for these essentials is The Essentials Triangle. Each side of this triangular framework aligns with a company's financial statement.
Blueprint Companies create a Big Idea that delivers breakthrough value for their customers. It is superior to competitors because the company fulfills an unmet need the best way. Not just at the beginning, but all the way to $1 billion revenue. Most companies accept the status quo of their industries. Not Blueprint innovators. They look for blockbuster ideas with quantum leap value propositions.
Blueprint Companies that create and sustain exponential revenue growth give the management team the option to create a business model of exponential returns. Attractive markets, customers, and alliances enable exponential revenue growth. Blueprint Companies use them all to achieve exponential revenue growth.
Blueprint Companies create a business model of exponential returns by managing expenses and investments to deliver positive return on investment (ROI) and cash flow early and consistently. For the technology companies, the role model for exponential returns, I found that cash flow, on average, was a constant percentage of revenue. Therefore, the absolute value of cash flow paralleled the exponential growth of revenue depending on the trajectory-four, six, or twelve years. Cash flow and return on investment are the primary drivers of market value (or shareholder value). To achieve these returns, the management team had to execute all seven essentials. No one leader could do them all.
The 7 Essentials of Blueprint Companies are described in the following sections.
1. Create and Sustain a Breakthrough Value Proposition
A value proposition states the benefits customers receive from using a company's products or services in terms that the customer understands.
The best Blueprint Companies not only have compelling value propositions, they have breakthrough value propositions. There are three kinds:
Shapers of a New World, truly create a new market for their products and services.
Niche Shapers, follow New World Shapers with products or services that redefine a specific market segment.
Category Killers, optimize a market by attacking the existing incumbents with a better-faster-cheaper value offer.
Excerpted from Blueprint to a Billion by David G. Thomson Excerpted by permission.
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Table of Contents
1. The Blueprint Thesis: A Different Approach to Growth.
Part One: Create and Sustain a Breakthrough ValueProposition.
2. The Blueprint Value Proposition.
Part Two: Create and Sustain Exponential RevenueGrowth.
3. Exploit a High-Growth Market Segment.
4. Marquee Customers Shape the Revenue Powerhouse.
5. Leverage Big Brother Alliances for Breaking into NewMarkets.
Part Three: Seizing the Opportunity to Create ExponentialReturns.
6. Becoming the Masters of Exponential Returns.
7. The Management Team: Inside-Outside Leadership.
8. The Board: Comprised of Essentials Experts.
9. Linking the 7 Essentials.
10. Blueprint Companies for the Next Decade and Your Part inThem: An Epilogue.
Appendix A: Top 100 Blueprint Companies.
Appendix B: Delivering Breakthrough Benefits Drives ExponentialGrowth.
Appendix C: Assessing Management’s Focus, Drive, andAbility.
Appendix D: Methodology.