Business Strategists, Executive Directors, Finance Specialists, C-Level, VP’s, Sales, Partners, BOD, Owners – all employees. Who doesn’t want a growth track? Is your company in growth mode? What does growth look like? What are the factors of growth for your company? What is a reasonable growth rate for revenues, profits, cash flows? What are the implications for your business based on your answers?
This is all about your existing business, it is paying the bills for now and what’s next. Therefore, it must continue to grow, continuous improvements, innovation, it is all a requirement. The implications for all this are profound.
Let’s examine growth based on my research. There are two separate markets that growth occurs in – market dominance and a competitive market. Research that continues leads me to accept that one company could operate in both. PAUSE – you decide, what market is your company in? How do you decide? What are the characteristics? Knowing which one and what are the implications? Is your company’s 2020 year a roller coaster year? How difficult is it to see to the end of December 2020? The 2020 year is not as clear a journey as a 2020 view would suggest. Consumer buying is shifting, discretionary spending patterns are changing, priorities are different, companies are reducing cap-ex and operating costs. This is attributable to COVID-19 and now add politics, election year. Uncertainty has been around a long time but it appears on steroids now. As a result of the uncertainty in US and Global Economies, many corporations no longer publish guidance for the balance of 2020. The stock market swings are significant in September and affecting some of the companies included in this growth analysis. The impact on business for the short-term and long-term is unprecedented and unpredictable. You should be fully aware of your company’s compass heading. The table below shows results for some of the companies included in this blog. All information is from the company’s annual report.
With this in mind, let’s examine Market Dominance. This particular growth model has specific characteristics. These characteristics would be the ability to set your price, maintain strong margins and generate positive cash flows. In addition, Peter Thiel’s outlines 4 concepts:
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- Proprietary Technology
- Network Effects
- Economy of Scale
- Branding
These were mentioned and detailed in my previous blog, “What direction is your company’s COMPASS pointing – Growth or Decline?” At Innovation Advantage, I believe that this is the place to begin to understand your company’s macro view (check out our website for more details at https://innovationadvantagellc.com/). The implications of this are significant – it impacts the company’s overall strategy.
Growth is a moving target. These are unprecedented times. Product life cycle tests are imperative with consumer and business requirements shifting, your product/service that was once in demand may drop like a rock in water. If no longer needed or greatly reduced, what are you going to replace it with it? How will your company make it up? What are consumer’s priorities shifting to? Implications need an answer. Bezos even highlighted in Amazon Annual Report 2019, the growing competition in the e-commerce space which Amazon has dominated now for years is threatened more and more.
My research adds an additional one in market dominance space. A corporation required 25% of revenues to be from new products over the past 3 years. Originally, it started out at 5 years. How would that measure up in your company? Would you meet that requirement or not? If you did, how would it change your business, its financial results?
Let’s examine some examples of companies considered in a market dominant position. These companies were some of the highest rated in 2019 Drucker Institute Survey for financial strength and innovation (https://www.drucker.institute/programs/company-rankings/). You may want to gather your financial information for 2019, 2018, 2017.
Based on my research the following companies are listed as having a market dominant position. This recognition is based on the points made so far.
-
- Amazon – CEO appeared
- Microsoft
- Apple – CEO appeared
- Facebook – CEO appeared
- IBM
- Alphabet – CEO appeared
So much as a dominant position, nearly monopoly that on July 29, 2020 four CEO’s appeared virtually before a Congressional Hearing on antitrust concerns. I am not qualified to comment as an antitrust anything but these companies certainly appear to have a dominant market position. However, other companies are challenging them. The other factor to identify as a dominant position – is 25% of revenues from products or services introduced over the past 3 years, this information is not publically available. They certainly check the boxes for proprietary technology, network effect, economy of scale, branding. What do you see in your numbers? Are revenues growing, are 25% of revenues from products introduced in the past 3 years, margins improving or net income up? Can you check the boxes for proprietary technology, network effect, economy of scale and branding?
It is not just these companies that are in a market dominant position. A list from (https://iot-analytics.com/the-leading-industry-4-0-companies-2019/) shows a potential list of companies who could develop into a market dominant position. They are:
-
- Hosting – Microsoft, already shown
- Industrial IoT Platforms – Microsoft, GE, PTC, Siemens
- Analytics – Uptake
- Microchips – Nvidia
- Sensors – Festo
- Connectivity Hardware – HMS
- Cybersecurity – Claroty
- System Integrators – Accenture
- Additive Manufacturing – GE
- Augmented and Virtual Reality – Upskill
- Collaborative Robots – ABB
- Connected Machine Vision – Cognex
- Drones/UAVs – PINC
- Self-Driving (material transport) Vehicles – Clearpath Robotics
A factor for growth (as well as decline) is time. Time will show the success of these companies in their pursuits.
Let’s examine the competitive market examples. My research discovered some characteristics of competitive markets and companies in them. Characteristics included revenues flattening or declining, margins falling over time, cash flow declines, market share could be declining, no differentiation in products. As market share drops due to other competitors developing products or your products decline in meeting customers’ requirements, then, companies lower its price, sacrifice margin. Peter Thiel expressed, if your company is in this space – find something to improve over other companies by a factor of 10 (innovate), leverage it and reap a stronger position. Thiel developed a business model in the early stages of electronic payments, improving the process by a factor of 10. The result was PayPal. Amazon started with selling books, expanded the books available and improved what the competitors offered.
The automotive industry is in a competitive market. Technology advancements in the automotive industry abound since Henry Ford. Technology advances are a big part of the auto industry now. Advertisements are all about the technology built into every model. Tesla introduced new technology beginning in 2003. Elon Musk invested in the start-up and served as chairman beginning in 2004. In 2008, Tesla released it first car, completely electric. In 2010, Tesla had an IPO. The history of this company is controversial and performance lacks profits.
Tesla stock price fluctuates to position it at times more valuable than other manufacturers. Will Tesla continue to be successful in this competitive market, achieving greater results than other automotive manufacturers? Will Tesla differentiate itself from the pack? Time will tell. Tesla’s Q2 2020 shows a profit. Tesla continues to pursue its automotive product in a competitive market and delivered an electric car that improves over its competition. What other electric car is discussed in the automotive industry? Is your company in a competitive market, how are you going to differentiate?
Airlines represent another competitive market group with little differentiation between all airline companies. The profitability is limited, stock performance fluctuates and now with COVID-19, airlines are suffering with existence decisions. Recently, all airlines ended the practice of charging for changes in flights (in 2019- $2.8 billion). Southwest never charged passengers if they changed their flight schedule. Are there any secrets out there for an airline to discover that could differentiate it from the pack? Are they looking?
It is essential for your existing business to continue to grow revenues, profits, cash flows, improve through purpose driven change in order for it to thrive and support what’s next. What’s next should increase the company’s durability in either their market dominant or competitive environment it now operates. What’s next comes about by innovation (find secrets, see my blog on this), it is the advantage companies have.
Your company in its dominant market position, its compass firmly pointing toward growth, will be challenged. Amazon has led the e-commerce economy for years and it continues to expand, grow, improve. Yet, Jeff Bezos in May 2018 stated one day, Amazon could go bankrupt, fail (https://www.investopedia.com/news/why-jeff-bezos-saying-amazon-will-ultimately-fail/). A continuing pursuit of excellence, maintain the market dominance position with strategy, proprietary technology, network effect, economy of scale, branding, identify and remove barriers and pursue excellence is essential.
Your company in its competitive environment can lead or even shift to a stronger position or differentiate itself from the pack by improving a slice of the business above the others. Is your company #1 or #2 in your competitive market? If not, evaluate your position, identify and remove the barriers, understand the gap of where you are and where you need to be, begin the journey to close the gap and differentiate your company from the rest. It can be done as demonstrated by other leaders before you.
What will your company’s response be to these unprecedented times, challenges, business climate? Your individual company’s circumstances are unique yet require a constant approach for excellence in your existing business to achieve durability. Whether your company’s compass heading is pointing toward growth in a market dominant position or competitive market, excellence is imperative, innovation is essential or your compass can point into another direction, away from growth.
Innovation Advantage is looking to continue its research and is looking for sponsors to allow us to facilitate this important first step, Compass Heading, in our discovery process. Contact us.
Enjoy the journey.
All Figures are in millions except Diluted EPS and from annual reports.
| Amazon |
YR 2019 |
YR 2018 |
YR 2017 |
| Revenue |
$281 |
$233 |
$178 |
| Operating Income |
$15 |
$12 |
$4 |
| % Opr Income |
5.3% |
5.2% |
2.2% |
| Net Income |
12 |
10 |
3 |
| % Net Income |
4.3% |
4.3% |
1.7% |
| Diluted EPS |
$23.01 |
$20.14 |
$6.15 |
| Net Cash |
$39 |
$31 |
$18 |
| Microsoft | |||
| Revenue |
$126 |
$110 |
$96 |
| Operating Income |
$43 |
$35 |
$29 |
| % Opr Income |
34.1% |
31.8% |
30.2% |
| Net Income |
$39 |
$16 |
$26 |
| % Net Income |
31.0% |
14.5% |
27.1% |
| Diluted EPS |
$5.06 |
$2.13 |
$3.25 |
| Net Cash |
$11 |
$12 |
$8 |
| Apple | |||
| Revenue |
$260 |
$266 |
$229 |
| Operating Income |
$64 |
$71 |
$61 |
| % Opr Income |
24.6% |
26.7% |
26.6% |
| Net Income |
$55 |
$60 |
$48 |
| % Net Income |
21.2% |
22.6% |
21.0% |
| Diluted EPS |
$11.89 |
$11.91 |
$9.21 |
| Net Cash |
$50 |
$26 |
$20 |
| Revenue |
$71 |
$56 |
$41 |
| Operating Income |
$24 |
$25 |
$20 |
| % Opr Income |
33.8% |
44.6% |
48.8% |
| Net Income |
$18 |
$22 |
$16 |
| % Net Income |
25.4% |
39.3% |
39.0% |
| Diluted EPS |
$6.43 |
$7.57 |
$5.39 |
| Net Cash |
$21 |
$15 |
$17 |
| IBM | |||
| Revenue |
$77 |
$80 |
$79 |
| Operating Income |
$10 |
$11 |
$11 |
| % Opr Income |
13.0% |
13.8% |
13.9% |
| Net Income |
$9 |
$9 |
$6 |
| % Net Income |
11.7% |
11.3% |
7.6% |
| Diluted EPS |
$10.63 |
$9.57 |
$6.17 |
| Net Cash |
$8 |
$12 |
$12 |
| Alphabet | |||
| Revenue |
$162 |
$137 |
$111 |
| Operating Income |
$34 |
$28 |
$26 |
| % Opr Income |
21.0% |
20.4% |
23.4% |
| Net Income |
$34 |
$31 |
$13 |
| % Net Income |
21.0% |
22.6% |
11.7% |
| Diluted EPS |
$49.16 |
$43.70 |
$18.00 |
| Net Cash |
$19 |
$17 |
$11 |
| Tesla | |||
| Revenue |
$25 |
$21 |
$12 |
| Operating Income |
($69) |
($388) |
($1,632) |
| % Opr Income |
(0.3%) |
(1.9%) |
(13.6%) |
| Net Income |
($862) |
($976) |
($1,962) |
| % Net Income |
(3.5%) |
(4.6%) |
(16.4%) |
| Diluted EPS |
($4.92) |
($5.72) |
($11.83) |
|
Net Cash |
$7 |
$4 |
$4 |
| United Airlines | |||
| Revenue |
$43 |
$41 |
$38 |
| Operating Income |
$4 |
$3 |
$4 |
| % Opr Income |
9.3% |
7.3% |
10.5% |
| Net Income |
$3 |
$2 |
$2 |
| % Net Income |
7.0% |
4.9% |
5.3% |
| Diluted EPS |
$11.58 |
$7.67 |
$7.06 |
| Net Cash |
$3 |
$2 |
$2 |
| American Airlines | |||
| Revenue |
$46 |
$45 |
$43 |
| Operating Income |
$3 |
$3 |
$4 |
| % Opr Income |
6.5% |
6.7% |
9.3% |
| Net Income |
$2 |
$1 |
$1 |
| % Net Income |
4.3% |
2.2% |
2.3% |
| Diluted EPS |
$3.79 |
$3.03 |
$2.61 |
| Net Cash | – | – | – |
| Delta | |||
| Revenue |
$47 |
$44 |
$41 |
| Operating Income |
$7 |
$5 |
$6 |
| % Opr Income |
14.9% |
11.4% |
14.6% |
| Net Income |
$5 |
$4 |
$3 |
| % Net Income |
10.6% |
9.1% |
7.3% |
| Diluted EPS |
$7.30 |
$5.67 |
$4.43 |
| Net Cash |
$4 |
$3 |
$2 |
| Southwest | |||
| Revenue |
$22 |
$22 |
$21 |
| Operating Income |
$3 |
$3 |
$3 |
| % Opr Income |
13.6% |
13.6% |
14.3% |
| Net Income |
$2 |
$2 |
$3 |
| % Net Income |
9.1% |
9.1% |
14.3% |
| Diluted EPS |
$4.27 |
$4.24 |
– |
| Net Cash |
$3 |
$2 |
$1 |