How the CAD software maker reinvented itself by refocusing on its customer segments, product differentiation, and a new sales model
In the early days, fortunes changed swiftly for Autodesk (ADSK). The computer-aided design (CAD) software company advanced from being described in the pages of BusinessWeek in 1985 as "a high-tech issue that may not fly" to a "Hot Growth Company of the Year" for two successive years, in 1986 and '87.
Indeed, the San Rafael (Calif.) company has been on a roller coaster for much of its quarter-century history. The low point of Autodesk's ride occurred during the height of the Internet boom, when it embarked on a fateful shift in sales strategy. The company turned its back on the so-called channel partners that had long sold its engineering software and instead branched out into selling new services online. The lure of selling without the support of resellers turned out to be wrong for products as sophisticated as those in Autodesk's portfolio. As a result, Autodesk's revenues dropped by an average of about 2% a year between the fiscal years 1999 and 2003, with profits shrinking as a percentage of sales.
Then Autodesk made a move that sent it on a climb that has lasted five years. The company found and nurtured a hidden asset that would reverse its fortunes and cause the top line to grow from $824 million in 2003 to $2.17 billion in 2008 with profitability growing more than 10 times. A $2 billion company is rarely able to maintain such a torrid growth rate, and Autodesk may be no exception. Still, it's worth looking at some of the factors that have contributed to such a great five-year run, even if the shares have been buffeted in recent weeks amid disappointment with the company's most recent earnings and concern that Autodesk will be hurt by a decline in IT spending as the economy slows.
Autodesk is among a handful of companies that have been able to revive a core business by discovering and harnessing hidden assets—in this case, undervalued customer segments. Over the years, businesses accumulate overlooked assets that are viewed, if at all, in the context of their value in the past, not in the future. As a result, the companies tend not to inventory, assess, or track these assets because they don't appear in typical financials. But making the most of hidden assets is an approach that has worked as successfully for companies nearing their natural limits to growth, as it has for companies that need a new strategy. In addition to discovering an undervalued customer segment, companies can find hidden customer assets by discovering an untapped influence they may have over a specific group of customers or reevaluating proprietary information that can be used to alter, deepen, or broaden the customer relationship.
Consider the approach taken by Harman International (HAR), the high-end automotive equipment company, which renewed itself by focusing on a particular customer segment—automotive original equipment manufacturers—while also associating Harman's premium brands with the invention of a new type of product, so-called infotainment systems. The change in customer strategy led to 10 years of profitable growth and took Harman from strategic stasis and impending crisis to a nearly fortyfold increase in market value.
Global bank ING Group ( ING) recognized a hidden asset in an untapped customer segment and launched a low-cost, direct, Internet-based offering called ING Direct. The highly focused targeting of Web-savvy, self-sufficient customers helped the bank gain rapid market share against competitors that did not see this emerging segmentation.
Hail Mary Strategy
Autodesk represents one of the most dramatic examples of how a company has made the most of a hidden customer asset. In the late 1990s, Autodesk made a series of moves it would live to regret. The company decided to expand beyond the design tools that had been the keystone of its success and instead add services and products that were neither part of its core business nor natural adjacent businesses. Autodesk also decided it could save on costs by selling to its customers directly and over the booming Internet, instead of through its network of resellers. "The company had adopted a Hail Mary strategy, trying lots of new and different things, often throwing business analysis and [proven] practices to the wind," says CEO Carl Bass.
The strategy backfired. Not only were the new offerings unsuccessful, but the company also learned—the hard way—that its resellers were better at selling its products than Autodesk was. Performance plummeted, and Autodesk knew it needed to change. But the how-to wasn't obvious. Like many other companies, Autodesk didn't know where it was falling short with its customers and where it could differentiate itself by developing new products and services.
In a 2004 survey of 259 executives worldwide, Bain & Co. found that for many, there is a huge gap between perception and reality when it comes to serving customers. Among respondents, 80% of executives thought they were doing a good job of delivering "very differentiated" products and services. But when we compared this belief with a similar sample of their customers, only about 8% said they thought their suppliers were highly differentiated.
Autodesk confronted its own version of this delivery gap by taking a deep look at itself to understand how it might be underserving customers. The company evaluated its established customer base in different ways, searching for patterns of behavior and new ways to segment its customers and then develop products that might appeal to different segments. Autodesk realized there was greater potential demand from long-standing customer segments where it had a stronger set of capabilities than it had recognized.
Step by Step
The company then embarked on a five-step program that fueled its turnaround.
First, the company reinvested in its indirect channel with a vengeance. "We stopped competing with them," Bass says. "We treated them like our own sales force and invested in basic training."
Second, management shifted its focus to narrow industry segments within the specialized market of computer-aided design, targeting such groups as architects and mechanical engineers. The company realized it hadn't been serving these segments as well as it could have been serving them.
Third, the Autodesk team developed a new product asset with 3D technology, which represented a quantum leap for its customers who were using its earlier-generation 2D technology. The company realized it could expand its core CAD business by converting its 2D customer base to 3D.
Fourth, Autodesk brought in new managers eager to implement the new approach.
Finally, the company changed to a subscription model for using its software. This presents a simplified way for customers to gain access to software upgrades, service and support, and packages that help them migrate from 2D to 3D.
Like the CAD programs the company sells, Autodesk imagined a new reality and then made it come to life. Revenue has grown at 18% annually, more than double that of the enterprise software industry. And in the most recent quarter, even though slightly below Wall Street's estimates, Autodesk racked up 20% growth, to hit $599 million in revenue, and earnings for fiscal year 2008 rose 23%.
Propelled by the power of its hidden assets and redefined strategy, Autodesk—whose Discreet 3D software was used to model King Kong in the movie of the same name—is once again making big tracks in its industry.