Autodesk's Turnaround Secret

How the CAD software maker reinvented itself by refocusing on its customer segments, product differentiation, and a new sales model

by Chris Zook and George Cogan

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.

Hidden Assets

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.