Financial Management

22Revenue and Gross Margins

Revenue growth is one of the most important drivers in building and sustaining shareholder value. Understanding the drivers of revenue growth, estimating future revenue levels, and achieving sustainable growth rates are some of the most difficult challenges that managers face. The objective of this chapter is to enable more discipline and analysis in predicting, driving, and evaluating future revenue projections.

Gross margins are an important indicator of efficiency and competitive position. Product and service pricing, discounting, new product introductions, and competitor challenges all impact gross margins. Design effectiveness, and material, manufacturing, and supply chain effectiveness impact the costs of products or services and therefore gross margins.

REVENUE GROWTH: KEY DRIVERS

Figure 22.1 presents a summary of key drivers of revenue growth. Revenue growth arises from two sources: growth resulting from internal development activities and growth resulting from acquisitions. Growth resulting from internal activities is often referred to as “organic growth.” Growth resulting from acquisitions will have very different drivers and economic characteristics from organic growth. The economics of acquired growth will be covered in detail in Chapter 31, “Analysis of Mergers and Acquisitions.” We will focus on organic growth for the remainder of this chapter. Organic growth may result from growth in the overall size of the market, by gaining ...