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BUSINESS PLANS

What It Takes to Break Through
 

An excerpt from Keith McFarland's eagerly awaited new book on how companies move beyond the entrepreneurial stage. Watch the grapefruit spurts!
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I bumped into √"berguru Peter Drucker one afternoon in 1994, on a tree-lined sidewalk at Claremont University. Over a Diet Coke, we had a short conversation that would change the course of my life, and would result -- almost fifteen years later -- in the writing of this book.

I was in my mid-thirties at the time and had just been named chairman of Collectech Systems, a two-time Inc. 500 technology company based in Los Angeles. I believed Collectech had the potential for exponential growth, perhaps even to revolutionize the industry, but I also sensed that we were at a crucial transition point that would require wrenching changes if we were going to reach our full potential. Making those changes, I feared, might also run the company aground. At the time I ran into Drucker that fateful afternoon, I was making the three-hour, round-trip drive to Claremont University's Drucker Center three times a week to take Ph.D classes from Drucker and his colleagues, hoping they could help me make sense of the difficult issues we faced as a company. My frustration, however, was growing and I decided to ask the master for some help. "Why can't I find the book that helps people like me solve the real problems of moving beyond the entrepreneurial stage of development?" I asked Drucker. After a moment of thought, he looked up and flashed his famous toothy, Zen master grin. "Because," he grunted in his thick Austrian accent, "you haven't written it yet."

Shortly after our conversation, the wheels came off of our business, and I didn't have time to think about books, neither reading nor writing them. I dropped out of the doctoral program with only my dissertation left to complete and spent the next several years fighting for our firm's survival. Collectech eventually emerged from the crisis stronger than ever, with a new business model that propelled it from annual revenue of $10 million to $100 million in just over three years. As the company transitioned out of that difficult time, my mind returned again to that conversation with Drucker. Where, I wondered, was the book that could help a leader steer a firm through the difficult terrain my firm had just navigated, the terrain that lies just beyond the entrepreneurial stage of development? Drucker's words echoed in my mind: ". . . you haven't written it yet."

Then, in 2002, I agreed to be a keynote speaker at a CEO conference in Detroit. At dinner the night before the event, I found myself seated next to the event's other keynote, Good to Great author Jim Collins. We discussed his book over dinner and I shared with him my frustration about the lack of books on how to help companies break through the entrepreneurial stage. I pointed out that all the Good to Great companies were big companies (in his book the average company has sales of $32 billion) that were years or even decades away from their entrepreneurial roots. I wondered aloud whether we would learn different things if we studied companies closer to the time of their entrepreneurial breakthrough. "What a great research question," he replied, and then he went on to encourage me to do my own study using research methods similar to those he used in Good to Great.

On the plane ride home from Detroit, I decided that if the universe delivers signs, mine could not be any clearer. Two of the most respected observers of the business world had told me that I needed to write this book. I reached into the seat pocket and pulled out an air-sickness bag and wrote out a list of three questions that would become the basis for The Breakthrough Company:

1) Why do most companies start small and stay that way?

2) What is special about the handful of companies that successfully break through the entrepreneurial stage of development?

3) What can a leader do to ensure that his company maximizes its chances for breaking through?

We set out to discover what enables little firms to become big. Our search led us to create and analyze what we believe is the most comprehensive database of more than 7,000 of America's fastest growing private and public companies. In addition, we have talked to more than 1,500 key executives, and we reviewed and cataloged more than 5,600 articles. And to make sure we understood the issues from the inside out, we conducted intensive 90-day studies with fifty-two firms ranging in size from $9 million to $3 billion in annual sales.

My goal was to conduct the most exhaustive research ever undertaken on the subject, and to write the book that I had always wanted to read -- the one that fills in some of the details of the territory that lies just beyond the entrepreneurial stage of development. I wanted to identify the secrets of breaking through.

Anyone who has ever made a study of anything knows one thing for certain: The best part is when you come face-to-face with the unexpected. Surprising findings are, as star detective Charlie Chan once said, "like squirt from aggressive grapefruit." Our study produced grapefruit squirts at every turn, so many that we concluded that much of what is believed about what it takes to build a breakthrough company is just plain wrong. Here are just a few of the surprises we uncovered:

1) The most interesting companies may not operate in the markets that Wall Street and the business press consider interesting or "cool." When we launched our study, we worried that perhaps the best-performing companies would all come from a single sector of the economy like tech, leaving us with findings that wouldn't be applicable to the broader market. But our concerns were unfounded. Many of the breakthrough companies began in market segments experts considered unattractive at the time. We weren't surprised to identify several high-tech firms like Intuit, SAS, and ADTRAN among the breakthrough companies -- but we certainly didn't expect to find a nuts-and-bolts distributor, a snowmobile maker, a payroll processor, or even a niche real estate business.

2) Sticking to the knitting won't always get you there. Just as the breakthrough companies ignored the so-called experts when it came to the prospects for their industry, they also kept redefining their businesses. While the textbooks -- and the consultants -- might have suggested that Polaris should remain focused on its core snowmobile business, the company hopped the fence into the far more competitive and profitable ATV market, facing off against some of Japan's most powerful keiretsu at a time when most believed Japanese industry would take over the world. ADTRAN had recently left the relative safety of its telecom niche to do battle over corporate clients with Cisco, the multibillion-dollar tech company in San Jose, California. When Intuit squared off against Microsoft in the small-business accounting market, after having just bested Bill Gates to gain control of the market for personal financial management software, there were many who questioned Scott Cook's sanity. Cook's decision, however, like the ones made by the other breakthrough company leaders, was critical to creating the kind of performance that put these companies on our distinctive list.

3) Don't look for extraordinary people; build a place where ordinary people can do extraordinary things. While they certainly obsessed about each individual hiring decision, breakthrough companies also focused on creating systems that helped their people grow along with the business. "We built this company hiring who we could afford to hire," said Lee Hein, a regional vice president at Fastenal. "What we found was that the average company today doesn't have a clue what people are capable of if you believe in them."

4) It's not about where (or even whether) you went to school. The diversity of the people who established and/or are running the nine breakthrough companies is simply astounding. The group includes: a former college professor and Ph.D in mathematics (Jim Goodnight at SAS); two Harvard MBAs (Intuit's Scott Cook, who is also a Bain Consulting alum, and Tom Tiller, once one of General Electric's rising stars); a guy who finished his associate degree (Tom Golisano at Paychex); and Scott Edmonds, who hit the bricks right out of high school in Virginia and rose to become CEO of Wall Street darling, Chico's. Not only is Bob Funk, the CEO of Express, an ordained minister and cattle rancher, he's also the elected chairman of the Federal Reserve's Conference of Chairmen, which advises the Board of Governors of the Federal Reserve System.

5) You don't always need other people's money. We've all heard the professional investor's elevator pitch, "Sure, you can grow your business, but you can grow it faster with our money." We were shocked by the fact that not one of nine breakthrough companies was funded by venture capital in their start-up years. Scott Cook tried to raise venture money for Intuit and was turned down by more than twenty firms (he accepted a small amount of private money just before Intuit went public in 1993, mainly to tap the genius of Silicon Valley legendary VCs John Doerr and Burt McMurtry).

6) How employees feel about working in a place is a significant driver of success. A key discovery, driven home in our visits to one breakthrough company after another, was that the task of building a great place to work wasn't delegated to the human resources department alone. The top people in the company thought about it every day.

Another concept that emerged early during our five years of field work is the concept of "crowning the company," where leaders serve their company rather than have the company serve them. We found that companies tended to fall into two broad categories: companies that were organized around the leader and companies that were organized around a vision that was bigger than any one person.

Here's an example: If anyone in business today would have the right to make a business all about himself, it would be Roger Staubach, founder of The Staubach Company. After winning the Heisman Trophy as a junior at the Naval Academy in 1963, he delayed his NFL debut to complete a tour in Vietnam. He was considered past his prime in 1969 when, at the age of twenty-seven, he signed on as a tenth-round draft pick of the Dallas Cowboys. It was at the ripe old age of twenty-nine, after sitting on Coach Tom Landry's bench for two years, that Staubach burst into the sports world's consciousness, earning Most Valuable Player honors in the 1971 Super Bowl on his way to becoming one of the most famous and respected quarterbacks in football history.

But if you walk into Staubach's office just outside of Dallas, you'll notice there's something missing -- just about anything related to football. And if you ask him why, he'll tell you, "It's because we're building something here that is bigger than Roger Staubach."

Staubach started working in the Texas commercial real estate business in 1977, a couple of years before he retired from the NFL. While he knew that he could make a career in the industry, he figured he needed to carve out a niche for himself. After seeing how frustrated his commercial tenants were when they dealt with landlords, the idea hit him: He could focus on the tenant representation side of the business.

While it was groundbreaking enough for someone in the brokerage business to build a business around the tenants, Staubach left an indelible mark on the industry when he decided to move outside his stronghold in Dallas and make The Staubach Company a national business. To face off against established competitors like New York City-based Studley and Grubb & Ellis, Staubach tapped brokers around the country who would work under the Staubach banner but be free to operate their individual offices as entrepreneurial enterprises. "Even with all of Roger's star-power, he knew he wouldn't grow much past $40 million on his own," said Greg O'Brien, who has worked for the company since 1993 and who was named CEO last July. "He knew that in order to grow, he couldn't be the quarterback on every deal. The company needed to become bigger than him to last."

To lure the best and brightest brokers to his team, Staubach granted them an equity stake in the company. At the same time, he developed the Staubach Constitution, a playbook of sorts that fosters a platform of teamwork and a common set of values for the entire company. For example, in an industry that Staubach says operates on a "fee-and-me" principle, Staubach's brokers commonly share information and, perhaps more extraordinarily, celebrate each other's victories.

Staubach's main competition over the years has been from Julien J. Studley, who ran a tenant representative firm that bore his name up until 2002. Studley, founded in 1954, was one of the forerunners in the tenant rep business in the ever-turbulent New York City real estate market while Staubach was struggling to find a toehold in Dallas. The firm was run by the charismatic Julien Studley, a Holocaust survivor, known also for his presence on New York's fund-raising circuit and having a hand in just about every major real estate deal in the city. While the firm eventually expanded to 20 offices nationwide, Studley's customer base remained in New York with its founder, who retained 100 percent ownership until 2002, when, at the age of seventy-one, he sold the company to forty-five of his brokers. Over a shorter time frame, The Staubach Company grew from a single office into more than sixty around the country, employing more than 1,400 people. Since making the switch to turn his brokers into owners, Staubach has seen his annual revenue skyrocket from $20 million in 1993 to more than $400 million in 2006, which, based on industry estimates, is about double Studley's revenue.

Staubach had come to understand that the success of his venture did not rest on his shoulders alone. It was only when he empowered his entire organization to operate independently that The Staubach Company really took off. He had crowned The Staubach Company.

Reprinted from The Breakthrough Company Copyright © 2008 by Keith R. McFarland. Published by Crown Business, a division of Random House, Inc., and available in stores Jan. 15.

Last updated: Jan 1, 2008




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