Excellence In Medium-size Companies

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While In Search of Excellence, by Thomas J. Peters and Robert H. Waterman Jr., continues to tear up the best-seller lists, two other consultants from McKinsey & Co. find that they, too, may have a potential best-seller on their hands. The consultants -- Donald K. Clifford Jr. and Richard E. Cavanagh -- are authors of a 40-page report on fast-growing medium-size companies, prepared for the American Business Conference Inc. (ABC). "The Winning Performance of the Mid-sized Growth Companies" reads like In Search of Excellence for businesses in the $25-million to $1-billion range. McKinsey brought out the report in May, and now the authors are being besieged by publishers that want them to do a book on the subject.

The report offers a fascinating glimpse of what Clifford -- a McKinsey director -- has called the "threshold" companies, that is, companies that are moving beyond the entrepreneurial stage and striving to achieve long-term prosperity and growth. These companies play a vital, if unsung, role in the American economy: While they constitute less than 1% of all U.S. businesses, they account for 25% of all sales, 17% of assets, and 19% of private-sector employment. Within this category, moreover, there is a group of exceptionally dynamic companies that consistently outpace the rest of the business community by virtually every measure of growth -- sales profits jobs exports, and so on. Clifford and Cavanagh set out to discover how and why.

Like the authors of Excellence, they took an unconventional approach, looking beyond the numbers to the people and organizations involved. The core of their analysis comes from 60 in-depth, informal interviews with ABC members, all of whom are leaders -- and many of whom are founders -- of medium-size growth companies. The findings explode some popular myths about success in business. For example:

* Fast growth is not confined to fast-growing industries. The medium-size growth companies operate in almost every sector of the economy, from bicycles and doughnuts to energy and communications.

* You don't need a huge market in order to succeed. Most of these companies flourish in small market niches, and they constantly look for new niches into which they can expand.

* They also defy the common wisdom about gaining market share by lowering costs and competing on price. Rather, they compete on value, often charging premium prices.

* As for industry experience curves (whereby companies succeed by developing economies of scale), "these companies innovate so rapidly that they create new curves and let other, less agile, competitors fight their way down the old ones."

* Bureaucracy may be a common by-product of size, but the medium-size growth companies refuse to accept it as inevitable. In an effort to maintain their entrepreneurial edge, they make sure that employees are also owners, holding -- on the average -- almost 30% of the company's stock.

* Nor do the entrepreneurs behind these companies fit the stereotype. "Where conventional folklore depicts them as disorganized, undisciplined, and dollar-motivated, we found that their greatest pride and priority is in building organizations with clear values, tightly drawn direction, and an almost missionary zeal."

What emerges from all this is a rich and anecdotal portrait of companies in transition. There is, for example, the small company that a group of investors purchased for $25,000 in 1968, thereby acquiring the rights to a simple machine that could clean greasy parts and tools quickly, neatly, and cheaply, without creating an ecological nightmare of hazardous wastes. Today, the company is known as Safety-Kleen Corp., and it has more than a quarter million customers worldwide and a market value of more than $300 million.

There is also Millipore Corp., which developed such a lock on the market for microporous membranes that it successfully fought off competition from the likes of General Electric Co. And Meredith Corp., the magazine company that made a series of ill-advised acquisitions in the 1960s. After clarifying its mission, it divested the unrelated businesses and got back on track.

There are obsessive chief executive officers like Robert Elliott of Levitz Furniture Corp., who told the researchers, "I know our inventory and payroll position in every store, as well as their lease arrangements, financial characteristics, and merchandising." And organization builders like Stanley Wainer of Wyle Laboratories, who declared, "To build an organization, you've got to have the guts to get people who are better than you are." And experimenters like James R. McManus of Marketing Corp. of America (see INC., June, page 58), who said, "Most big companies fire or demote their risk takers who fail, and so they lose their ability to learn from failure and to generate better new ideas. We have had 10 winners and 10 losers in new business areas since we were founded, and no one has been fired or demoted as a result of the losers."

All in all, this is the stuff of which best-sellers are made, as publishers have been quick to point out. "If you'd asked me five months ago if I would ever write a book, I would have said, 'Certainly not!" Clifford insists. Then again, how often do you get a chance to write a best-seller?