ROYAL WATERBEDS INC.
Dennis Boyd, the 32-year-old founder of Royal Waterbeds (#346), is hardly the stereotypical new-age entrepreneur riding the wave of a fad. Oh, yes, he did grow up in California. And yes, he made his start-up money as a lifeguard. But unlike most of his competitors, Boyd never saw much of a future selling low-priced waterbeds to students. The money and the long-term viability, he figured, were in selling to older, professional customers who looked on the waterbed as furniture rather than a sexual novelty or a political statement. Soon he was selling them the frames and dressers as well.
The early bubble of enthusiasm for waterbeds has long since burst, drowning many of Boyd's original competitors in a sea of red ink. But thanks to his initial strategy, Boyd's operation continues to grow. Instead of one store with 1,000 square feet and 5 different waterbed models, he is showing as many as 65 bedroom sets at each of his 18 outlets -- showrooms that run as large as 13,500 square feet. And because he has patented and manufactures his own line of waveless mattresses, he is able to sell his products at very competitive prices without having to lower his margins. Profits last year were more than $1 million on sales of $15 million.
For all that success, does Boyd still sleep on a waterbed? Very soundly, he says.
INTEGRAL SYSTEMS INC.
WALNUT CREEK, CALIF.
In 1981, Integral Systems (#320) was a relatively minor player in the market for personnel software, with sales of about $2 million. Four years later, it was an industry leader. Its formula for success has been one followed by just about all the successful software companies we've encountered: a product designed for a highly focused market; a willingness to make a heavy investment in product improvements; and close and continual communication with customers.
Although designing software can be technical, and the jargon of selling it can sometimes be a bit oblique, the driving concept behind building a software company is really quite simple, explains ISI chairman Brian Aspland: people don't buy software, they buy solutions to problems. In this case, customers wanted programs that could help them with personnel reporting, benefits advancement, and payroll processing. And they wanted software not just for maniframes, but for minicomputers and later personal computers, too. Perhaps most important, they wanted software that could communicate with users in English, not in COBOL or FORTRAN, and that would allow even a relative novice to establish security for files, provide flexible benefits programs, and download data from a mainframe system to a PC. Responding to those requests, Aspland says, was always challenging, usually expensive, but in the end quite profitable. Last year ISI reported a 75% increase on aftertax income of $3 million on $25 million in sales.
SAGE FEDERAL SYSTEMS INC.
Let other INC. 500 chief executive officers boast of their prowess with mergers or acquisitions. Sage Federal Systems (#496) is proof that a company can grow by going in exactly the opposite direction -- by breaking itself in two.
Back in 1974, when CEO Howard Arnold and three partners started the original Sage Systems Inc., they created a computer-software company to serve government agencies and Fortune 500 companies. But by early 1983, with $3.5 million in sales, the company was developing a split personality. One part was selling off-the-shelf software to commercial customers while another provided computer-programming support to the government. As the business grew, it was pulled in two directions at the same time.
It came down to a question of money. Arnold and his partners felt it necessary to go to the public markets to finance the company's next stage of growth, but they were not sure how to go about it. "We really were two different businesses -- and we were perceived to be so by the capital markets," Arnold recalls. The immediate problem was putting a price tage on the company. By the usual rules of thumb, the product half of the company -- the software division -- could normally be expected to bring 40 times earnings, while the service half doing the programming could be expected to fetch a price-earnings ratio of 12 or 14. The only practical solution seemed to be to divide the company.
The reorganization was relatively painless. Arnold became CEO of a private company, Sage Federal Systems, which would continue to provide programming services to government agencies, while his partners went public in 1986 with Sage Software to develop and sell new software products. Now, both companies are thriving. Sage Software watched its sales grow from $10.4 million to $14.5 million in its first year of independent operation. And at Sage Federal, sales jumped from $13.2 million to $22.2 million -- enough to win Arnold a place on the INC. 500 for the fifth year running.
NATIONAL HEALTH CARE AFFILIATES INC.
Most people find nursing homes doleful places, but Mark E. Hamister is different. Fourteen years ago, just one year out of college, Hamister took his first job, in a private long-term health-care facility as an administrative trainee -- "with neither passion nor compassion," he remembers. But within six months he was entranced.
"I loved the challenge of it. Running a nursing home isn't like making a widget; there's always more to do, and a better way to do it. I found that it was fun to talk with all the residents when I walked down the hall. They were the ones who taught me how to do the job the right way."
And Hamister was taught well. Rotating through each department, he got to know his fellow staff members and their jobs. Then he spent a week living as a resident, learning to see the world through their eyes. Training completed, he went back to school to complete requirements for his own nursing-home administrator's license and founded National Health Care Affiliates (#329) as a single facility in Leroy, N.Y., in 1977.
The past 10 years have been hard for the nursing-home industry. A number of operators have been convicted of overcharging patients and the government, while others have been accused of abusing and neglecting their residents. In response, government oversight and regulation have become more stringent, while nursing-home patients and their families have become both more discriminating and more demanding. Through it all, NHCA has grown steadily -- from one facility with 77 beds to 15 with 2,387 residents.
Hamister credits his company's growth to the values he learned during his apprenticeship, and he has made it his business to see that his employees share those values. Potential managers are trained just as he was, spending up to two years rotating through the housekeeping and dietary and receivables departments. And like Hamister, they live for a time with the residents. Even when training is completed, managers make regular rounds with the nurses, talking to each resident at least twice a month.
To the residents, Hamister says, it's the details that matter most -- wallpaper rather than paint, fresh flowers in the rooms, dining rooms where residents can eat with their families. But delivering that quality depends on keeping high-quality staff, usually the bane of nursing-home operations. Good salaries help, and NHCA's salaries are consistently higher than industry norms. As a result, turnover, which averages more than 60% nationwide, is less than 40% at NHCA.
ADVERTISING, MARKETING, AND PUBLIC RELATIONS
A decade ago business-to-business advertising was small potatoes, a market virtually ignored by the powerful agencies clustered on Madison Avenue. The advertising itself was rarely more than a recitation of performance specifications. The agencies that handled it were mostly small and sleepy.
Starmark helped to change that. When the husband-and-wife duo of Dan Estes and Peggy Nordeen started their Chicago agency 10 years ago, they were determined to show business customers that it was possible to convey technically important facts in ways that were as sophisticated or dramatic or as visually appealing as the best of the cigarette and car ads. "After all," explains Estes, "everyone is a consumer, whether they're an engineer or a purchasing agent, and everyone is going to react like a consumer."
Today, the logic of that argument has generated a booming business-to-business advertising market, with nearly 2,000 agencies across the country competing for these ever-more critical and profitable clients. And Starmark (#311) has managed to stay in the forefront of the industry by broadening its services to include public relations, market research, and sales support. The agency now has offices in Chicago, Denver, and Milwaukee. And it has developed a computer program, Adfacts, which measures the effectiveness of advertising programs and allows the agency to fine-tune its advertising buys.
MANUFACTURER OF MICROCOMPUTER BOARDS
Chris Priebe never expected to be in computers. In fact, he never really expected to be in business. In college he'd been a sculptor, earning his master's degree in fine arts at the University of Wisconsin. Reality hit at graduation, when he realized that his artwork just wouldn't support a young and growing family.
It was an engineer friend who first saw the connection. Priebe's sculptures were not exactly carved from Italian marble. They were massive things, and "building them was something of a manufacturing process," Priebe remembers. "I had to work with blue-prints, metal fabricators, design engineers."
It was from these artistic roots that Heurikon (#498) began. Priebe found his first inspiration at the photo-finishing lab where he took a job. There he noticed that his colleagues were constantly checking their watches to see when the pictures would be finished. Teaching himself the necessary electrical engineering, Priebe developed a programmable time sequencer. Other controller systems soon followed -- one for newspaper platemaking, and another for maintenance of a bean cannery.
In those early days, Heurikon, as a custom shop, developed products for individual clients much as an artist would produce work for patrons. But in 1980, with sales just over $600,000, Priebe decided to turn his company into a full-scale manufacturer of computer circuit boards. The company took off, largely on the strength of military contracts. In 1986, sales were more than $10 million.
Businessman Priebe says he still feels very much the artist. "I think of the company as if it were a sculpture," he explains. "Like a piece of art, it has to work in a specific place and relate to a wide variety of attitudes. But the difference is that a company changes over time -- and perhaps that's what makes it more intriguing."