The Market Makers
Most businesses are endlessly searching for new markets. Here's how America's growth leaders go out and create their own
Frankly, you have to wonder how Dave Archer's company, Pioneer Pipe, out in Marietta, Ohio, ever made it onto this year's list of the 500 fastest-growing private companies in America. On the face of it, there's nothing special about the business. Just an ordinary company in an ordinary town.
You might ask the same question about Rick Heiniger's company, RHS Fertilizing/Spraying Systems, in Hiawatha, Kans. Most of us wouldn't peg spraying and fertilizing for the prototypical growth industry. And hasn't the Farmbelt been in something of a slump over the past few years?
Maybe you even have to wonder about Gateway 2000, in North Sioux City, S. Dak., which makes and sells personal computers. Sure, Gateway's in an exploding industry. But the competition in that business includes such companies as IBM and Compaq, not to mention low-price manufacturers such as Dell. Only five years ago Gateway employed just two people.
Make no mistake: An appearance on the Inc. 500 is no small feat. As a group, the companies on this year's list boosted their collective revenues from $563 million in 1985 to $9.6 billion last year. They created 56,858 new jobs. The average company on the list has been growing at an annual rate of 103%, adding nearly 23 employees every year.
And what are these companies' secrets? Certainly there are plenty of entrepreneurs scratching their heads and wondering the same thing. What did they do that I'm not doing? How on earth could someone in that business grow so fast? The startling diversity of the Inc. 500 only adds to the puzzle. How can a supplier of metal stampings show up on the same list with a supplier of monoclonal-antibody cancer-diagnosis kits? What does a cheese maker have in common with a computer-chip maker, or either one with a Social Security consultant?
Oddly, when you pose questions about growth to the founders of Inc. 500 companies, you hear little about the specific businesses they're in. Instead, you hear a lot about customers and competitors, all of it adding up to an unusual view of the marketplace. Other businesses typically think about serving a market; they want to do their job as well as, or better than, anyone else. Inc. 500 companies, by contrast, seem to think about creating a market. More often than not, they set out to do something no one else is doing.
How? Often by relentlessly pursuing One Big Idea -- inventing a new product, a new niche, even a new industry. Some of the techno-wizards on our list fit into that category, as do some entrepreneurs who wouldn't know a floppy disk from a slipped disk. But other companies, remarkably enough, grow by exploiting not one idea but several, by creating not one new market but many. These companies -- despite their modest size and deceptively ordinary veneer -- diversify, though in a way that has little to do with old-fashioned, conglomerate-style diversification.
Both approaches have a big payoff. Consider some of the market-making companies on the list and you'll see what it is.
For a select few, market creation and Inc. 500-style growth originate with a big new technological idea -- an idea that's then pursued with as much entrepreneurial as scientific zeal.
Krishan L. Kalra, for example, was working as a research chemist when he realized that the emerging biotechnology of monoclonal antibodies could be utilized for spotting cancer cells. Today Kalra's BioGenex Laboratories (#300) sells $2.3 million worth of diagnostic kits to hospitals and labs, and is spending heavily on research and development to investigate other methods of cancer diagnosis. Brooktree (#7), in San Diego, pioneered and patented a so-called mixed-signal computer chip, capable of condensing 25 square inches of circuit board onto one piece of silicon. Brooktree now holds an estimated 40% of the world market for the chips that produce colors on personal-computer and workstation screens.
But most Big Ideas aren't technological, even for companies in high-tech industries. Back in 1985, for example, Ted Waitt's Gateway 2000 was a tiny company selling software and peripherals for the ill-fated personal computer of Texas Instruments. Looking for growth opportunities, Waitt decided to get into the manufacture and sale of IBM-compatible PCs. But rather than take on all the companies in that crowded business, he figured he would sell through only one channel, mail-order ads in computer magazines. And he would sell for less than anyone else.
In effect, Waitt built an entire company to fill this niche. He located the business in South Dakota, where land and other costs are low. He pays employees as little as $6 an hour -- minimizing fixed costs -- and supplements the wage with regular bonuses from company profits. Gateway's single-minded marketing strategy eliminates retailers' markups and most salespeople's commissions; unlike other mail-order companies, such as Dell, it has no telemarketing expenses and no costly international operations. Its prices, as a result, are about half of IBM's -- and typically are 10% to 20% below those of other direct marketers.
You also don't need any technological acumen to invent a new service, indeed, a whole new industry. Take James Allsup, founder and chief executive of Allsup & Associates (#239), based in Belleville, Ill. Before he started his company, Allsup's chief asset was five years with the government's Social Security Administration, which left him with a sizable store of knowledge and a profound distaste for the way his former employer treated the public. Disability claimants, for instance, were routinely discouraged from getting Social Security benefits, first by the complexity of the forms they had to fill out and then by the chilly reception they got from the agency. The losers in this process, Allsup realized, weren't just the victims themselves but also the insurance companies that wrote long-term disability policies. Disability benefits are typically reduced by the amount a claimant gets from Social Security. If nothing comes in from the feds, insurance foots the whole bill.
Loading up his car, Allsup set out on what turned into a 4,500-mile trip, visiting 27 insurance companies in three weeks. Give me a contract, he said, and I'll steer your policyholders through the Social Security maze, making sure they get all the benefits they're entitled to. The reaction? "Over half the companies said I was full of it. The others scratched their heads and said, Well, we don't know what to think. They ended up giving it a shot.
"It was really the creation of a new industry," concludes Allsup, "a nationwide, private service, without attorneys. It's like an H&R Block concept: we do the groundwork and serve as liaison between the government and the individual. We ourselves have more than 50 employees now, but in addition to that the insurance companies are hiring people to pay attention to Social Security, which they never did before. And we've got a lot of little competitors springing up."
What's striking about the Inc. 500 isn't just the new products or the new niches; after all, a lot of companies hit on One Big Idea and parlay it into fast growth. Rather, it's that so many of these entrepreneurs have a knack for focusing on what customers need, not just what their own company happens to be selling at the time.
The result: companies that seem to move almost effortlessly from one area of growth to another. They integrate backward or forward, then turn their ventures into growing businesses in their own right. They spin off ancillary products no one else has thought of. They take on jobs outside their normal line of business -- but always in attempts to make their core business healthier. It's diversification, but diversification that has little to do with conglomerate-style portfolio management.
Most of the time, for example, it's no news when a business decides to move up or down the production chain, adding, say, manufacturing or retailing capacity. But an Inc. 500 company such as Steadfast (#469), in Chelsea, Mass., doesn't stop there.
Steadfast's original product was a steel collar surrounding a car's steering column and ignition lock; the collar prevents a thief from popping the lock and hot-wiring the car. It caught on with rental-car companies, among other customers, and Steadfast grew. Then, when the two brothers who ran Steadfast's metal-stamping supplier decided to retire, Steadfast bought their business too. It was "an operational necessity," as chief financial officer Jim Fuller dryly puts it.
But Fuller and partner Mitko Zagoroff made a virtue of that necessity. Hiring some seasoned production managers away from General Electric, they turned the metal-working facility into a high-quality supplier of aircraft parts and other precision stampings. Today about 40% of Steadfast's revenues are from external stampings sales, up from 15% a few years ago, and the company's growth rate is effectively compounded. Steadfast, meanwhile, is in the process of developing other proprietary products to take advantage of its new capabilities, in hopes of compounding its growth rate once again.
Similarly, it's hardly startling when a manufacturer sells off its waste products. But what about a company that sees those products as yet another opportunity for growth? Golden Cheese Co. of California (#13), in Corona, makes a line of commodity and specialty cheeses, and has elbowed its way into a statewide market previously dominated by midwestern manufacturers. But fully 20% of its revenues this year will come from products other than cheese.
"When you make cheese out of milk," explains CEO David Wooten, "you're left with whey-protein concentrate. We take that and make it into a 75%-protein food additive. Until recently we were the only ones doing it in this country, and even now we produce maybe 10% of the world's supply. What's left after you take out the whey protein is lactose and milk salts; we ferment these into ethanol. Some of that is used as a fuel additive, and we also have developed an industrial grade, used in cosmetics and pharmaceuticals."
Back when conglomeration was in fashion, companies diversified far and wide, hoping to protect themselves from cyclical downturns and other risks to their core businesses. As the marketplace grew more competitive, they found they couldn't manage all their far-flung ventures, and they were better off sticking to their knitting. Inc. 500-style diversification, by contrast, never takes a business very far from its central expertise. Steadfast produces metal-stamped parts for itself and for others. Golden produces cheese and its by-products. But both have learned to create new markets and bring in new revenues.
Often, indeed, a 500 company's real business seems to lie in what it knows rather than what it does, and branching out is not only easy but natural. RHS Fertilizing/ Spraying Systems (#465), for instance, began life as a tiny spare-parts distributor, selling components for fertilizing systems to fertilizer and chemical retailers. But founder Rick Heiniger could see that the marketplace was opening up new opportunities. Fewer farmers were applying their own fertilizer and chemicals; more were hiring experts to do the job for them. The experts needed more durable and sophisticated equipment than a traditional tractor-pulled applicator.
Heiniger came up with some designs, bought a small metal-fabricating shop in Hiawatha, Kans., and began turning out customized Ford trucks -- equipped with tanks, specially developed sprayer booms, electronic controls, even a patented sonar system that keeps the booms at precise heights over the ground on uneven terrain. No Farmbelt slump for Heiniger, who's now selling a couple of million dollars' worth of truck systems every year. Nor is he letting any corn grow under his feet. Realizing that the evolving industry gave him the opportunity to create still another market -- to capitalize on the new competition, in effect -- he's selling his lightweight booms and other products to other sprayer manufacturers.
The granddaddy of such expertise-based diversifiers has to be Pioneer Pipe (#93), which zoomed from a scant $500,000 in revenues five years ago to nearly $16 million last year. CEO Dave Archer chuckles as he describes his company's trajectory from business to business: first it was pipe fabrication, then mechanical contracting, then contract maintenance work, then steel erection, then general construction, even a little residential and commercial plumbing.
Aimless opportunism? Nope. What ties all those businesses together is the CEO's expertise in hiring specialized, highly skilled union workers and deploying them exactly when and where they're needed. Archer, a former business manager for the pipe fitters' union, employs union pipe fitters, ironworkers, carpenters, welders, and so on. To get started, he began fabricating big pipe assemblies for chemical companies such as Du Pont and American Cyanamid.
But diversification seemed only natural to someone with Archer's expertise. Mechanical construction? "We were already on bid-and-inquiry lists to fabricate the pipe. And we'd have people asking, 'Did you ever consider installing it as well?' Most journeyman pipe fitters have done that kind of work, so we had the knowledge." Maintenance? The building-trades unions had recently agreed on a standard facilities-maintenance contract offering companies 90% of standard rates and the assurance that no local union demands would interfere with the work. "We were one of the first contractors to use that agreement in the area."
Gradually, Archer realized his skilled employees and managers could do nearly anything in their field. He bid on and won a job to build a bank in Marietta, Ohio. He got a contract to disassemble a plant in Stamford, Conn. "We do jobs a lot of pipe fabricators would walk away from," he says. "We once assembled 13 or 14 tractor-trailer loads of 36-inch plastic pipe and sent it to Kansas for B. F. Goodrich. It took us six or eight weeks.
"We don't usually work with plastic pipe. But if a guy says, Can you do this? my instinct is always to say yes. Make him feel positive. It gets you one step closer to being that guy's first call."
For all the differences between the tightly focused companies and the diversifiers, there's one big similarity between them and one big payoff from the market-creating strategies they pursue. Notice anything unusual about all those examples? Not one of the companies has much competition. Other businesses might try to outsmart or outflank competitors. Inc. 500 companies, more often than not, maneuver themselves into a position where they don't really have any.
One Big Idea market creators such as BioGenex or Allsup or Gateway leave the competition behind almost from the beginning. BioGenex and Allsup were selling their wares before anyone else even knew about the business. Gateway wasn't first off the mark, but it didn't take long to outstrip competitors in its one narrow niche. How many companies can sell only through Gateway's channel and for as little as Gateway can?
The diversifiers, similarly, elbow their way into enough niches so that would-be competitors have a built-in disadvantage. Golden Cheese faces plenty of competition in the cheese business but less in whey-protein concentrate. RHS is in distribution, systems assembly, and specialty manufacturing. And though there are plenty of pipe fabricators and contractors in the Ohio Valley region around Marietta, how many can do everything that Pioneer does? "The competition is fierce," says Archer, "union and nonunion alike. But we've tried to have the flexibility to put together whatever kind of package a guy needs. Staying flexible is what's enabled us to carve out a niche."
In the end, that may be the best explanation for why companies such as Dave Archer's or Rick Heiniger's or Ted Waitt's find themselves on the Inc. 500 -- and why some companies, indeed, seem to make the list year after year. Whether they have a single great idea or several pretty good ones, these CEOs have steered their companies into what amounts to a private segment of the marketplace. It's private because they themselves have created it.
Anyone who does that will find fast growth -- Inc. 500 growth -- hard to avoid.