How to Launch an Inc. 500 Company
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What many booming businesses have in common isn't sorcery, it's a simple strategic idea -- an idea, in fact, that's as applicable to start-ups and strugglers as it is to fast-track money-makers
Business fantasies? Try these on for size:
Dennis and Ann Pence leave high-powered careers in New York City for the wilds of northern Idaho. They start a catalog company selling nature-oriented gifts. Its success is startling: $11 million in revenues last year, an estimated $20 million this year. Profits hover around 16%.
Gary Gagliardi, a Seattle software consultant, begins to create and sell accounting programs for businesses. The marketplace is teeming with competitors, but Gagliardi's new company shoots to the top, displacing the industry leader. Before long, big customers such as Marriott Corp. are placing orders. Sales for fiscal 1991: $5 million, with profits in the 6%-to-10% range.
Max Duncan loses his job as a drilling engineer; he is one more casualty of the mid-1980s slump in South Texas oil. Duncan gives the energy business one last shot, starting a company to make specialty chemicals for drillers. Incredibly -- because better-established companies are scrambling to get out of this market -- he strikes pay dirt. Last year Duncan's company topped $6 million in sales.
At times, we realize, such stories can be the curse of an entrepreneur's life. There they are, lionized in the local newspaper or the chamber-of-commerce quarterly or Inc., men and women with the Midas touch, magically creating gilt-edged companies and effortlessly slaying competitors. You can almost hear the envious reaction from less favored CEOs. What wizardry do they know that I don't? Or maybe just: How did they get so lucky? When you're mired in the muck of last month's ledgers and next month's projections, the gap between fantasy and reality can loom large.
And yet the plain fact about many booming businesses is that they aren't magical at all. What they have in common isn't sorcery, it's a simple strategic idea -- an idea, moreover, that's as applicable to start-ups and strugglers as it is to fast-track money-makers.
The idea begins with a simpleminded observation. Every company faces competition. Other businesses, some of them larger and better financed than yours, can always duplicate or imitate your offerings, can match you dollar for dollar in marketing, can hire as many people.
But successful CEOs invariably choose something, one key element of the business, that can provide their companies with an edge no competitor can easily match. Management theorist Michel Robert calls it the organization's "strategic heartbeat"; in simplest terms, it's the skills and systems that the company is built around, and that it knows better than anyone else. Robert's book The Strategist CEO mentions several big-company examples. At Johnson & Johnson, the strategic heartbeat is the company's single-minded focus on four -- and only four -- sets of consumers (doctors, nurses, patients, and mothers). At Sony, it's the company's unparalleled proficiency at research and development, which provides a constant stream of new products. Whatever that strategic center may be, says Robert, the most successful enterprises set their priorities around it and pour resources into it, thereby developing knowledge and capabilities competitors simply don't have. That's how they stay ahead of the pack.
As several examples culled from this year's Inc. 500 show, that is a lesson not limited to corporate giants. On the contrary: a lot of small companies have learned it so well that their success can seem truly fantastic.
Competitive Edge: Making Buying Easy
When they left New York City to set up Coldwater Creek Inc. (#71), in Sandpoint, Idaho, Dennis and Ann Pence began developing a network of small crafts manufacturers that could provide them with unusual gift items, such as tiny jade wolves howling at the moon. They placed a few ads; they designed their catalog; they began compiling a list of mail-order customers. So far, nothing any other savvy marketer with a good eye for crafts couldn't do.
But in the Pences' minds there was one key to a mail-order company's success. Call it the place where customer meets company: it includes everything from the day someone gets Coldwater Creek's catalog to the day she (most customers are women) receives an item she ordered. Carry out every step in the process better than anyone else does, the founders figured, and the buying decision will be so pleasant and simple that customers will keep coming back for more.
Today that strategic focus is visible in how the company directs its resources and develops its skills.
The catalog uses top-of-the-line photography, color separation, and paper: "We spend much more money than any cataloger our size I know," says Dennis. Result: colors are more accurately rendered, the items more precisely portrayed. Thanks in part to this authenticity, Coldwater Creek's merchandise returns are about 3.5%, a little more than half the gift-industry average.
Incoming calls are answered in an average of three seconds. The company makes sure there are always enough operators on duty to meet that standard, even if some are sitting around waiting for the phone to ring. The carefully tracked abandoned-call rate runs from 0.2% to 0.3%, compared with an industry average of 3% to 5%. Says Dennis: "We're saying, 'You're going to let one out of 20 potential customers walk? It's insane.' "
Orders are processed immediately; 90% go out the same day, virtually all within 24 hours. Seeking to reduce order-fulfillment errors -- wrong items, wrong quantities, and so on -- a team of employees identified 16 sources of error and created systems to prevent them. Today the company registers a 0.2% fulfillment-error rate, which is about one-fifth the industry average.
Central to all those efforts is Coldwater Creek's high-powered computer system: a new Hewlett-Packard 3000/967 minicomputer; the personal computers and other hardware that are plugged into it; and the fourth-generation catalog-company software, both more powerful and more flexible than earlier programs. The "heavy-duty iron," as Dennis describes it, lets the company focus on minute details of interaction with the customer. A simple bit of programming, for instance, prevents company shippers from sending packages via United Parcel Service to a post-office box; earlier, that logistical impossibility had been a common source of delays. Custom-designed curves allow Coldwater Creek's buyers to plot potential sales of dozens of items after only a week or two of incoming orders. They can then schedule monthly shipments from suppliers, reducing back orders while still holding down inventory costs.
As for pouring in resources, the Hewlett-Packard and other recent improvements to the computer system cost Coldwater Creek more than $1 million over the past 24 months. "That's a lot of computer for a company our size," says Dennis. "But we need the ability to use this kind of information, to have it at our fingertips, even more than a large retailer does. It provides us with a competitive advantage."
Competitive Edge: Fast Product Development
FourGen Software (#465 this year, #146 last year), based in Edmonds, Wash., began selling accounting software to small and midsize businesses several years ago. Its product had an initial advantage over the competition's: it was more easily adaptable to a business's individual needs. ("Modifiability by Design" was the company's slogan.) In software, however, a technical lead can vanish quickly. What gives FourGen its edge today -- it is still the fastest-growing company in its industry -- is its relentless focus on product development. New versions of its software have allowed it not only to stay ahead of the market but also to move into lucrative new niches, such as providing systems to large corporations.
Accounting-software companies typically release enhanced versions of their products every 18 months or so. FourGen has collapsed that cycle to 3 months. Four times a year it releases new products. At different points, but at roughly the same interval, it releases "bug fixed" editions of existing products. "We're six to eight times more productive than other software companies in terms of being able to improve the product," claims cofounder and CEO Gary Gagliardi. "That's what has allowed us in one year to go from products aimed at small to medium businesses to a corporate product."
To reach that level of rapid innovation, Gagliardi essentially has had to reinvent -- and keep reinventing -- the company's operations, pouring resources into training and restructuring and internal communication. Step one was to scrap the old method of software production, in which programs moved sequentially from research to development to production. Step two was to create self-directed work teams capable of developing products from start to finish in a small fraction of the usual time. To Gagliardi that meant training every employee to think like an owner -- to plan work around long-term objectives, to root out problems and bottlenecks at their source, to coordinate by staying in constant touch with others doing relevant tasks. Over a period of three months Gagliardi met with everyone in the company for an intensive series of small-group training sessions. He imparted both that philosophy and the skills, such as statistical analysis of output, that he saw as critical to its implementation.
Implementing the new approach has been neither cheap nor easy. Employees must spend from 5% to 30% of their time -- up to two or three hours a day -- reading and responding to the inevitable flood of electronic-mail messages. Group leaders must lead by consensus, often a time-consuming process. Training continues, in areas such as consensual decision making and internal communication. Even so, the payoffs have been remarkable. Automatic testing programs have been developed, shortening the time required for finding and fixing bugs. Glitches in the process of writing, printing, and shipping documentation have been eliminated. As new and updated products have begun pouring out, sales have shot up -- roughly 60% in the year ending June 30.
To keep up with the fast pace, FourGen employees often work 60-hour weeks. They are expected not just to put their time in but to decide for themselves what to do; and in some cases, they are paid below-market wages. What makes the system possible is the fact that most are owners of the company and are treated as such. Basic financial information is distributed monthly. Fringe benefits are generous, and cash compensation is supplemented with bonuses based on FourGen's profitability. Seventy percent of the company's 90 employees hold potentially lucrative stock or stock options. "In the end, we intend to create a lot of millionaires," says Gagliardi.
Competitive Edge: Low Cost
Integrity Industries (#394), in Kingsville, Tex., didn't have what you would call an auspicious beginning. Not only had founder Max Duncan lost his job, not only were the South Texas oil fields in a state of near-collapse, but Duncan had virtually no money. Nor was any outside financing available: back then, energy-related ventures were as popular with Texas banks as a skunk at a wedding.
So Duncan redefined the concept of bootstrapping. He located a vacant facility where he could blend specialty chemicals and persuaded the owner to sign on as a partner; Duncan gave him one-third of the fledgling company in return for a year of free use. He found an experienced sales manager willing to take another third of the company in lieu of a year's salary. Duncan bought used equipment for "pennies on the dollar"; he ordered free samples from chemical companies for his initial raw materials. He lived on unemployment benefits.
Even in a depressed industry, however, Duncan quickly found customers. The reason was simple: his costs were so low that he could charge 10% to 20% less than the competition. He made a little, sold a little, poured the profits back into the company, and made a little more. Soon he had a modest loan from the local bank, and by the end of his second year he had bought the blending facility from his partner. Since 1987 the company has grown more than eightfold. Even with growth, though, Duncan never lost sight of Integrity's key advantage, which was its ability to maintain rock-bottom costs. "We're able to make healthy profit margins and keep prices low by maintaining extreme efficiency in our operation," he explains.
What makes for efficiency in this near-commodity industry? For one thing, not only does Duncan blend chemicals, he designs and builds his own blending equipment. A plant for making "soap sticks" -- products dropped into a well to help the oil or gas flow more freely -- uses a unique hot-water heating system and requires only one operator, compared with the three or four attendants required to run conventional equipment. Another custom plant, for oil-based drilling fluids, allows one employee to do the work of five. What makes such a quantum jump possible, says Duncan, is the fact that the specialty-chemicals end of the energy industry has been a kind of backwater, largely ignored by engineers. "So we took some time and spent some money in making the plants do a hell of a lot better job than what was already on the market."
Integrity's work force gives new meaning to the term lean. Duncan expects this year's sales to rise 10% over last year's. Yet the head count remains at only 18: Duncan, three people in sales and marketing, an accountant, a secretary, and 12 production and delivery people. Production managers work alongside line workers; everyone is trained in the operation of every piece of equipment. People fill in for one another as necessary. Repairs and maintenance are done on the spot, by the same people who run the equipment. "They're extremely knowledgeable about every phase of our operations," says the CEO.
Integrity spends money to make sure the employees keep all that knowledge within the company. Wages average 50% above the current industry standard. The company pays for health insurance. A pension plan matches up to 15% of an employee's earnings, and a bonus plan distributes up to 25% of profits. Duncan makes a point of both training employees and letting them know how the company is doing. ("It's kind of an open-book-type policy," he says.) The result: turn-over at Integrity is virtually nil. "We have high levels of expertise because all of our people are experienced in our own operation."
Competitive Edge: Getting Shelf Space
Question: How does a young company compete in the toy business? If you said, Get on the shelf at Toys 'R' Us, you win. The giant retailer has up to 50 times as much space for toys as other toy sellers do, and smaller merchants watch closely what their big competitor buys. Trouble is, not much of that extensive shelving is up for grabs. Giants such as Mattel and Hasbro claim sizable chunks. Classic toys -- from Monopoly games to the Fisher-Price preschool line -- occupy much of the rest.
Such obstacles don't faze John Osher, founder and president of Cap Toys Inc. (#92), who has built his Bedford Heights, Ohio, company around just such a strategic focus. "You're not competing with other companies head on, you're competing for shelf space," he explains. "You're trying to create toys that buyers have to buy because they feel that everyone else is going to buy them."
Osher's methods: spend at least two months a year on the road visiting the professional toy inventors who come up with most of the industry's new products. ("To get 10 or 12 products, we probably look at 3,000 concepts," says Osher.) Keep an eye out for toys that have some unusual features without being too far out. (Example: Cap's Giant Bubble Gun, a battery-operated device that blows soap bubbles.) Stay away from dolls, action figures, and other fashion-driven categories; they're too unpredictable. Make sure you have plenty of manufacturing capacity available, but keep overhead low. (Cap collaborates with a Hong Kong partner that oversees manufacturing; the partner is paid entirely on commission.)
Most important: work closely with Toys 'R' Us buyers. Show them concepts. Develop packaging themes together. Discuss pricing. If they don't want it, don't argue; chances are there's something wrong with your approach. "If Toys 'R' Us doesn't like the toy, we don't do the toy," declares Osher. Finally, make sure the toy can sell itself on the shelf, since TV advertising is both costly and risky.
Once you're on the shelf you have a good chance of staying there: Osher hopes for three to five years of sales from each toy, and he develops lines of toys that build on previous sales. That's why Cap's revenues, already up 2,392% in the past five years, will likely rise another 100% this year. At that rate, Osher will reach his start-up goal -- a $100-million company -- in short order.
Competitive Edge: A Unique Distribution Channel
Not many start-up entrepreneurs would care to plunge into a slow-growth manufacturing business dominated by big German and Japanese companies. But Eric Stetzel did just that -- and his company, Panoramic Corp. (#46), is now the nation's top seller of panoramic-X-ray machines, the kind that let dentists photograph a patient's whole mouth at once. Stetzel's secret: he developed a distribution channel competitors couldn't easily emulate. Stetzel began selling supplies to dentists right after he finished college. He took on a Japanese panoramic-X-ray line and soon was its largest U.S. distributor. But in the mid-1980s, with the yen rising relative to the dollar, Stetzel began thinking of eliminating his supplier. Knowing there was plenty of excess manufacturing capacity in his home-town of Fort Wayne, Ind., he sought out a partner capable of reverse-engineering the Japanese machine and producing a homegrown version of it -- much as Japanese companies once did with countless American products.
In 1988 Stetzel's new company, Panoramic, began marketing its U.S.-made machines direct to dentists, no distributors involved. Today, only four years later, it's still the only direct seller in the industry. Salespeople based in Fort Wayne make calls around the country and attend trade shows. Once an order is in, the machine is shipped out promptly; it can arrive in a dentist's office as early as the next day.
The maintenance of this distribution channel is a top priority for Panoramic. Customer-service reps call buyers monthly and visit their offices twice a year. The company offers a two-year parts-and-labor warranty, as compared with the one-year parts-only warranty standard in the business. "We feel that loyalty and word of mouth really help us," says Stetzel.
Eliminating the middleman, adds the 36-year-old founder, allows Panoramic to keep prices low even while offering services a buyer might expect from a dealer, such as below-market financing. Best of all, none of his big competitors can easily emulate the strategy of direct selling. "They'd have to cut off dealers they've had for years," says Stetzel with a laugh. "Besides, they sell everything from dental chairs to toothbrushes, and those products do need distributors."
Panoramic's sales this year are expected to hit $12 million, up from about $6 million last year.
ONE INDUSTRY, DIFFERENT EDGES
The task for a company in the construction industry: erect high-quality buildings at the lowest possible cost. But what if everyone else does the job (or claims to do it) as well as you do? Like any business, a contractor or builder has to develop an edge by choosing one key element of the trade and delivering it better than any competitor does -- and by pouring all necessary resources into that strategic focus.
Do the most successful contractors tend to choose the same focus? Nope. The builders on this year's Inc. 500 are the cream of anyone's crop: they recorded their rapid growth during a five-year period when construction nationwide was shrinking by 15%. Even so, they're as different from one another as a screwdriver from a blowtorch. Some examples:
Managing subcontractors. Doug Anderson of Union Pointe Construction (#205), in Salt Lake City, relies on subcontractors for 40% to 80% of each contract; he attributes Union Pointe's success to its "superior relationship" with them. Anderson carefully prequalifies subs before giving them a job, asking them to fill out detailed questionnaires indicating the size and types of projects they've worked on in the past. Once hired, subs must purchase and follow a standard specification manual, a tome that spells out company policy down to the tiniest detail. In return, Anderson says, he'll cut his subs slack when needed -- for example, providing them advance draws when cash is tight.
Drumming up new business. Joel Field of Field Brothers Construction, in Marion, Ohio, has made the Inc. 500 twice (#417 this year, #131 last year) by turning his business into a numbers game. The company -- run also by brothers Jon and Dave Field -- specializes in home remodeling and uses telemarketing to find new customers. The key: a predictive dialing system that lets operators cull numbers from a computerized database and call up to 14,000 households a day. Each day's calls typically generate 50 qualified appointments, 30 of which Field Brothers converts into jobs.
Creating a distinctive image. Ken Wells of Key Con-struction (#259), in Wichita, wants to make "customers so happy they can't stand the thought of doing business with anybody else." But first they must believe that Wells is different from everybody else. To that end, Wells has field workers wear uniforms on the job; his office staff wear regular business apparel. Stationery and envelopes are embossed, not just printed, with Key's logo. Job sites are neat and are posted with highly visible Key Construction signs. Wells's rationale, which he tries to instill in every one of his employees: each job is not just an opportunity to make money but an occasion to sell the company.
-- Alessandra Bianchi