The 10 Commmandments of Hypergrowth

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But thanks to the widespread stock ownership, PSS's employees understand that they'll get a chance to share in the wealth if they stick around. That knowledge, in turn, lets PSS run a high-performance operation without too much turnover. "You need stability to run a successful branch," says Nick Pecoraro.

The ESOP at the moment is worth roughly $46 million. One branch operations manager has nearly a million dollars' worth of stock through his ESOP holdings alone. A truck driver has nearly half a million. Both are in their early thirties. Other employees own stock not only through the ESOP but also through an employee stock-purchase plan (which allows people to buy shares with after-tax dollars) and through an incentive stock-option plan (which provides options to key personnel and to all employees with more than five years' service).

All told, ownership of PSS stock has already created about 40 millionaires, most of whom are still on the company payroll. "I always stress stock ownership to everybody," says Roderick Smith, manager of the New Orleans warehouse. "You can see some results -- 'Hey, this is going to add up over time."

X. Build Leaders for the Future
Every new branch needs two new managers -- or, as PSS prefers to call them, "leaders": one in operations and one in sales. With hypergrowth, that's a lot of leaders. "If you're growing revenues 40% a year, you have to grow people 40% a year," Kelly says.

At first, he just promoted the best salespeople. But the turnover among their ranks was astronomical -- the goals and characteristics of a great salesperson aren't necessarily those of a great leader. Now he finds people who want to be leaders and sends them to special sessions of PSS University. He also takes them on a boat ride, usually down the Inland Waterway in Florida. Kelly, who has a name for everything, calls it Creativity Week.

"What happens is, three of these young leaders come get on my boat. They're required to read three books -- A Whack on the Side of the Head, The Goal, and The Seven Habits of Highly Effective People. They read those books, and in the morning we talk about them. In the afternoon we go through 20 possible problems. It's a case-study approach: when this happens, what do you do? They solve those problems as a group. I'll impart to them some of the ideas that have come out over the years on how to solve this problem.

"The second day comes, and the next three show up for the boat trip. The first three, who were pupils yesterday, are now the teachers. I just sit back and listen. If they miss a point, I'll reiterate it. We try to teach the process: you're a pupil today, a teacher tomorrow. In the afternoon, that group works through another 20 problems. Now it's six people working them through -- and so it goes, all the way down to Key West and all the way back.

"This will be our ninth year coming up. Everybody who is in management has been through the program. They're the newest, most promotable people. This year all the Taylor managers will go through it, too.

"This is how we teach people. It has worked really well for us."

If you were to sum up all these commandments into one big one, it might be this: Build the kind of company that can turn on a dime when it has to.

Hypergrowth, after all, is risky. You have stretched yourself to the limit. You have taken advantage of one set of market conditions. When the market changes, you're vulnerable. Think of the hypergrowth stars of the past, such as Wang Laboratories or Digital Equipment Corp. Health care, moreover, is probably the most mercurial marketplace around. It's not hard to imagine that some shift of government policy or business strategy could jeopardize PSS's positioning. Even now, its salespeople worry that their customers are being forced into larger and larger practices -- and that big hospital-supply companies will muscle in on their turf.

On the other hand, you have to think that PSS will adapt to the market changes. You have to think so, because it has already done so once, only two years ago. In 1993 the Clintons were talking serious health-care reform, and doctors were running scared. Before, PSS's customer surveys had found that most doctors ranked price dead last in a list of reasons for buying from a supplier. Most of them valued service far more, along with their relationship with the sales rep. Now the rankings were upside down. Fully 70% of PSS's customers were saying that price was the most important factor.

So Kelly swung into action. PSS cut its prices on 300 of its most popular items. It initiated a kind of buying club, dubbed Network Plus, in which physicians agreed to buy most of their supplies through PSS in return for low prices. Gross margin fell three percentage points over the next two years. Salespeople's commissions suffered. Kelly himself was chagrined: it meant a wholesale change in strategy. "Here was a guy who stood on a soapbox and preached for 10 years, 'You are a Cadillac,' all of a sudden telling them they should become a Chevrolet," he says. It took time for people to become convinced.

But the kind of company Kelly had built was precisely the kind of company that could make that shift. Salespeople -- and everyone else on the PSS payroll -- had a long-term stake in PSS's success. They knew what the surveys said, and they could see the impact of PSS's moves on the financials. They trusted Kelly and the other top executives. At the branches, managers and employees paid even more attention than before to expenses. Everyone had bought in to PSS and could see why people were being asked to change. Slowly, salespeople began throwing themselves into the new strategy. As they did PSS expanded its market share. It not only maintained its net margins, it improved them, thanks mainly to a drop in selling and administrative expenses.

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