It's a simple-enough question: What business are you in? And it usually elicits simple answers. "We run sales-training seminars." "We distribute parts to the electronics industry." Such simplicity reflects an approach to running a business that has become deeply ingrained. A company should find its niche. Stick to its knitting. Know -- and focus on -- its core competencies. Those strengths usually boil down to expertise in a narrow range of products or services.
Ask the question of Albert Black, however, and you get a wholly different kind of answer. What business is Dallas-based On-Target Supplies & Logistics [#78] in? "You could look at it," says the CEO, as "sourcing, procurement, transportation, warehousing, assembly, distribution, inventory management on the customer side, and second-market management."
All-righty, then. Maybe Black could offer a word of explanation?
The 42-year-old founder recounts his company's rather remarkable history. It started 20 years ago as a nice little everyday business: providing janitorial services and supplies to corporations. Pretty soon it was focusing on supplies alone and stocking them in its own warehouse. Then the market shifted -- more on that later -- and it began selling stuff like paper for copiers and computers. Over the years it added one business after another. Logistics and supply-chain services. Assembly and kitting. Outsourced warehousing and inventory management. (The "second-market management" Black refers to is the business of selling off excess or unwanted goods.) Eventually, the company grew to $28 million in revenues. When the current recession hit On-Target's customers hard -- "nobody defies the laws of gravity," says Black -- sales fell sharply, but the company dealt with the crisis by branching out still further. It entered the consulting business. It began hosting corporate-training sessions in a newly built conference center.
SURVIVING THE DOWNTURN: "Nobody defies the laws of gravity."
But what's truly surprising about this year's list of Inner City 100 companies is the fact that so sprawling a business model isn't unique. Techead [#68] started as a desktop-publishing house, got into staffing, added graphics and multimedia software training, and now includes in its portfolio back-end Web design -- Linux-based databases, for instance. Interactive Ink [#57] started out developing children's CD-ROMs, got into Web-site development and other Internet projects, and is now preparing to market knowledge-management systems. Even companies that stayed roughly in the same line of work seemed to branch out. For example, AAA Business Supplies became AAA Business Supplies & Interiors [#99] when it added an office-furniture division.
What's going on here? It's not surprising that entrepreneurial companies should move from one business to another as Opportunity A fails to pan out and Opportunity B beckons. Nor is it odd to find companies scrambling for new things to do in a downturn like the one we've endured recently. But there's something different about the many-faceted Inner City 100 companies. They seem to embrace new-business development as a way of life, branching out in boom times and bust times alike. And they don't typically exit one business when they get into another; instead, they add on layers of products or services, amalgamating the new with the old and turning themselves into something resembling miniature multidivisional companies. One reason for that contrarian, don't-stick-to-the-knitting approach, no doubt, is that they have grown up in tough economic neighborhoods and so have had to cultivate the fine art of business survival. But there's more at work here than hardscrabble opportunism, as the companies' record of chart-busting growth suggests. Talk to their leaders long enough, and you realize that they approach the world in a manner unlike that of most CEOs. They have a different definition of what constitutes a market. They view their companies' core competencies through a unique set of lenses -- ones that allow them to see opportunity where others might see only stagnation.
Let's look at markets first. Economists, strategy consultants -- heck, even a few business magazines -- assume that markets exist in the abstract. They're "out there," anonymous, waiting to be discovered and exploited. Market research -- surveys, focus groups, tests, and so on -- is how you find out what your prospective customers want. That mind-set makes perfect sense if you're a Procter & Gamble targeting zillions of consumers. The underlying assumptions -- largely true for giant companies like those -- is that every sale is an impersonal transaction and that if customers don't want what you're offering, they'll take their business elsewhere.
ENGINEERING THE FUTURE: "I was in the right place at the right time."
By contrast, consider how On-Target's Black has always regarded his market. Back when the business was starting out by selling janitorial supplies, he didn't hang out a shingle or work his way down the yellow pages; he targeted a few large corporations and focused on selling to them. It wasn't a grand strategy, he admits -- he just needed "people who could pay us fast" because there wasn't much money in the checkbook. Later those large companies began outsourcing janitorial services to small start-up companies. Black had zero confidence that the new entrepreneurial suppliers would pass his pay-us-fast test. So he redefined his market. Suddenly, he wasn't in the janitorial-supplies business, he was in the let's-sell-something-else-to-our-traditional-customers business. "We chose a product line" -- copier paper, computer supplies, and so on -- "that [the corporations] retained while outsourcing the janitorial."
How did his company make such a shift? In fact, the change was enabled and encouraged by customers like Texas Instruments. Executives at TI advised Black to consider branching out into the new markets. They counseled him on how to make the move work (for instance, by relocating his headquarters into South Dallas, where he'd be closer to customers). Eventually, they offered On-Target a five-year contract in the new business -- enough to get him started while he tracked down other buyers.
That is how many Inner City 100 companies operate. Their market is a particular group of customers. Their business is doing pretty much what those customers want at any given moment. Of Techead's expansion from desktop publishing into staffing, CEO Philise Conein says, "Our clients started asking us, 'Hey, this is great. You can do all this page layout and stuff, but can you send us somebody? We'd like to have them on site." Of AAA's expansion from office supplies into contract furniture, owner Steve Danziger remembers: "Our customers were saying to us, 'Gee, you folks are not a great furniture source. Can't you work with us more on furniture?" You'd think that purchasing departments would be leery of suppliers who are new to a line of business -- but in the eyes of some big customers, at least, experience is less important than a relationship with a trusted vendor, people that you know will do their utmost to keep you happy.
CASH IS KING: "The name of the game was to grow fast so you wouldn't be over-taken by bigger, more prominent players, but because we were also cash-flow positive, we were more solid than others. Other companies couldn't turn the ship fast enough given the events that unfolded."
There are limits to what Inner City 100 companies will take on for their customers, but the limits can be broad. Take PlastiComm Industries [#19], in Denver. Some years back the company got the contract for supplying telecommunications pipe to the new Denver International Airport. But the airport's procurement folks also needed someone to arrange for other purchases and deliveries to that part of the job -- rebar, fiber-optic cable, and so forth. No problem, said PlastiComm CEO Ron Montoya; the company promptly increased the number of telecom products in its portfolio. Later, PlastiComm began focusing on distributing supplies to the telecom industry. But when a customer asked for a bid on manufacturing components known as pressure cable stubs, what was PlastiComm's response? Right the first time: "No problem." The company didn't win the bid, but the winner proved to be unable to do the job -- so the customer returned to PlastiComm, which promptly took on the work.
So where does this leave the notion of core competency? When management gurus C.K. Prahalad and Gary Hamel first popularized the concept in a 1990 Harvard Business Review article, it was like a bright ray of sunshine illuminating what was then a miasma of big-company strategic thinking. Forget diversification for its own sake, the authors advised. A company needs to focus on what it does best and then find ways to apply those skills in different marketplaces.
On one level, you can see the Inner City 100 companies as textbook cases of core-competency-based management. That's the key, for example, to Black's lengthy and abstract statement about what business On-Target Supplies & Logistics is in ("sourcing, procurement, transportation," and so forth): the company developed a series of related core competencies one at a time and has capitalized on each. In the beginning its only skill was the ability to locate and provide high-quality services and supplies at a competitive price. ("We would be a supply company that had a comparative advantage by being more intelligent about the products we sold," says Black.) When it began to warehouse the supplies itself, it needed -- and developed -- a new set of skills, those relating to inventory management. The more material it moved in and out of those warehouses, the more expertise in transportation and logistics it gained. Eventually, Black's whole laundry list of logistics services became On-Target's core area of expertise.
"I just hate suburbia and I love downtown. I never gave those little ugly rows of cubes any consideration. I wanted an old building with some soul."
Look at what that enabled the company to do when the recession hit. On-Target's sales plummeted 34% in 2001 as key customers faltered, and Black had to lay off nearly a quarter of his workforce. But the company was able to preserve 85% of its earnings by changing its sales mix while still capitalizing on its core skills. Fewer product sales, but more warehouse-management services for companies that could no longer afford to maintain their own facilities. A new emphasis on consulting services, offering clients the benefits of the skills the company had developed. Texas Utilities (TXU Corp.) recently hired On-Target to analyze and streamline its warehousing and distribution operations. Wyndham Hotels asked it to help the chain strengthen and diversify its supplier base. "If we can't sell what we have," says Black about the company's recessionary strategy, "let's sell what we know."
So that's one kind of core competency. But there's another view of the idea that many of these companies share. Their fundamental expertise may be not just the skills themselves but the ability to learn and keep on learning new skills. It's the learning that enables them to hang on to markets as those markets shift beneath their feet.
Learning, of course, is a squishy concept in a business environment, and fashionable terms like the learning organization conjure up visions of company executives attending seminars at ivy-bedecked campuses and studying the latest management buzzwords. For the Inner City 100, learning is a grittier and more tangible process. Step one: say yes to those customers you have identified as important to your business. Step two: take on jobs that stretch your company's capabilities. PlastiComm, for instance, recently completed a major five-year project that entails building so-called racking systems for a big telecommunications manufacturer, configuring the systems, prewiring and testing them, and installing them throughout the company's network. The scale of the job and PlastiComm's central role in it dwarf anything the company has done in the past.
SWEET LIFE: "It makes sense for this company to put a significant chunk of its resources into something that's good for the world, because we are building a reputation in the world, and our customers appreciate that."
Step three: invest in figuring out how to do something. "We spend a tremendous amount of time and floor space doing R&D projects for telecommunications companies," says PlastiComm's Montoya. "We'll build and rebuild and reconfigure and reconfigure systems at our own expense." The hope is that company personnel will come up with a workable new methodology or product and that they alone will then have the knowledge necessary to put it into production.
Interactive Ink, the Ohio Web-consulting-and-other-stuff company, is a case study in the importance of learning, maybe because its owners got an early and brutal lesson in the importance of developing new skills. The business started with a contract from Panasonic Interactive Media to develop CD-ROMs for children. It was sailing along merrily -- "something like 95% of our revenues were coming from Panasonic," remembers CEO Tom Rausch -- when Panasonic suddenly announced it was quitting the business. Ouch. Rausch scrambled to develop and market a Web-database product for the real estate market. Since then it's been one damn new skill after another. While converting a big lighting manufacturer's catalog to CD-ROM and Web format, Rausch proposed adding Amazon.com-like affiliate-marketing functionality, which would provide the manufacturer's mostly mom-and-pop dealers with instant E-commerce capabilities. ("Suddenly, we had to become experts in Internet marketing," says Rausch.) Asked by another client to develop an intranet, Rausch realized that the client hadn't begun to think through the strategic ramifications of the project. ("Now we had to become experts in business planning," Rausch says.)
Spend enough time learning, of course, and your company is likely to wind up a long way from where it started. It will be deep into new markets. It will be armed with new skills. Many of this year's Inner City 100 companies have followed that approach. When you're checking out the rankings to see the businesses these companies are apparently in, remember that it's often impossible to capture the sheer diversity of what they do in one line on a chart.
For Interactive Ink, that approach to business is standard operating procedure, and CEO Rausch has turned it into something like a mantra. Companies that are married to a technology or product, he says, look inward. Companies that are focused on customers look outward and therefore change all the time. Rausch's words to live by effectively define the whole modus operandi for the learners and adapters that make up so much of the Inner City 100 list:
"If you're married to the customer-need side," he says, "you say, 'I don't care what technology I have to learn or adapt to. I'm just going to go where my customer is going to go.' "
John Case is a contributor to Inc.
Inc staff Kate O'Sullivan, Tahl Raz, Thea Singer, Anne Stuart, and Ilan Mochari also contributed to the reporting of this year's Inner City 100 package.
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