TableofContents

TitlePageCopyrightPageDedicationIntroductionSECTIONONE-ThinkBig

SECTIONTWO-TheBuildingBlocks

Chapter1-DowntoEarthChapter2-KeepYourHandsDirtySASINSTITUTEChapter3-MakeShort-TermGoalsandLong-TermHorizonsSONICDRIVE-INChapter4-LetGoCABELA’SChapter5-HaveEveryoneThinkandActLikeanOwnerKOCHINDUSTRIESChapter6-InventNewBusinessesDOTFOODSChapter7-CreateWin-WinSolutionsMEDLINEINDUSTRIESChapter8-ChooseYourCompetitorsPETCOANIMALSUPPLIESChapter9-BuildCommunitiesSTRAYEREDUCATIONChapter10-GrowFutureLeadersO’REILLYAUTOMOTIVESECTIONTHREE-TheQuadASELF-EVALUATIONANDRANKING

SECTIONFOUR-TheResearch

SECTIONFIVE-Charts

ConclusionAcknowledgementsINDEX

ALSOBYJASONJENNINGS

LessIsMoreHowGreatCompaniesUseProductivity

asaCompetitiveAdvantage

It’sNottheBigThatEattheSmall...

It’stheFastThatEattheSlowwithLaurenceHaughton

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INTRODUCTION

You’reabouttolearntheidentitiesofahandfulofcompanieswhoseconsistentrevenues and profit growth places them among the top one-hundredth of 1percentofallAmericancompanies.Havingincreasedrevenuesandprofitsby10percent ormore for ten consecutive years, they routinely accomplishwhat therestofus(theother99.99percent)have,asyet,onlydreamedabout.Here’swhywhatthesecompaniesdoisvitallyimportant...toyou.

RaisingRevenuesandProfitsIsn’tanOption

Thebottom-lineneedofeverybusinessisconstantlyhigherrevenuesandprofits.Ambitious workers want to improve their lot in life and expect raises.Competitive spirits demand runs on the scoreboard. And investors andshareholdershave insatiableappetites forconstantlyhigher returns.Companiesthataren’tgoingforwardaregoingbackward!

Executives and managers who fail to consistently increase revenues andprofitsendupwiththeirheadsonastick,andbusinessownerswhodon’tgrowrevenues end up with empty storefronts, deserted factories, and hauntingmemoriesofwhatcouldhavebeen.Historically,businessmanagersandownershave had three choices for constantly improving the financial performance oftheirbusiness.

IncreaseRevenues

It’s easy to increase revenues when the economy is in terrific shape, thecompetitionisn’tpayingattention,andpeopleareknockingdownyourdoor tobuywhat you sell.Unfortunately, those days are over.Economies everywherearefragile.Everyonehasmoreandbettercompetitionthaneverbefore(andthatwon’t change) and nobody absolutely needs anybody; everyone has plenty of

alternatives. Today business managers and owners are forced to constantlyincreaserevenuesinthemostchallengingenvironmentthathaseverexisted.Theproblemisthatthetacticsusedbymostownersandmanagerstogrowrevenuesaretiredrerunsofoldconventionalwisdom.

“Haulthesalesstaffinhere!”bellowstheboss.“I’llgivethemthe‘Come-to-Jesus’routineandfirethemup.”

Regrettably,theresultofrallyingthetroopsisalwaysshort-lived.

EntertherecentMBAgraduate,burstingwithideas.“Maybeincreasingsalescommissions for brand-new businesses and lowering them for existingcustomersistheanswer,”hemuses.“Inonecasewestudiedduringmysemesterabroad,aMongoliancompanydid thatand increased theirsalesofyak jacketsbytwentypercent.”

Unsurprisingly,changingincentivesandplayingwithpeople’spaychecksandlivelihoodsseldomhaveapositiveeffectonmorale.

“I have an idea,” pipes up an assistant brand manager. “Let’s add somejalapeño flavoring toourSuperCrunchyRiceFlakes, call themOlé!Olé!Oléandhavethesalesstaffintroducetheproductwearingsombreros!”

Sorrytobethebearerofbadnews,but96percentofbrandextensionsfail—andthefailurerateisprobablyhigherforlast-gaspmeasures.

“Whatwereallyneed,”lamentstheold-timerwhohasbeenaroundtheblockmore times than a septuagenarian streetwalker, “is to find some low-hangingfruit,somerealeasybusiness.”Hopingagainsthope,headdsawistful,“It’sgottobeoutthereinsomeplacewe’veneverlookedbefore.”

Alas,competitionistougherthanit’severbeen.Whattodowhenallthelow-hangingfruithasbeenpicked?

Invariably, the same old tactics for increasing revenues bring the same oldresults.Moreoftenthannot,companiesendupfailingtoachievetheirrevenuegrowthobjectivesand so resort toquick fixes todemonstrate short-termprofitgrowth.

CutCosts

Asecondwaytoimproveacompany’sfinancialperformanceisusuallythemostunpopularoptionforyouremployees:cutcosts.Cutcutcut.Layoffs,shutdowns,contractions,andassetsalesareemployedinordertoimproveshort-termprofits.All of these moves, of course, come back to bite these companies on theirbacksides. Reducing, snipping, and nonstop rounds of cutting does nothing tojump-start or grow revenues. Downsizings and layoffs frequently become asaddictiveasstreetdrugs,and thecompanies thatabuse themendupemaciatedshadowsoftheirformerselves.

Or,CooktheBooks

When companies fail to increase their sales and find their bag of cost-cuttingtricksempty,manyresorttoplayingloosewiththetruth.Ofthe1,200publiclytraded companies forced to restate their operating results for 2003 under theSarbanes-OxleyAct,every single company had to adjust their revenues and/orprofits downward. They had all claimed that their revenues or profits werehigherthantheyactuallywere.Notasinglecompanyhadunderstatedrevenuesorprofits.

WhatWeFound

Sowhat do you do if the three commonways of posting financial health areclosetodefunct?Wewentonahuntforanswers.MyteamofresearchersandIevaluatedandstudiedeverypubliclytradedcompany(abouttwentythousandofthem) in theworldaswell asmore than fifty thousandof the largestprivatelyownedcompaniesintheUnitedStatesinordertofindthecompaniesthatdothebestjobofconsistentlyincreasingrevenuesandprofits.(You’llfindanarrativedescribingourcompleteresearchmethodologyinSection5.)Wereasonedquitesimply that ifwecould identify the companies that do theworld’sbest jobofconsistentlyincreasingrevenuesandprofits,there’dbevaluablelessonstolearn.So we traveled the nation; got inside every company we’d identified; andinterviewed, studied,observed inaction,andgot toknow thepeoplewho leadAmerica’sbestperformingcompanies.Wewerehardlydisappointed.

Wediscoveredthatnoneofthesetopcompaniesembracetiredoldtacticsforgrowingrevenues,cuttingcosts,andexaggeratingtheiroperatingresults.Insteadtheyhavefiguredouthowtoconsistentlyincreaserevenuesandprofitswithoutusingmanipulationorgimmickry.Theydon’trecyclethesameoldstuffthathasa history of either being marginally effective or simply not working. In theprocess, each of these top performing companies has turned conventionalwisdomupsidedown.

America’sBest-PerformingCompanies

Here they are, the companies we identified as having increased revenues andprofitsby10percentormoreeachyearfortenyearsorlonger.Theiridentitiesmaysurpriseyou.TheirCEOsmay surpriseyou.Their locationsmay surpriseyou.Evenwhere they’renot locatedmaysurpriseyou.We think thisgroupofcompaniesisontosomethingthatmaychangetheveryfaceofhowcompaniesdriverevenueandprofit.

Cabela’s Headquartered in a small town of a few thousand people on thewestern plains of Nebraska, Cabela’s has built a sporting and outdoor goodsempire thatmails outmore than 120million catalogs annually,making it thelargestdirectmarketerintheUnitedStates.Bytossingoutthetraditionalretail

rulebook, their large-format destination retail stores, filled with waterfalls,mountains, aquariums, and exotic-game trophies, are among the top touristattractions in their states. Cabela’s has institutionalized doing something thatmost companies can’t or won’t do, and it’s the thing that prevents mostbusinessesfromeverachievingtheirfulleconomicpotential.

DotFoodsWhocouldhaveguessedthatayoungcouplewithtwelvechildren

wouldmortgage thehouse, ramblearound Illinois andMissourideliveringdrydairygoodsoutofthebackoftheirfamilystationwagon,andthattheirchildrenwould invent a brand-new business that would revolutionize the way food isdistributed, eventually becoming the largest food service redistributor in theUnited States? The same things Dot Foods did to revolutionize the fooddistributionbusinesscanbeappliedtohostsofotherindustrycategories.

Koch Industries A conglomerate with holdings in petroleum, natural gas,chemicals, fibers,minerals, ranching, and securitiesmightnot sound too sexy.Butwhen itcomes to thesecond-largestprivatecompany in theUnitedStates,whichhascreatedmorevalueforitsshareholdersthananyothercompanyintheworld, you’d do well to take notice. Koch’s secrets in this task can beimplementedbyanybusinessreadytocommittotheKochGuidingPrinciples.

MedlineIndustriesFromhumblebeginningsasasmallChicagoshopwhere

a husband-and-wife team sewed uniforms,Medline has grown into a businessthat sells more than 100,000 products to hospitals, surgery centers, extended-care facilities, home-care agencies, and physicians’ offices. This company’ssalesforcehasbeenrankedthebest in theUnitedStatesandyou’llknowwhywhenyoulearnhowitoperatesandhowitcompensates.

O’Reilly Automotive Most seventy-two-year-old businessmen sent out to

pasture at the directive of a know-it-all young consultant would hang it up.Instead,CharlesF.O’Reillyandhisson“Chub”O’Reillydecidedthatthebestway to even the score was to open a competing store selling aftermarketautomotive tools, professional service equipment, and accessories. Today thecompany’s one thousand two hundred stores generate almost $1.5 billion in

annualsalesandforthepastdecadethey’veachievedaverageoperatingincomegrowthofmorethan30percentayear.

PETCO Animal Supplies By picking its competitors wisely, PETCO has

become the leading specialty retailer of premium pet food, supplies, andservices,andsellsmorethantenthousandhighqualitypetproductsinitsstoresand online. Besides selling pet supplies, PETCO offers grooming, obediencetraining,vaccinationclinics,andevensponsorsanonlinepetadoptioncenter.

SASInstituteTheworld’slargestprivatelyheldsoftwarecompanyachieved

a string of twenty-five years ofmore than 10 percent annual revenue growth.The company is frequently lauded in surveys of the best places to work inAmerica.TheleadersatSASdosomethingmostCEOsandmanagersrefusetodo—andit’swhytheygrowduringgoodtimesandbad.

SonicDrive-InWant chocolate syruponyour fries?Yougot it saysSonic,

America’s largest chain of quick-service drive-ins (more than three thousandrestaurants in thirty states) where every order is completely customizable,completelyyourown.ThecompanyhasgrownfromasinglerootbeerstandinShawnee,Oklahoma,anddifferentiatesitselfbyusingamodelwherebyvirtuallyeveryemployee, including theCarhops,has a financial stake in the successofthebusiness.

Strayer Education Founded in 1892, Strayer educates more than twenty

thousandworking adults on its thirty campuses and throughStrayerOnline. Itpurposely chose to grow slowly, in order to preserve the highest educationalqualityandprotectitsbrand,yetthecompany’sconsistentfinancialperformanceisstillstellarandhasbecomethemodelforeducation-orientedcompanies.

ACommonThread

OnedayasIwasnearingcompletionofmyresearch,Iwasconductingafollow-up interview with Pattye Moore, former president of Sonic Drive-In. TheinterviewwasalmostoverbutIhadonefinalquestion.

“What’s themagic,” Iasked,“that’sallowedSonic to raise its revenuesandprofitsbydoubledigitseveryyear?”

“That’saneasyone,”sheansweredwithouthesitation.“Wethinkbigbutweactsmall.Whenbigcompaniesstartactingbig,theygetintrouble.”

Thosefewwordsabsolutelynailedwhatwe’dfoundinsideeverycompanyinthisbook.Eachonethinksbigbutactssmall.

RightaftertalkingwithPattyeMoore,myresearchersandIsente-mailsouttoallthecompanieswewerewritingabout.Wetoldthemthatwefinallyhadatitleforthebook.Thensomethingsurprisinghappened.Mostofthecompaniesbegane-mailing uswith copies of old companymemos, speeches, and articles.As Ireadthemitwashardnottosmile.Theleadersofalmostallthecompaniesinthebookhadbeenusingthephrase“thinkbig—actsmall”foryears.Andsowehadatitleforournewbook.

What’sHereforYou

Our findings genuinely surprised us. We didn’t discover any mind-bendingtactics or top-secret methods that enabled these companies to grow theirrevenuesconsistently. Instead,becauseeachhasnailed the fundamentalsbetterthanallothercompanies,theirdramaticandconsistentgrowthoccursnaturally,evenorganically.

Inthefollowingpages,you’lllearnthetenBuildingBlocksthesecompaniesusetogrowtheirrevenuesandprofitseveryyearanddistinguishthemselvesasbeingAmerica’sverybest.

EachBuildingBlockrevealsoneofthetruthswediscovered,introducesoneof the companies, briefly tells its story and shows how theBuildingBlock isappliedat theothercompaniesweresearched.TheBuildingBlockswepresentwould be no less valid if they weren’t practiced by every company, butsurprisingly,inalmosteveryinstance,everythingwefoundisawayoflifeatallofthecompanies.

JustCommonSense?

At some point during your reading you might be tempted to say to yourself,“Well, that’s only simple common sense.”When so tempted, I’d urge you torecallafewunforgettablewordssharedwithmeseveralyearsagoinAsia.

IhadjustfinishedgivingaspeechinHongKongwhenIwasapproachedbyan elderly Chinese lady. “I enjoyed your speech verymuch,” she said tome.“Thethingsyousaidwerereallyjustsimplecommonsense.”

I took it as a backhanded compliment, if a compliment at all. Seeing thecrestfallen look on my face, she looked up, smiled, and quietly added,“Remember,themostcommonthingaboutcommonsenseishowuncommonitis.”

If you’re ready to learn the ten Building Blocks that promise to help youincrease your company’s revenues and profits every year, it’s time to startreading—anddiscovering.

JasonJenningsTiburon,California

SECTIONONE

ThinkBig

IntheBeginning

Imaginewhatadismalplace theplanetwouldbe ifnoonehadeverhadabigidea. We’d still be naked savages communicating with grunts and groans,seekingshelterunderupendedtreerootsandscavengingforscrapsoffood.

Thankfully,oneofourancestors thoughtbigandwrappedhimself inanimalskinstowardofftheelements;anotherthoughtbigandconstructedaprimitiveshelter; still another thought big and decided to stay put and cultivate a cropratherthanroamandforagewiththeseasons.

Millions of years later Ralph Lauren thought big, stitched a logo on thoseanimal skins, and founded Polo, a fashion empire with $5 billion in annualreveneus.WilliamLevitt thoughtbig,foundedLevittown(inventingthesuburbin the process), eventually building 35,000 small, detached, single-familysheltersandnettinga$60-millionfortune(when$60millionmeantsomething).Andwaybackin1867,AlvaKinneythoughtbigandbegansellingthebountiesof the field in the form of bags of flour and ConAgra, a company with $15billioninannualrevenuestoday,wasborn.

Thinkingbighasbeenresponsibleforeveryadvance,everydevelopment,and

everysuccessfulbusinessknowntoman.Therewerebigthinkersbehindrocketships,skyscrapers,computers,assembly lines, fast-foodhamburgers,andeveryleap forward in medical science. Along the way, the marketplace hashandsomely rewardedmanybig thinkers.BillGates,WarrenBuffett, andSamWalton all defied conventionalwisdom, thoughtbig, significantly changed theworld,andamassedfortunesworthtensofbillionsofdollarsintheprocess.

NoShortageofBigThinking

Each year millions of businesses are founded worldwide. Sometimes it’s anindividual going solo in a home office. In other instances it’s friends andpartnerspoolingresourcestopursueadream.Andothertimesit’sthelaunchofamanufacturingorservicefacilitydesignedtoemploythousands.Inthecaseofeverynewbusinesstherearetwocertainties:therewassomebigthinkingbehindthe decision tomake the leap, and not a single businesswas createdwith theintention of failing. Unfortunately, judging from business mortality rates, justthinkingbigdoeslittletoensureabusiness’ssuccess.

AConundrum

Each year the United States records more than forty thousand businessbankruptcies.Eachyearthedreamsofhundredsofthousandsofsoleproprietorsare dashed. In one recent twelve-month period more than two hundred bigcompanies, famous titans that had seeminglywithstood the test of time—withnames like United Airlines, Kmart, WorldCom, and Adelphia—ended up inbankruptcycourt.Manywidelyquotedstudiesconcludethatfourofeveryfivenew businesses fail within the first five years of their existence. A recentUniversityofTexasstudyarguesthat98percentofsmallcompaniesdisintegratewithin eleven years. Is seriously flawed big thinking responsible for suchmiserableperformancesandtrackrecordsoristhereanothermissingingredient?

FourTypesofThinkingandActing

Evidenceofthinkingbigispresentineverysuccessfulhumanenterprise.Butbigthinking without proper execution inevitably results in failure. There are fourtypesofthinkingandacting(executing)availabletoeveryleaderandcompany.Wefoundthatcompaniesthatexcelatachievingconsistent,long-termfinancialperformanceallfallintoonlyoneofthesefourpossiblecategories.

ThinkSmall,ActSmallTheenterprisesthatfallintothiscategoryareeither

smallmom-and-popbusinesses,companieswherethesoleambitionistoprovidea livingwage to theowner(s),orenterprisesdesperately trying toholdon toavestigeofabetterpast.They’reunwillingtoinvestintheirbusinesses,andeitherbecauseofnecessityorabasiccharacterflaw,they’renotoriouslycheap.

Unlesstheirmarketnicherequiresanunusuallyhighdegreeofskill,orthere’sadearthofcompetition,theseoperatorsdisappearwhenthemanagementretiresor dies or when customers abandon them in favor of enterprises with morecompellingofferings.

The sole exception to the previous description is people who haveintentionally chosen to think small and act small because they believe that allbusiness is inherently evil. These people typically opt to reside deep in thewoods in cabins without utilities where they weave macramé, string brightlycoloredbeads, andcastcandles in sandmolds for saleat art fairesandprotestfestivals.

Peoplewho thinkandact small aregenerallynotdangerous toanythingbuttheirownenterprises.

ThinkSmall,ActBigBecausetheyinfrequentlyhaveoriginalideas,thistype

contents itself with exaggerating past accomplishments and providingunsolicitedopinionstoothersabouthowtoruntheirbusinesses.

You’llfindthempontificatingontheevilsofWal-MartandhowitdestroyedMainStreeteverytimethere’sabreakfastmeetingofthechamberofcommercefeaturingfreeKrispyKremes.Eventhoughtheirownbusinessesneverachieve

their full economic potential, that doesn’t get in theway of their overinflatedviewsoftheiraccomplishments.

Unless their advice is taken seriously, people who think small and act biggenerallyaren’tseriouscompetitorsinanygivenmarketplace,buttheirnonstopbravadocanbetiring.

ThinkBig,ActBigEveryoneisfamiliarwiththistype,whetherit’slocated

inClinton,Mississippi,oronMadisonAvenue.Armedwithadeliciousbigidea,they start out on a promising track—and then something happens that sendsthemovertothedarkside.

First there are the sizzling suites of offices filledwith snappy young execs,phalanxes of kowtowing assistants, and an increasingly bloated hierarchy.There’s more swagger than walk, and eventually strategy is trumped byarrogance.Laterit’salmostalwaysdiscoveredthatrevenueshadbeenartificiallypumpedup,profitsoverstated,sharepricesmanipulated,andtreasurieslooted.

Peoplewhothinkbigandactbigaredangeroustoworkers(they’llprobablylose their jobs when the big cheese begins announcing layoffs designed toprotect his backside), vendors (whomay not get paidwithout the approval ofbankruptcy court), and shareholders (whose investments may very welldisappearinsmoke).

ThinkBig,ActSmall (Sighof relief.)Theseare thepeopleandcompanies

whogetitright.Theirconsistentlong-termfinancialperformancedistinguishesthem. Their big thinking is based on authentic big ideas, genuinely solvingcustomers’problems,makingsomethingbetter,orcreatingvalue.

Thesepeopledon’tusethecompanyastheirpersonalexchequer.Ratherthanallowing success to go to their heads, they remain humble. They continue toworkcloselywithcustomersandunderstandthattheorganizationwon’thavealong-termfutureunlessshort-termobjectivesareachieved.

They’re ready to letgoofwhat isno longerworking;geteveryone to thinkandactlikeowners;andconstantlyinventnewbusinesses,providingcustomerswithwin-winsolutions.Theycarefullyselect theircompetition,work tirelesslyto build communities of raving fans, and their biggest thrill is identifying and

helpingbuildfutureleaders.

People and companies who think big and act small are good for workers;vendorsandsuppliers;shareholdersandcommunity.

GoAhead...

Goaheadandthinkbig!Butwhenitcomestoexecutingyourideas,followtheprinciplesof thinkingbigandacting small aspracticedby thecompanieswhogrowtheircustomercountandsatisfaction,revenues,andprofits,yearafteryearingoodtimesandbad.

SECTIONTWO

TheBuildingBlocks

1

DowntoEarthThepeoplewholeadtheAmericancompaniesthatdothebestjobofconsistentlygrowingrevenuesaren’tcelebritiesanddon’tseekfame.Infact,muchlikethefirsttimeyouheardyourrecordedvoiceplayedbackandwonderedwhyitsoundedsostrange,mostofthesepeoplewillfinditawkwardtoseetheir

namesinprint.

By the time we’d whittled our list of companies from seventy thousandcandidatestotheninemostconsistentlyprofitablebusinesseswe’dbestudyingandwriting about,wewere convinced that eachCEO and companywould berightfullyproudthey’dbeenchosenandmorethanpleasedtocooperatewithus.Instead, as you can read inmore detail in the research section, getting insideeachofthesecompanieswaslikepullingteeth...onlyworse.

As someone who is constantly besieged by CEOs and PR people asking,“Howcan Igetmycompany inoneofyourbooks,” I scratchedmyheadandwondered,“Whywouldn’tcompaniesthathadaccomplishedsomuchwanttheirachievementsknown?”

Eventually, as we spent time with and got to know the leaders of thisremarkablegroupofcompanies,theanswerbecameunmistakablyclear.There’slittledoubtthatpartoftheirreluctancetoopenthemselvesandtheircompaniestouswastheirdesiretoremainsecretive,butitwasn’ttheirprimaryreasonfornotwantingtomeetwithus.Noneofthesecompany’sleadershasanyinterestinbeingportrayedasacelebrityCEO.Theverythoughtisanathematothem.

Youwon’tfindasingleslick,overconfident,swashbucklingsalestypeleadinganyofthecompaniesthatdothebestjobofconsistentlyincreasingrevenues.Infact, you’ll find just the opposite: very humble people leading and managing

equallyhumbleenterprises.

JustaRegularGuy(Gal)

Aswecrisscrossedthenation,meetingandinterviewingthepeoplewholeadthecompanies we’d eventually write about, we were continually struck by thedown-to-earth nature of every one of them. As we’d complete each daylongCEOinterviewwe’dinvariablywaituntilwewereoutofsightandearshot,thengrin and say, “Can you believe it . . . no pretense . . . just another regularperson?” Each of the leaders we encountered was more modest than theprevious.Becauseofthehumblenatureofthesepeople,theyhadbeenkeepingtheir compelling storiesmuch to themselves for years.What we foundwas atreasuretrove.

Even afterwe’d spent hours getting to know each other and discussing hiscompany,themomentthediscussionturnedtohimasanindividual,eachCEObecame noticeably uncomfortable. Typical of our interviews is the followingexchange takenverbatim fromour interview transcriptwithRobertSilberman,CEOofStrayerEducation.

JASONJENNINGS:Finally, talktomeaboutyou.Tellusyourstory,just so I— ROBERT SILBERMAN: It’s not really that important,frankly—JJ:Iknow,butjusttakeusthroughit.“Iwasbornin—”

RS:Well, most importantly, for me, this really ought to be about thebusinessmodel—JJ: And itwill be—RS: Andwhatwe’re trying toaccomplish— JJ: I just need a little bit of background stuff— RS:Becausemostofwhat Isee in thiskindof journalismreally isbullshit.AndIthink—JJ:Iagree.ButIalsohappentoknowthatyoureadmylastbookanduseditanddidn’tthinkitwasBS.

RS:That’strue.

JJ:So,alittleaboutyouplease—RS:It’sjustthatIfindthatthefocuson CEOs is— JJ: Listen, you have my commitment; the book’s notaboutyou,I justneeda littleflavor.Ineedto let thereadersknowthatsomehowwetouchedthesoulsofthepeoplewe’rewritingabout—RS:

OK,Iwasbrieflyanavalofficer...

Nobodywas anxious to share their personal story because no one believedtherewasastorytobetold.Theymaintainedthattherealstorywasthecompanyand that their personal contribution(s) in founding or leading it was of littleimportance.

We kept waiting to bump into our first larger-than-life, perfectly coiffed,trumpedupcaricatureofaCEOreadytocaptivateuswithtalesofhispersonaland professional conquests. It never happened and we constantly foundourselvessearchingfornewwordstodescribetheabsolutegenuinenessandself-effacingpersonalitiesofthepeopleweencountered.

Aftereachinterview,we’dendupdiscussingthesamesubject:whatwasthemagic that allowed these companies to be the top revenue performers in thenation? And we always ended up with the same conclusion: the unassumingnature of the people who head these companies is central to the enterprise’sability to consistently grow revenues. Egos are just not relevant at thesecompanies. The people who lead the businesses get a strong psychic rewardfromthesuccessof theirenterprisesand theircontributions inguiding theminwaysthatlesssuccessful,lesshumble,CEOscanonlyenvy.

HumblePeopleBuildHumbleCultures

Thefirstrequirementofeffectiveleadershipismakingarealisticassessmentofthe people and resources being led and determining an agenda for the group.Whenanenterprise isheadedbya cocky,publicity-seekingegoist, theagendahasalreadybeendetermined,andeventuallythecompanywillcometoresemblethe leader and take on his psychological and physical traits. But when anorganization is headed by someonewho does not have the need to constantlytrumpet his own importance and is ofmodest pretensions anddimensions, theorganizationanditsagendawillcometolookalotlikehim.

Each of these organizations takes on its own characteristics and culture,reflectivebutalsoindependentofthefounder/CEO/leader;theculturebecomesbigger than any one individual. In our research and interviews,we found thateverycompanythatdoesthebestjobofconsistentlygrowingrevenuesisatits

coreahumbleorganization.

SevenAttributes

During our research we identified seven traits shared by the leaders and theorganizationsthey’dbuiltorledthatwedeemednoteworthy.Here’sourtakeonthesevenmainattributesofhumblenesswefoundatthecompaniesprofiled.

StewardshipTransparencyAccessibilityWorkEthic

StandforSomethingEraseSuperficialDistinctions

NoBigOffices

1.Stewardship

In CEO Robert Silberman’s 2003 letter to Strayer’s shareholders, we foundsomething thatbestdescribes theattitudessharedbyeachof theCEOs towardtheenterprise they lead.“Iwouldbe remiss,”hewrote“if Ididn’texpress,onbehalf of the entire Strayer management team, how fortunate we considerourselves.Weare trulygrateful for theopportunity tobe thestewardsofyourcapitalinanenterprisewhichcreatessomuchvalue,opportunity,andunalloyedjoyforourstudents.”

Eachof thepeople leadingthecompanieswewroteabouthereseesherrolenot as a swashbuckling soldier whipping the corporate steed on to newconquests, but as a steward entrusted with the responsibility of carefully andjudiciously shepherding and guiding the organization. It’s a responsibility shetakesveryseriously,muchlikeareligiousvow.

When we asked David O’Reilly, CEO of O’Reilly Automotive, a publiclytradedcompanywithmorethanonethousandtwohundredlocations,whyhehasstayedwiththecompanyforhisentirecareer,heprovidedfurtherinsightintothe

minds of these leaders. “First, it’s about responsibility,” he said. “I feelresponsibleforthecompanyandeveryoneinit.”

Goodstewardsshareanattitudeaboutpersonalwealthandmoneythatisoftensurprisingtopeoplewhoarecynicalaboutanythinghavingtodowithbusiness:it’s simply not about the accumulation of vast personalwealth for the peoplewhoheadtheseenterprises.

“Itwasneveraboutthemoney,”O’Reillycontends.“Ofcourseweallwantedtoearnagoodlivingandtakecareofourfamilies;that’ssimplyaresultofhardwork, but it’s certainly not why we built the company.” He continued thediscussion by saying, “My dad, my sister and brothers, and I are verycompetitiveandwewanted toaccomplishbuildinganenduringenterprise.Wereallywanted tomakeourmarkandachievesomething.Weweredriven tobebiggerandbetterthanwewerethedayoryearbefore.”

Another stewardof a companywho sawmoney as a secondarybenefitwasRon Bailey, former professor and eventual president of Strayer University.WhenBaileysoldhissharesintheuniversityfor$200million,hepaidhistaxesand began the Bailey Family Foundation, funded with the remaining $150million. Bailey’s foundation, not surprisingly, is in the business of grantingscholarships.AsBailey says, “What the heck elsewas I going to dowith themoney?I’dmadeitineducation.Theobviousthingtodowasgiveitback.”

Lessthan250milesfromtheMissouriofficesofO’ReillyAutomotivearetheIllinois headquarters of Dot Foods, the nation’s largest privately owned foodredistribution business. Founded byBob andDorothyTracy, using the familystationwagontodeliverdriedmilkproductstoicecreamfactories,thecompanyisnowheadedbyCEOPatTracy,oneofeightchildrenofthefoundersworkingforthecompany.AstoryTracytoldusspeaksloudlytotheinstitutionalhumilityofthecompanyheheads.

“Mom andDad still live in a small brick housewhere they raised all theirtwelvekids,”hesays,“andrightnextdoortotheirhouseisamodestbuildingwecallTheCountryStore.”Tracyexplainsthatthestoresellsproductsnearingtheirshelflifeexpirationandthosethathavebeendentedorwhoseoutercasinghasbeendamaged.“Oneday,”hesays,“mymothertoldme,‘Pat,Iusedtogonextdoorandbuythosehalfchickensthatareperfectforyourfatherandme,buttheprice has gone up so far that I don’t buy them anymore.’And shewanted toknowwhythere’dbeenapriceincrease.”Tracyexplainedtoherthatsheowned

the store and could well afford to pay the small increase, to which sheresponded,“Ohno,Icouldn’tpossiblydothat.”

Collectivelytheleadersandownersofthesecompaniesareworthbillionsofdollars.Butwe couldn’t find one palatial estate (wewent looking);we didn’twitnessa single instanceofconspicuousconsumption;andnever sawpersonalwealthflaunted.

Thepeoplewhofoundedand/ornowleadtheseninecompanieswantthesamethings everyonewants: a nice home, a good living, financial security for theirfamilies,andtheopportunitytobeinchargeoftheirowndestiniesandmaketheworldabetterplace.Inthetruestsense,theyarestewards.

2.Transparency

WhilewewereinSanDiegowithPETCOchairman1BrianDevine,hebroughtup the subject of transparency when he told us, “You have to tell the horrorstories to everyone. Everyone must know the bad stuff so it doesn’t happenagain.

“Twenty-seven years ago,” he recalled, “I lost a key ally due to amiscommunicationandpromisedmyself there’dneverbeamiscommunicationagain.Untilanorganizationistransparent,whereit’salloutthereforeveryonetosee,miscommunicationsareinevitable.”

AswestoodbythebankofelevatorswaitingtoleaveSonicDrive-In’shomeofficeinOklahomaCity,myleadresearcherturnedtomeandsaid,“CheckouttheCEO’sofficespace.”I turnedandlookedatCliffHudson’sofficeareaandthesmall,walled-in,glass-paneledconferenceareabehinditthatwe’dusedforourinterview.Briansaid,“Eventhisguy’sprivatemeetingareaistransparent—everything’soutintheopen.”

Aswecontinuedourstudyofeachofourtopninecompanies,itappearedthatallwerejustastransparentasCliffHudson’sofficeandBrianDevine’ssteadfastbelief.

Thetakeawayhereisremarkable.Wehavefoundbusinesssocietieswherealltheknowledgeandinformation(thecurrency)isavailabletoeveryone.Inthesecompanies, because there’s zero personal profit or gain to be achieved in

hoarding, trading,or trying topassionatelyprotectknowledge,everyone in thecompanyhasaccesstothesameknowledgeandinformation.Thepeopleinthesefirms are free to spend all their working time advancing and achiev-ingthecollective goals of the organization instead of worrying about engaging incommerce with their currency, trying to bolster their personal survival andadvancement.

Itistrulyameasureofone’shumilityandselflessnesstobeabletoofferupall the lucrewithagenerous, “Here it is foreveryone touseandshare.”Onlywhen thehoardingofknowledgeand information is stoppedandeveryonecansee clearly through the organization will genuine collegiality commence.Humble leaders have sufficient confidence in themselves and the value theybring their organizations that they see the benefit of having the completeorganizationbetransparent.

3.Accessibility

Collectively,thepeoplewholeadthesecompaniesgeneratealmost$60billioninannual sales and employ more than 130,000 people. Running enterprises thatlargeentailsalotofresponsibility.Conventionalwisdomsuggeststheseareverybusy people whose time is extremely valuable and must be parceled outparsimoniously.Infact,itturnsoutthatanothertestamenttothehumilityofthepeople running these organizations is their accessibility. We concluded ourresearchhavingrejectedthecynicalhypothesisthattheiraccessibilityismerelya good business tactic; concluding instead that it’s part of their DNA.Whenpeopledon’tbelievethattheyortheworktheydoaremorespecialorimportantthan everyone else in the company, the need to hide out in a corner officeprotectedbylayersofassistantsisunnecessary.

Oncewe’d settled into the hotel wherewe’d be staying inMount Sterling,Illinois,whileconducting interviewsatDotFoods, Ibegan leafing through thelocal telephone directory. By accident I quickly located the listed hometelephonenumberforcompanyCEO,PatTracy.HowmanyCEOsof$2-billionenterprises do you know with a listed telephone number? If you agree thathavingalistedhometelephonenumberisafairmetaphorforaccessibility,thenwe’d stumbled on to an accessible bunch of leaders; it turns out thatmost ofthese people have listed home telephone numbers. They aren’t afraid that a

workerorcustomermightdisturbthemathome.Comparetheirconductwiththedecisionofmostexecutivestobuildimpenetrablewalls toseparateandprotectthemselvesfromworkers,customers,andstakeholders.

AlthoughRobertSilbermanrunsaneducational institutionwith twenty-threecampuses and almost twenty thousand students, he continues to teachmanagementstudies.Hedidn’tunderstandoursurpriseandmaintainedthatit’ssimplycommonsense.“HowelsecouldIbetterstayintouchwithmystudentsandfacultythanteachingandbeingclosetothem?”hewonderedaloud.

ThehomeofficesofSAS, locatedinCary,NorthCarolina, lookmorelikeabucolicuniversitycampusthananycommercialenterpriseyou’lleversee.Whenstrolling the grounds you pass manicured athletic fields, physical fitnessfacilities, a health-care center, a high school, day-care facilities, stunningbuildings, sculptures, and the university president’s house. Oops, you almostforgetyou’renotonauniversitycampusinfrontofthepresident’shouse,you’restanding in frontofCEOJimGoodnight’shome.A stone’s throwaway is theresidenceofGoodnight’scofounder,JohnSall.Themenwhofoundedandbuiltan enterprise that experienced double-digit growth for twenty-five consecutiveyearsaresoaccessiblethey’vechosentoliveinfullviewofthefourthousandpeople who work at SAS headquarters. How many billionaire CEOs do youknowwho’vechosentoliveonthefactorygrounds?

During our company visits, one of our standard requestswas for awalkingtour of the facilities. To prevent any possibility—there’s the cynic again—oftheseevents’beingstagedororchestratedwealwaysmadeourrequestatthelastminute. Walking the hallways, factory floors, and company lunchrooms withthese leaderswas always interesting.Warm, affectionate, first-name greetings,oftenaccompaniedbygentleribbingandteasing,werethenorm.Wecouldhavebeen the IRS, a couple of software salesmen, or prospective customers and itwouldn’thavemattered.Workershadnohesitationtoapproachthebossandsay,“Hey,Pat,gottatellyouthatnewequipmentisapieceofjunk.Itkeepsbreakingdown all the time. Save yourself some money and us some aggravation nexttime.”ItwasalwayshardtosuppressasmileandimaginesuchaninterchangetakingplacebetweentraditionalandimperiousCEOsandtheirworkers.Iteitherwouldn’thappenortheworkerwouldhavesignedhisowndeathwarrant.

4.WorkEthic

CharlesKochofKoch Industries isoneof theworld’sonehundredwealthiestindividuals.With amultibillion-dollar fortunehe candowhateverhewants todo. And he does. Koch and his wife live inWichita, Kansas. He has a longworkday, eats lunch every day in the company cafeteria, and says he can’timaginedoinganythingelse.

“IlovewhatIdo,”saysKoch.“Itturnsmeonandmakesmehappy.”

Whenweaskedforfurtherexplanation,Kochsays,“It’shardformeeventoanswerthat,becauseit’sagiven.Igettoworkwithgreatpeople,seethemgrowand develop, see the company create value, and get to reward people whocontribute to our success. Instead of askingwhy I dowhat I do, the questionshouldbewhynot?”

ThemorewequestionedKoch—amanwho could theoretically spend$200million annually on himself for the rest of his life, without ever touching theprincipal—abouthismotivation forcontinuing towork long,hard,challengingdaystobuildthecompany,themoreferventhebecame.“Ifyouspendyourlifestrivingtoprofitbycreatingrealvalueforcustomersandsociety,youareinfactmakingpeople’s livesbetter, andwhenwedo that itmakes theworldabetterplace.” Koch concluded by adding, “We’ve built a win-win enterprise. WhatwouldIwanttodowithmylife,ifnotthat?”

5.StandforSomething

In recent years, many businesses have clamored to create a published set ofcorporatevaluesofguidingprinciples.Infact,itbecameamanagementfadtodoso. Inmany instances theguidingprinciplesare the resultofaweekend team-building exercise held at a lakeside cabinwith cases of beer and boxwine aslubricantforthewords.Oncecompleted,thedocumentispostedonafewwalls,published in the employee handbook, and referenced by the boss during theannualemployeerecognitiondinner.Formostfirms,otherthanthoseoccasionaluses,thedocumentdoesn’tmeansquat.AgoodcaseinpointisEnron’s“codeofethics,” which decreed the moral and honest manner in which the companywould conduct its business. Ken Lay’s document, from July 2000, is nowcollectingdustintheSmithsonian.

Instarkcontrast,eachoftheindividualswhoheadthesecompaniespossesses

afundamentalsetoftruthsandlawsbywhichheleadshislifeandwhichinturnbecomesthebasisofreasoningandactionwithintheorganizationheleads.It’sonlywhenasetofbeliefsispracticedbyeveryonefromthetoptothebottomoftheorganizationthatithasanymeaning.

Wefoundoneofthemosteffective,institutionalizedusesofasetofguidingprinciples atKoch Industries.TheprinciplesbywhichCharlesKoch leads theorganizationcomefromhisviewoftheworldandthewayhethinksitoughttobe.IfyouwanttoworkforKochIndustriesandbepartofhelpinghimchangethe world, you must agree with and believe the following: 1. Integrity—Allbusinessaffairswillbeconductedlawfullyandwithintegrity.

2.Compliance—Strivefor10,000percentcompliance:100percentofusfullycomplying100percentofthetime.

3.ValueCreation—Createlong-termvaluebyeconomicmeans.Understand,develop,andapplyMarketBasedManagement®togetsuperiorresults.Eliminatewaste.

4.Entrepreneurship—Demonstratethesenseofurgency;discipline;accountability;judgment;initiative;economicandcriticalthinkingskills;andrisk-takingmentalitynecessarytogeneratethegreatestcontributiontothecompany.

5.CustomerFocus—Understandandbuildrelationshipswithcustomerstoprofitablyanticipateandsatisfytheirneeds.

6.Knowledge—Seekandusethebestknowledgeindecisionsandproactivelyshareyourknowledgewhileembracingachallengeprocess.

7.Change—Embracechangeandenvisionwhat

couldbe,challengethestatusquo,anddrivecreativedestruction.

8.Humility—Practicehumilityandintellectualhonesty.Constantlyseektounderstandandconstructivelydealwithrealitytocreaterealvalueandachievepersonalimprovement.

9.Respect—Treatotherswithdignity,respect,honesty,andsensitivityandencourageandpracticeteamwork.

10.Fulfillment—Createvalueandproduceresultsinordertorealizeourfullpotentialandfindtrueenjoymentinourwork.

Inmanyenterpriseswherethepublishedsetofprinciplesismerelyapieceofpaper,peoplecansurvivewhilesnickeringat,beingdisdainfulof,ortreatingtheprinciples of the company lightly. That wouldn’t happen at any of these ninecompanies.Youeitheragreewithandadheretothevaluesheldbyeachoftheseenterprisesandtheirleadersoryou’llpromptlybeshownthedoor.Eachofthepeoplewholeadthemstandsforsomething.There’snothingwishy-washyabouttheprinciples,beliefs,orcodeofconductatanyofthesecompanies.

Theculturesof thesecompaniesaresostrongthateachself-selects theteammemberswhowillbecomesuccessful.Ifsomeonefitstheculture,they’rein.Iftheydon’tfittheculture,they’reoutfast.

6.EraseSuperficialDistinctions

AswesetoffonourfirstresearchtriptoSanDiegotointerviewPETCO’sCEOBrianDevine,weweredressedforanimportantmission.Iworeastandarddarkbluesuit,crisplystarchedwhiteshirt,burgundytie,andshinylace-upshoes.Themoment we stepped into Devine’s office we all realized we were wayoverdressed. Devine and his colleagues looked like they were dressed forplayingaroundofgolforwatchingNASCARinchinosandcasualshirts.

Themeetingbeganwith thePETCOfolks lineduponone sideof the tableand us, the researchers, resembling Mormon missionaries, on the other.Realizingitcould turnout tobeanagonizinglystiffmeetingunlesssomethinghappenedfast, Iasked,“Doyoumind ifwe lose these tiesand jackets?”Theynoddedpermission,andwithinminutes themeetingwasrelaxedandheadedintherightdirection.

Notwantingtomakethesamemistakeagain,webegane-mailingaheadandaskingwhat the appropriate dresswas for ourmeetingswith the CEOs.Withonlyoneexceptionweweretoldthesamething,“It’skhakisandpoloshirtsallthetimeinouroffices,exceptonFriday’swhenit’srealcasualdress.”

The fact that we encountered casual dress to be the standard at all of thecompaniesisnotsuperficial: it’s important.Theyhaveneitherthetimenortheinclinationforpretense.Whenclothingisallowedtoconveyclassstatuswithinanorganization,ahierarchicalstructurebuiltonrankandpositionisperpetuated.

Leaderswhobytheirownexamplemakeitclearthatclothingdoesn’tconveyranksendaloudmessagetotheorganization:we’reallequalsandthisisaboutcollegialityandcollaboratingfortheachievementofouragreedobjectives.

7.NoBigOffices

WhenyouvisittheOklahomaCityofficesofSonicDrive-In,it’shardnottobeimpressed.Locatedacrossthestreetfromabrand-newold-timebaseballstadiuminanareaknownasBricktown,thecompany’sheadquartershavebeenbuilttomatchthelookandfeeloftheonceabandonedwarehousesthatnowteemwithrestaurants,nightclubs, and shops. It’s impossiblenot to smilewhenyouenterthebuildingandconfrontthefunandwhimsythathavemadethisfifty-year-oldfast-food chain one of the nation’s best businesses. But the biggest surprisecomeswhenyougetofftheelevatoratthethirdflooronyourwaytovisitCEOCliffHudson.

The first thing we saw was a big, curved reception desk with light-filledhallwaysheadingoff inmanydirections.Amaleadministrativeassistant inhismidfortiesstoodupfrombehindthereceptiondesktogreetus.

“Hello, we’re here to see Cliff Hudson,” I said, handing him my businesscard.

“Soyou’retheauthor.Nicetomeetyou,”hesaid.

“It’sgreatbeinghere,”Ioffered.“WillyoupleaseletMr.Hudson’sassistantknowwe’rehere?”Iasked.

He smiled and said, “We’ll, actually, I’mMr.Hudson, but you can callmeCliff,andthis,”hesaidashesurveyedthereceptionarea,“ismyoffice.”

CliffHudson’s office is the third-floor reception area. It’swhere heworks,takeshisphonecalls,answershise-mail,andholdsmeetings.“Beingouthereintheopen,”Hudsonsays,“isoneofthebestdecisionsI’veevermade.Itmakesmeaccessible,letsmeinteractwitheveryone,andletsmekeepmyfingeronthepulseofthecompany.”

The offices of all the CEOs reveal their feelings about space and theegalitarianculturesofthecompaniesthey’vebuilt.

TheofficeofCharlesKoch,who leads thenation’ssecond-biggestprivatelyheldcompany,with revenuesexceeding$50billion, resemblesasmall readingroom in a library. Every inch of wall space is lined with floor-to-ceilingbookcases filled with thousands of books. The books aren’t for show. Inresponse tonearlyeveryquestionposed tohim,Kochstands,movesdown thewallsofbooks,pullsoneout,andsays,“Idon’tnecessarilyhavetheanswer,butthis author didwhen hewrote this,” and proceeds to answer our questions byreadingaparagraphfrombothobscureandclassictexts.

OurfirstmeetingwithJimGoodnightwasheldinaconferenceroom.Attheendofa longsession,Goodnight lookedatmeandasked,“Wouldyou like tosee the dashboard?” “Sure,” I said and he led the way down the hall to hisprivateoffice.(Goodnight’sdashboardisasingle-screenreal-timesummationofevery aspect of the business from customer counts to cash balances, clientrenewal rates to customer support response times and employee satisfactionsurveydata,andsoon.)AnyoneexpectingGoodnight’sofficetobegrandwouldbe sorely disappointed. The offices of most administrative assistants are farlarger.Hisspaceisperhaps140squarefeetandhasaplaindeskandwell-worncredenza.When I commented on the modest nature of his furniture, his onlycomment was, “Yes, it’s pretty old. It’s the same stuff that was here when ImovedinyearsagoandI’vejustnevergottenaroundtochangingit.”

In dramatic contrast to a business world populated by managers andexecutives who measure their self-worth on the size and trappings of their

offices, the people who lead the nine best-performing enterprises in Americahave the most modest of digs. They don’t have a need to waste valuableresourcestryingtoprovetheirimportancetoanyone.

TheConclusions

Whilestudyingtheninecompaniesthatdoabetterjobofgrowingrevenuesthanall other companies, wewere constantly reminded that each has taken on themodest and humble personality of its leadership. These are truly inspired,collegial, group endeavors where the momentary accomplishments ofindividuals are overshadowed by the consistent, long-term achievement of ateamthat’sgentlyanddeftlykeptoncoursebyahumbleleader.

Cabela’s, Dot Foods, Koch, Medline, O’Reilly, PETCO, SAS, Sonic, andStrayerareamongthetopone-tenthof1percentofallU.S.companiesintermsof consistent revenue growth—and the most basic trait shared by each is aheritageofauthenticallyhumbleleadership.

Doeshumilityreallysettheseorganizationsuptowintherevenueandgrowthgame?Theanswerisanincontrovertibley-e-s!If theseorganizationshadbeenincapable of holding on to their humble values, each would have become asdistracted as the hundreds of thousands of companies that perish annually byspendingtimeonthewrongpriorities.

TheBuildingBlocks that follow reveal the guiding principles employed bythesecompanies toachieve theirconsistentlyoutstanding increases in revenue.Eachprinciple, takenalone, canhaveapowerful impactonanenterprise.Theimpactofeachismagnifiedmanytimeswhenit’sinitiatedandimplementedbyhumbleleadersandhumbleteams.

ThinkBIG,ActSMALLDOWNTOEARTH

•Beasteward.•Makeinformationavailabletoeveryone.•Beaccessible.

•Beaccessible.•Praiseothers.•Lovewhatyoudoandleadbyexample.•Standforsomethinggoodandnoble.•Erasesuperficialdistinctions.•Stayhumble.

2

KeepYourHandsDirtySASINSTITUTE

SometimesI’llputtogetherasmallteamofprogrammersandwe’llcodearudimentaryversion1.0ofanewproductidea.

DR.JIMGOODNIGHT,CEOofSASInstitute

One of themost important lessons observed during our research is that in thecompanies that consistently grow revenues, everyone in the organization getstheirhandsdirty.

SASInstitute

There’snobetterposterboy forkeepingyourhandsdirty than JimGoodnightandthestoryofthecompanyhefoundedandruns—SAS(whoseinitials,whichnolongermeananything,arealwayspronouncedasaword).

SAS Institute is theworld’s largest privately owned software company andcreatesandsellsbusinessintelligencesoftwarethathelpstheirclientsmaketherightdecisions.Thefirm’ssoftwareisusedby97percentofthetoponehundredcompanies in the Fortune 500 list in more than forty thousand installationsworldwide.

OneexampleoftheirworkistheservicestheyprovidetoStaples,thenation’sleadingoffice-supplychain.Stapleshas1,400retailstoresaswellasaverybusyonlinebusinessandacatalogchannel.Collectivelythethreechannelshavemorethan10millioncustomers.It’sthejobofStaples’marketingdepartment—aidedbySAS software—tocollect and analyze thedataon all 10million customersandhundredsofmillionsof transactions,and thenpredictwhatandhowmanyproducts future customers will buy, how customers will find out about theseproductsandwhenthey’llbuythem,andevenwherenewretailstoresshouldbe

located. The pioneering business intelligence softwaremade by SAS in effectallowsitsclientstokeepitshandsdirtyinthesenseofkeepinginclosercontactwithemergingconsumertrends.

Eureka!

JimGoodnight,thefounderofSAS,wasraisedinWilmington,NorthCarolina,where during junior high and high school heworked in his father’s hardwarestore.Althoughheexcelledinscienceandmath,headmitshebarelysqueakedthroughhighschool,earninga“D”inhissenior-yearEnglishclass.

During his freshmanyear at theUniversity ofNorthCarolina someone toldhimaboutanewclassbeingofferedoncomputersandhesignedup.“Ididn’tevenknowwhatacomputerwas,”hesays,“andfor the first fewweeks Iwasbewildered.ButonedayIjustfigureditout.”Hefigureditoutsowellthatbythetimehestartedhissophomoreyear,aprofessorenlistedhimtoteachhislab,andGoodnight’slifecallinghadbeenfound.

Goodnightwassointriguedwithcomputersthatbeforelong,he’dmanagedtosnag twohalf-timeprogramming jobs:oneat theUniversityofNorthCarolinaandanotheratNorthCarolinaState.“Heck,Iwasjustaprogrammer,”hesays,“and I loved it.” “Programming,”hecontends, “is fascinatingbecause it’s likeworkingapuzzlealldaylong.Yougettowriteinstructions,makeacomputerdowhat youwant it to do, and create results that help other people do their jobsbetter.It’sextremelyrewarding.”

By1968Goodnighthadearnedhismaster’s andhe andhis friend JimBarrwereworkingforNCStateUniversityprogrammingandanalyzingdatafortheuniversity’sresearchstations.EventuallythirteenothercollegesintheSoutheastbegan using the duo’s computer programs rather than writing their own. Theother universities didn’t have to pay anything for the software becauseGoodnight’sworkwasbeingunderwrittenbyafederalgrant.

WhenRichardNixonbecamepresident,hedecreedthatonlyuniversitieswithhospitalscouldcontinuereceiving the typeofgrantmoneythatGoodnighthadbeengetting.ThatdecisionwasablessingindisguiseforGoodnightbecausetheuniversity officials said, “If you fellows want to keep playing with your

computers, you’d better figure out how to make enough money to pay yoursalaries.”

FoundingSASInstitute

GoodnightandBarrwenttothethirteenotheruniversitiesandaskedeachtokickin $5,000 annually and they all agreed. Additionally, the duo receivedpermission tobegin licensing their software tootherorganizationsandquicklysignedseveralpharmaceuticalcompaniesasclients.By1976JimGoodnighthadbeenawardedhisdoctorateandwasanassistantprofessorattheuniversity,andSAShad120clients.ThatsameyearsomeoneatAbbottLaboratoriesdecidedtohostanSASusers’conferenceand300peopleshowedup.Goodnightrecallshissurprise,“Irememberthinking,‘Wow,thisisprettygoodstuff,we’vegotthreehundredpeopleusingoursoftwarewhowanttogettogetherandtalkaboutit.’”

But therewasaproblembackat theuniversity.GoodnightandBarrneededmorespace forSAS togrowand therewasn’tany roomoncampus.SASwasfinallybornasaprivateenterpriseonJuly1,1976,whentheduoagreedtomoveSASoffcampus,lettheuniversitykeepallthemoneyitearnedthatyear(about$150,000),andfurtheragreedtolocatenearthecampussotheycouldcontinueto analyze data for the statistics department. They took two colleagues alongwiththem:JohnSall,agraduatestudent,andJaneHelwig,thegroup’stechnicalwriter.

Goodnight doesn’t remember putting up anymoney. “Hell, we didn’t haveany,”hesays.“AsIrecallwesoldsharesforadollarapiecetoeachotheranddidn’t takeasalary foramonthor twountilwe’dsolda few licensesandhadsomemoney.”Duringitsfirstyearthefirmgenerated$138,000inrevenueandbegananuninterruptedtwenty-five-yearstringofdouble-digitrevenueandprofitgrowth.

By 2003 SAS had grown to $1.53 billion in annual revenue, a 15 percentincreaseontheyearbefore.Thecompanyemploysnearlytenthousandworkersin close to three hundred offices worldwide.Worthy of mention is that SASspends more than one-quarter of its total annual revenue on research anddevelopment—anumberthatdwarfstheamountspentbyitscompetitors.

For the three decades of the company’s existence Jim Goodnight hascontinued to do what he learned in his freshman computer class: listen tocustomers,discernaneed,andhelpwrite thecode thatcreates the software tosolvetheproblem.

KeepingHisHandsDirty

Wefound thatkeepingyourhandsdirtywasa recurrent themeatSASand, infact, has become a vital part of the culture at a company that has consistentlybeen named among the best places to work by a multitude of ratingorganizations andbusinessmagazines.A senior executivewe spokewith said,“Sometimes,withmyteam,I’llfindsomebodyputtingupabarrierasiftosay,‘Hey,that’snotmyjob,’andI’llsaythataslongasJimGoodnightstillcodes,you’llstillpickupboxesandsowillI.Nobodyhasajobdescriptionhere.Wedowhatneedstobedone.”

Keith Collins has been with SAS for twenty-two years and serves as thecompany’sseniorVPandchieftechnologyofficer.“Youwouldn’tbelievesome

of the thingshedoes,”saysCollins.“At leastsometimeshe’spoliteenoughtocall me and tell me to cough up a few good developers, without letting mereplace them,butother times,hecomesoverhere likea thief in thenightandsteals away a handful of my best people and puts them to work on a newproject.”

Collinscontinued,“It’s justoneof the thingsyoucome toacceptwhenyouwork for SAS. We look for innovation wherever we can and Jim’s a greatinnovator.”

WhenGoodnight is pressed onwhether he’ll stopwriting code one day, heresponds, “We want to be the single most valued competitive weapon inbusiness decision making.When we fully realize our dream, maybe then I’llstop.”Headdswryly,“Butthenagain,maybenot.”

LotsofCompaniesTryBut...

Oneof2004’snewrealitytelevisionprogramswasNowWho’sBoss?Designedto show the heads of companies performingwork on the front lines alongsideworkers, the premiere episode featured the chairman and CEO of a big hotelchainchangingbeds,workinginthekitchen,andservingasabellman.

TheCEOspentfivedaysworkinginoneofhishotelswhiletapingtheshow.“Itgotmeclosertothepeople,”hesaidinaninterviewwithHotelMagazine.“Ilearned thathousekeeping isphysicallydemanding,uniformsarepolyesteranduncomfortable, and that many people don’t tip the housekeepers.” But hisbiggest surprise occurredwhen he got stiffed while serving as a bellman. Hecarriedfifteenbagsforonecustomer,andreceivednotip!

Thisperson,whohasbeenchairmanandCEOof thehotel chain for fifteenyears, says he was so inspired by his experience that he made a decision toimplementanannualeventforhotelgeneralmanagersandexecutivecommitteememberstospendonedaydoingline-leveljobs.

Whoosh...whateverhelearnedwentrightoverhishead.

Fromtimetotime,manyexecutivesandcompanieseventuallycomeupwithequally well-intended initiatives designed to move their executives and

management closer to the real work of the organization. The phrase that bestdescribessuchundertakingswouldbe“gettingourhandsdirtyonceayear.”

There’snoneed forgetting-your-hands-dirty initiativesat thecompanieswestudied because keeping their hands dirty is the very essence of who theseleadersandorganizationsare.

CompaniesthatConsistentlyGrowRevenuesKeepTheirHandsDirtybyBeinginFrequent

ContactandInvolvedwith:•Customers•Workers

•VendorsandSuppliers

KeepingYourHandsDirty—WithCustomers

When I began revealing and discussing the companies that had qualified forinclusioninThinkBig,ActSmall,wewerefrequentlysurprisedbythereactionthat thenameof oneof thebusinesses generated.When ImentionedCabela’ssomeonewould interruptmeandsay,“Nowthere isone incrediblecompany,”andeitherpullaCabela’screditcardoutoftheirwalletorproceedtotalkabouttheir personal experienceswith the company.We joked internally that’dwe’dfinallyfoundacompanythatdidn’thavecustomersbutapostles.

OnceinsideCabela’s,wequicklyfoundoneofthereasonsthecompanyhascreated such an incredibly loyal customer base and proven itself capable ofconsistentlygrowingrevenues.

Eachmorningwhen JimCabela, cochairman,walks into his office atworldheadquarters inSidney,Nebraska, there’sa tallstackofeight-by-fivesheetsof

whitepaperawaitinghim.Eachsheetcontainsacustomercommentorcomplaintfrom the previous day, the customer’s name and contact information, and theCabela’srepresentativewhotookthecomment.

Cabelaspendshismorningsreadingeachofthem,notinghiscomments,andseparating the complaints into smaller piles. Then before heading home forlunch,hewalksaroundthecompanyandpersonallydeliversthesmallstackstothe responsible parties for their immediate action and follow-up. Jim Cabela,who refers to his company’s employees as partners, exists to keep his handsdirty.

Howmanychairmenofmultibillion-dollar firmsdoyou thinkspendseveralhours each day reviewing all of the previous day’s client comments andcomplaints and personally directing an immediate follow-up? A jealouscompetitormightcynicallymutter,“WhattheheckelseistheretodoinSidney,Nebraska?” At Cabela’s, with a string of forty years of consistent revenuegrowth,JimCabela’sresponsewouldbeabenignsmileandaquestion,“Whatcouldbemore important than listeningandrespondingtocustomersanddoingwhateverelseyouhavetodotomakeandkeepthemhappy?”

OneSwampWatertoGo,Please...

Onethingyouwon’tfindatSonicDrive-In’sheadquartersisabigstainlesssteeltestkitchenwithexecutivechefswhizzinguptrendynewrecipesforthegroup’sthree thousand locations. “No way,” says an adamant Pattye Moore, formercompany president. Company executives spend as much as half of their timevisitingstoresandinthekitchens.

“We’llneverhaveacompanytestkitchenwherewecreaterecipesandfoodsand force them onto our franchisees,” says Moore. “Our product ideas comefromstudyingwhatourcustomersareordering,listeningtoourvendorpartners,andwatchingwhatourcrewmemberscookforthemselves.”

OneofSonicDrive-In’scompetitiveadvantagesisthatnothingispreparedinadvance. There’s not a microwave in any of its restaurants. Only after acustomerpressesaredbuttonandplacesanorderisthefoodcookedtoorder.Aslongastherestauranthastheingredientsonhand,customerscanorderwhatever

they’dlike.“Lastyear,”Mooresays,“welaunchedasuccessfulnewdrinkcalledOrangeCoolBreeze.ThatideacamefromastoremanagerwhohadacustomerdriveineverydayandorderacombinationofSpritewithorange,pineapple,andcherry.”

Another recent successfulmenu addition at Sonic came about because of achancemeetingMoorehadwhilevisitingoneofthedrive-ins.“Iwastalkingtothecrewmembersaboutbreakfastitems,”sherecalls,“andasweweretalking,Isawoneofthecrewcuttingupapieceofgrilledchickenandrollingitupinatortilla with ranch dressing, lettuce, and tomatoes. I asked her what she wasmaking, and she told me that ever since we’d brought in tortillas she’d beenmakingherself a grilled chickenwrap for lunch eachday.”Soon after, grilledchickenwrapshitthemenuandbecameanimmediatehit.

Many teenage customers at Sonic frequently order a drink called SwampWaterwhichisn’tonthemenubutisavailablechainwide.MooreexplainsthatSwampWater is a combination of all the various slush flavors; when addedtogethertheyturnadarkkhakigreen.“Oneday,”Mooresays,“myten-year-olddaughtercamehomefromschoolandsaidshewantedtogotoSonicandhaveaSwampWater.IaskedherhowsheknewaboutSwampWaterandshesaidherfriendsatschoolhadlearnedaboutitfromtheirolderbrothersandsisters.That’showmenuitemsgetdoneatSonic,”Mooresays.“Thecustomerdecides.”

OneofourinterviewswithMooretookplacewhileshewasinSanFranciscowithcompanyCFO(nowpresident)ScottMcLain,takingpartinaconferenceoffinancial analysts. “What do the two of you enjoy more,” I teased, “visitingrestaurants in towns like Pearl,Mississippi, or being an important part of theshowatasophisticatedfinancialeventinabigcity?”

“Presenting at analysts’ conferences and keeping them informed of whatwe’redoingis important,”answersMcLain,“but theworkwelovehappens inourrestaurants,”hesays.“That’swhereoursuccessreallytakesplace.”

IfPattyeMooreandothersatSonicdidn’tspendtimegettingtheirhandsdirtyby visiting restaurants, getting into the kitchens, and keeping a close eye onchanging customer desires, it’s unlikely that many of their recent hits wouldhaveeverbeennoticedbySonicmanagers,whohavetheabilitytorolloutthesenewideassystemwide.

LeadersGetintheTrenches—AndStayThere

InthepreviouschapterwewroteaboutRobertSilberman,chairmanandCEOofStrayer Education, also teaching a course at Strayer University in businessadministration.What’smost surprising is that he nevermentions that he’s theCEO to his students. “Maybe a few of them know,” Silberman says, “but I’dnevermention it. It’s justwhoweareandwhatwe’reabout.There’snobetterway forme toget thepulseofwhatmystudentsneed inorder tomake this abeneficialexperiencethanbeingintheclassroom.Stayingclosetoourstudentsissimplytheessenceofwhatwe’reabout.”

We found the same commitment by the company’s top executives to beingclosely involvedwith customers inMundelein, Illinois, atMedline Industries.AlmostanyitemyoumightfindinaU.S.hospitalornursinghomecouldhavebeen sold to them by Medline’s seven hundred-member sales force. “We’reessentiallyasalesorganizationthatcoincidentallyhappenstomanufacturemuchof what we sell,” says CEO Charlie Mills. “How can we run a large salesorganization without being closely involved with sales and our customers?”Millssaysthatheandtheothertwotopofficersofthecompanyareontheroadalmosteveryweekcallingonandworkingwithcustomers,andeachofthemhasanumberofaccountshestillhandlespersonally.Millsevenmethisfuturewifewhilebothwereworkingassalesrepsforthecompany.

Charles Koch has spentmore than forty years with Koch businesses, holdingpositions from ranch hand to CEO, but he still keeps his hands dirty withcustomers andvendorpartners. “It’s imperativewedevelop trustwithourkeycustomersandtrulyunderstandthemandwhat theyvalue,”hesays.“TheonlywayIcandothatistospendbothworkandleisuretimewiththem.Ifwebehaveintherightwayconsistently,andreallylisten,theyunderstandwe’rededicatedtotryingtocreatevalueforthem.Withvendorsandsuppliers,ourphilosophyistotreatthemthesamewaywetreatcustomers.Istayfocusedonthosewhoarecritical toourcompany’sperformance,andparticipatedirectlyinourefforts tobuildtrustandunderstanding.”

Aftergraduatingfromcollege,MissourinativeDavidO’Reilly,CEOofO’ReillyAutomotive, quickly headed home to Springfield and joined the family autopartsstorethathadbeenfoundedbyhisfatherandgrandfather.At thetimehestarted,therewerefourlocations.

“I’d spent all my teenage years working in the stores during summers andvacation,”hesays,“butwhenIjoinedthecompanyfull-time,Istartedworkingat the counter, taking and filling orders.” The next stop for O’Reilly was thephonedeskwherehe’dfieldcallsfromautopartsdealers insmallsurroundingtowns. Eventually he became the firm’s sales manager and spent his weekstravelingthestatewith thecompany’sfoursalespeople liningupandservicingaccounts.

“Myyearsrunningsaleswereagreattime,”O’Reillyremembers.“Iwasableto seeand learn thechallengesanddilemmasofbeinga smallbusinessownerfirsthand. Some of themost important lessons I learnedwere from seeing thestoresthatfailed.”

For O’Reilly, staying close to customers was fundamental to the eventualsuccessofthecompany.Bykeepingtheirhandsdirtywithcustomers,O’Reillysays the company gained a significant competitive advantage. “Learning fromourcustomersgaveusandcontinuestogiveusatremendousunderstandingofthebasicsof thebusiness that someofourcompetitorsdon’thave.Theyviewthingsfromaretailperspectivewhileweseethemfromthecustomer’spointofview.

“Youcan’tgetyourhandsdirty,”saysO’Reilly,“withoutbeingtrulypluggedin.Inmyopinion,you’reeitherpluggedinallthewayoryou’renotandthere’snosubstituteforexposingyourselftoyourcustomers,yourteammembers,andyour vendors. There are no shortcuts.When it comes to attending operationalmeetings,beingpresentat companyandcustomer functions,meetingwithkeyvendors,there’snosubstitute...forbeingthere.Itallfallsintothecategoryof‘managementbywalkingaround,’whichissomethingfartoomanyexecutivesdon’tdo.Ifitdoesn’tstartatthetopoftheorganization,”hewarns,“youcanbetit’snotbeingpracticedelsewhereinthecompany.”

KeepingYourHandsDirty—WithWorkers

Therealworkersinafranchiseorganizationarethestaffmembersandmanagersofthefranchisesthatactuallydeliverthegoodstoapayingpublic.Sonic’sCliffHudson says, “One thing you’ll hear about franchisors, generally, is that theyexisttodriveupthesalesattheirfranchiseesinordertomakemoremoneyforthemselves,withoutcaringwhetherornotthefranchiseesareprofitable.Idon’tneedtonamewho,”headds,“butyoucouldlookatsomeofthebigfranchisorsin this countrywho’ve spent years trying to buymarket share. In the process,they drove down the average store profitability of their own franchisees.Wecan’teverimaginedoingthat.”

Oneof thewaysSonickeeps theirhandsdirtywith the realworkers is theiruniqueFranchiseAdvisoryCouncil.Hudsonsays,“Wedon’tandwon’tpursueasingle significant initiative, marketing or product development [company], orbuildingdesignwithoutrunningitthroughthatgroupandgainingtheirapprovalandendorsement.”

KeepingYourHandsDirty—WithVendorsandSuppliers

Onasearchforfastandeasyanswers,manycompanieshaveconcludedthattheonlywaytobecomesuccessfulistoout-Wal-MartWal-Martandthey’vetakentowielding tire ironsanddonningsetsof ironknuckleswhennegotiatingwithvendors and suppliers.Unfortunately, the life expectancy of companieswhosesuccess is dependentonbeatingupvendors and suppliers is notoriously short.Assoonas thosevendorsandsupplierscan findaway todobusinesswithoutyou, orwith your competitor, theywill.We found just the opposite at all thecompaniesweidentifiedandresearched.

Here’s their prevailing view: we need tomake a profit to exist, grow, andnurtureourpeople,andoursuppliersneedtodothesamething.Eachcompanyhasforgedworkingpartnershipswithitsvendorsandsupplierswhichensurethatboth parties are able to realize their full economic potential.One of theways

they accomplish these unique partnerships is by staying close to and beingactivelyinvolvedineachother’sbusiness.

Tostayclose to theirvendorsandsuppliers,PETCOhostsamonthlyevent,OpenWednesday.Anyprospectivevendororsuppliercansimplyshowup;noappointmentsarerequiredandthecompany’sdoorsarewideopen.Manystart-upcompanieswithlittlemorethanagoodideahavegoneontobecomevaluedsuppliersbecauseofOpenWednesday.

But according to Chairman Brian Devine, the company’s openness andaccessibilitytosuppliersdoesn’tendthere.“Inmostcompanies,”hesays,“whenabuyerdecidestotakeapassandnotpurchaseanitemfromasupplierthat’stheendoftheroad.Butthat’snotthewaywedothingshere.”

EachyearPETCOhasatradeshowandfliesinalltheirstoremanagersfromaroundthenation.Allofthecompany’svendors(eighthundredtoonethousandofthem)attendtheshow.ButDevinehasaddedanunusualtwist.“Everyvendorthat our buyers have passed on throughout the year, butwould still like to dobusiness with us, is invited to exhibit at the show,” he says. “Then our storemanagers get to pick twenty-five items that the national support center hasn’tpurchased for their stores.” Store managers nominate products they’d like tohaveaddedtotheirinventoryandvoteonelectronichandheldmachineswiththetalliesilluminatedonlargescreensforeveryonetosee.

One of the company’s biggest hits ever—Greenies, a dental chew treat forpets—got into the PETCO stores byway of the annual trade show. PETCO’sbuyershadrepeatedlysaidno to theGreeniesproduct linebutstoremanagers,closertothedogandcatpublic,gaveitoverwhelmingthumbsup.

At Sonic, Cliff Hudson and his team take the concept of keeping their handsdirty to the extreme. No one at Sonic’s home office ever uses the words“vendor”or“supplier.”Allthecompaniestheyworkwitharealwaysreferredtoaspartners.Butagain,unlikethedisingenuouseffortssomecompaniesmaketooccasionally refer to their suppliers andvendorsaspartners,when the folksatSonicusethe“p”word,ithasaringofauthenticity.

Indollarterms,Coca-ColaisoneofSonic’slargestsuppliers,butHudsonsaysthe interaction it has with its partners at Coke is vastly different from therelationships most fast-food enterprises have with their major soft drink

suppliers.

“Ifyou’regoingtocallsomeoneapartner,”Hudsonsays,“thenyouhavetotreat them and they have to treat you as genuine partners, looking out for theinterestsofoneanother.Whenwehaveastrategicplanningretreat,ourpartnersfromCoke are there as full participants. They knowwherewe are,wherewewant to go, and how we plan to get there. By being that revealing with ourpartners,they’reabletomovebeyondbeingtransactionalsalespeoplesellingussyrupintofullfledgedwin-winpartners.”

One of themost striking things about themassivemerchandising and catalogcomplexthathousesCabela’sinSidney,Nebraska,isthateveryonewhoworkstherelookslikethey’rerightoffthepagesofoneofthecompany’scatalogs.Inonewayoranother,theyare.

Becausethecompanyinventoriesmorethan245,000SKUsandoffersaniron-clad, no-questions-asked, money-back guarantee on everything it sells,voluminous amounts of product testing are required. In order to involve theentirecompanywiththeirsuppliersandvendors,allteammembersareroutinelyaskedtosignoutclothing,shoes,hats,andsportinggearandareencouragedtoactively use them for a full year while simultaneously being engaged in adialogueabouttheproduct’squality.Attheendoftwelvemonths,theitemsarereturned,takenapart,andanalyzed.

Bycloselyinvolvingalltheirteammembersintheevaluationandselectionofall the products featured in their catalogs and stores, Cabela’s has movedcollegiality beyond the confines of the company and into the ranks of itssuppliersandvendors.Afterall,thereceptionist,assistantbuyer,orbookkeepingclerk just might happen to be the person testing and evaluating your firm’sproduct.

Whenleadersandcompanieskeep theirhandsdirty, they’rebetterable tospottrends;learnandactonwhatcustomersreallywant;andbetterearntherespectand trust of customers, employees, and suppliers. For something that’s such ano-brainerit’samazingthatmoreleadersandcompaniesaren’tpreparedtokeeptheirhandsdirtyandbuildthekindsofcompaniesthey’dwanttoshopat.

By keeping their hands dirty, the senior executives are, in a sense,relinquishing some of their power to the common employee, vendor, orcustomer.Theyarefavoringabottom-upmanagementapproachasopposedtoatop-down one. A bottom-up approach imbues the team with a sense ofownership,whichtranslatesintoitstakingresponsibilityandcontributingtothebottomlinebecauseitwantsto,notbecauseithasto.

ThinkBIG,ActSMALLKEEPYOURHANDSDIRTY

•Neverbecometooimportantforcustomercontact.•Turnworkersintovaluedteammembers—notemployees.•Turnsuppliersintopartners.•Beavailabletopeoplewhowanttodobusinesswithyou.•Giveallteammembersavoiceinthedecision-makingprocess.•Respondtoeverycustomercommunication.

3

MakeShort-TermGoalsandLong-TermHorizonsSONICDRIVE-IN

“We’renotcapitalconstrainedandcouldgrowfaster,butourlong-termvision forexpansion is irrelevant ifwe lose focusofdoing things righteveryday.”

CLIFFHUDSON,CEOofSonicDrive-In

The remarkable and consistent revenue growth achieved by the companiesweidentified,researched,andwroteaboutdidnotoccurbecausetheyhadfive-yearplans carved in stone. In fact, oneof theprimary reasons these companies areabletoconsistentlygrowtheirrevenuesbydoubledigitseveryyearisthankstoan absence of an inflexible long-term plan. While continually casting theircollective eyes toward the long-term horizon, each company understands thatlocked-in long-term plans are a waste of time unless short-term plans areproperlyexecutedandachieved.

Serious consequences occur when organizations bind themselves to rigidlong-termplans.

•ResourceAllocationThemanagerorexecutivewhobelievesthathercompanywillbemanytimeslargerinthefutureislikelytoallocateresourcesforfunctions,facilities,andpeoplethatmayneverbeneeded.Yearsafterthedot-combust,thousandsofcompanieswerestilltryingtoleaseorsubleasemillionsofsquarefeetofofficespacethey’dbuiltorleasedinaccordancewithfaultylong-termplans.

•FutureTalkWhencompaniesadoptlong-termplans,theyoftenbecomepreoccupiedwiththeachievementoftheplanandstoppayingattentiontothevitalday-to-daydetailsofbusiness.Inmanyinstancestheirplanbecomesmoreimportantthantheircustomers.

•GreedTakesOverWhenmanagersandexecutivesstartdreamingaboutthecoastalhomes,privatejets,andyachtsthey’regoingtobuywhen

theycash-outattheendoftheplan,they’reconcentratingonthewrongthings.

•MismanagedExpectationsWhenthetomorrowsdon’ttakeplaceaspromised,workersoftenexperienceacrisisofconfidenceinthepeoplewhosoldthemthelong-termplanandbecomecynicalorleave.

•InvestorsLoseConfidenceWhenabusinesspresentsalong-termplantooutsideinvestorsandlenders,theplanbecomesthedefactoBiblebywhichtheenterprisewillbejudged.Anydeviationisseenasanindicationofmanagerialmalfeasance.

•It’sToughtoChangeCourseWhenpeopleareherdedupandsentoffinonedirection,it’salmostimpossibletogetthemtochangecourse.

•ItCanSlowEverythingDownWhencompaniesarelockedintoaplan,theyfrequentlybecomeunwillingtoenvisionanythingthatdoesn’tfittheirplan.Theybecomelessnimbleandlosetheabilitytozigandzagasrequiredbymarketcircumstances.

Each of the companies we studied patiently concentrates on profitablyexecutingandachievingitsshort-termobjectives,knowingthateachstepbringsitclosertotheachievementofitsfulleconomicpotential.

TheSonicStory

There’snobetterexampleofacompanywhereexecutiontakesprecedencethanSonic Drive-In, with three thousand locations in thirty states and the highestcustomer frequency rate in the fast-food industry. (And themost funcompanyonecouldeverresearch.)WhencustomersdriveintoacolorfulSonicDrive-In,parkbeneaththelargecanopycoveringcustomers’cars,andaskforcooked-to-orderhamburgers,extra-longcheeseconeys,deep-friedtatertots,andthousandsof drink combinations including cream pie shakes, it’s hard to imagine thecompany as anything other than a classic all-American rags-to-riches successstory.

But the storyofSonic’s first fortyyears isoneofacompany that faced thesame troubles and intrigue that simmer beneath the surface at millions ofcompaniesandpreventsmostfromeverachievingtheirfulleconomicpotential.Agreatideaandinnovationalmostgotlostbecauseofgrowththatwastoorapid.Therewerescoresofgrandioseplansandmoretimewasspentdreamingaboutthe payoffs of tomorrow than the details of today. Rampant infighting andmaneuveringforpowerthreatenedtoupendthecompany.Alackofsystemsandprocess resulted inabrand that lackedadefinitive identity.Silosgotbuiltandwere zealously protected, and almost all the players had their own hiddenagendas.

TheEarlyYears

The company’s humble beginnings read almost like a fairy tale. Followingmilitary service inWorldWar II, Troy Smith, the founder of Sonic, returnedhometoShawnee,Oklahoma,andwentintotherestaurantbusiness.Beforelong

henoticedthatarootbeerstandontheedgeoftownwasbusierandapparentlymakingmoremoneythanhisrestaurant.Soin1953heboughtthedrive-inandrenameditTopHat.

Before long, Smith was approached by an eager salesman named CharliePappe,amanwhoseveryname,accordingtothosewhoknewhim,conjuresupaptimagesofhisdemeanor.Describedas“wearingaporkpiehatandpossessingamoving-downtheroaddeportment,”andwithaflourishingpitchtypicalofthetimes,he toldSmith,“I loveyourdealandby theway, together,wecanhavefifty of these some day!”With a handshake, a new partnershipwas promptlyformed.

Togetherthepartnersbeganimplementingastringofinnovations,includinganovel way of taking orders. Reasoning that Carhops wouldn’t have to writedownordersandrunthembacktothekitchen,theyinstalledbothamicrophoneand loudspeakers at each parking place. Smith says that as soon as theloudspeakerswereinstalledandmusicstartedplaying,“Businessexploded!”

By1959thepartnershadopenedadditionallocationsandastheyapproachednumber five decided it was time to begin franchising. Disappointingly, theydiscoveredthattheirnamehadalreadybeencopyrightedandtheyneededanewone.Withtherecentinstallationoftheloudspeakerscomplete,Smithwenttothedictionaryandlookeduptheword“sound.”Oneofthewordslistedundersoundwas“sonic”andwithoutapennyeverbeingspentonbrandresearch,he’dfoundanameandsloganthatepitomizedthetime:Sonic—withthespeedofsound.

In order to keeps things administratively simple, rather than chargeprospective franchiseesabigupfront fee, thepartnerscollected theirmoney inan innovativeway: throughabagroyalty.Eachrestaurantwasrequired tobuyall their wrappers from a single paper company and each month the papercompanysentSmithandPappeacheck representingonepennyperbag.Eventoday, old-timers in the Sonic system fondly recall the bag royalty because itneverfeltlikeitwascomingoutoftheirpockets.

TheTroubleBegins

By the 1970s Pappe had died and a group of a dozen young, enterprising

subfranchisorsandfranchiseeshadswelled thenumberof restaurants to250—andtheywantedtogrowevenfaster.TheywenttoSmithandaskedhimtofoldhiscompanyintoanewonewithalltheirrestaurants.Insteadofagreeing,Smithchallengedthem,“Formyourcompany,continuebuildingrestaurantsandifyouprovethatyouallcanworktogether,I’llputmycompanyinlater.”Twoyearslater,withthegroupapparentlyworkingwelltogether,Smithmergedhispartofthecompanyintotheirs.Thecompanytookoff,addingmorethanonethousandfranchiseesinonlysixyears.TroySmithwasstillreceivinghisbagroyalty,butthenewgroupbegancharginga$15,000feetojointhesystemanda3percentroyaltyonsales.

Whensomanystrong-willedpeoplegettogether,inevitablythere’sdissensionand trouble. Sonic was no exception. By the mid-1980s several partners hadbeenkickedoutofthecompany;marketinghadgroundtoastop;therewasnocommoncentralizedpurchasing;everyonewasfightingwitheveryoneelse;andthe operations support from headquarters was almost nonexistent. As onecompanyinsidersays,“Wehadwhatamountedtoaveryweakfranchisorwithsubfranchisors,whowerebeginning towonderwhy theywerepaying a three-percentroyaltyandgettingnothinginreturn,busybuildingtheirownfeifdoms.”Eventually almost four hundred restaurants left Sonic’s fold or were closed.Acrimonyreigned.

By the mid-1980s, after a number of false starts, the remaining boardmembersandownersdecidedtogiveonemoreshotatturningthingsaroundandbroughtinanewCEO.Severalmonthslaterhebroughtinayoungattorneytofillinforthefirm’scorporatecounsel,whowasonmaternityleave.Thatyoungattorney,CliffHudson,wasabouttoreceiveabaptismbyfirethateventuallyledhimtothepositionofCEO,ajobhestillholdstoday.

Hudsontookupwhathethoughtmightbeashort-termassignmentandfounda company in disarray. He says there were three dynamics going on thatthreatened any chance of reversing the company’s backward slide. “First,” hesays, “the newCEO reallywanted to buy the company himself. You had theattemptedturnarounditself,whichwashardbecauseyouhadtenboardmembersconstantlyfightingandbickeringwithoneanother.Andthen,therewerelicenserenegotiationsgoingonthathadthepotentialtotankthecompany.”

One particularly difficult franchisee and board member (who owned thirtyrestaurants) had already succeeded in changing the company’s royalty

agreements.Insteadofbeingpaidaflat3percentroyaltyfromfranchisees, thenew royalty started at 1 percent andgrewbasedonhowwell thehomeofficedroveindividualunitsales.Goadedbyhissuccess,thedissidentfranchiseewentto Smith and said, “Next, I’m going to acquire fifty-one percent of yourcompanyandtakeitapart.”

Smith,sensingtheurgency,arrangedforhismanagementteamtobegrantedanoptionforcontrolofthecompanyasapreventativemeasure.Tothesurpriseofeveryone, themanagementscrambledand in1986wassuccessfulat finding$10millioninfinancingandactuallyexercisedtheoptionfor51percentcontrol.Hudson,atagethirty,wastheyoungestmemberoftheteamandsays,“Noneofus had any money.We arranged more than nine million in loans and peoplemortgaged their homes, pawned their wives’ wedding rings and scraped upwhatevertheycouldforthebalance,”recallingthathisownequitycontribution(excludingpersonalbankloans)wasapersonalcheckfor$1,250.

As franchisees began modestly dressing up their restaurants and the newowner’s fledgling marketing and advertising efforts gained some traction,revenuesstartedgrowingandmanylocationswerewitnessingannualsame-storesalesincreasesof10to15percent.In1991Sonicwentpublicandthecompanythathadbeenvaluedat$10millionafewyearsbeforewassuddenlyworth$100million. (By 2005, under Hudson’s leadership, the market capitalization hadgrown tomore than$1.5billion.)Hudson,whohadbeenmoved to the roleofCFO when the company went public, became COO in 1993 and was finallynamedCEOin1995.

ANewBeginning

“When I became COO I knew I had to change the culture,” Hudson says.“Althoughmostofourfranchisees’revenuesweregrowing,thehomeofficewashorrible.The entire companyhaddeveloped into a groupof independent silosand nobody was working with anyone else. We had a marketing group thatdidn’tuseouroperators’guidetotestnewmarketingideas,wehadapurchasingdepartmentthatactedlikethemarketingdepartmentandwecouldn’texecute.Intrying to change the culture, what I found was that no one was interested inworkingtogether.”

Finally,Hudsonhadenough.“Oneday,”herecalls,“Isimplysaidthatanyonewhocan’tbuythefactthatthedaysofthesilosareovershouldleave.Everyoneisgoingtoworktogetherorthereisn’taplaceforyouatSonic.”WhenHudsonwouldn’t relent, every member of the senior management staff, except one,finally left. Pattye Moore, the one who remained, was eventually namedpresidentofthecompany.

While working to change the culture of the home office, Hudson wasconfronted with another dilemma. Half of the franchisees asked for a newcontractthatwouldextendthetermsoftheirfranchisesfortwentyyearsandgiveitgreaterprotectionontraderadiusesaroundtheirstores.Hudsonwaspreparedto comply with their request but wanted concessions in return. He wantedauthority.

“You have to understand,” says Hudson, “that this was a forty-year-oldcompanywithout a consistentmenu or look across the chain andwithout theauthoritytorequireit.”Hegavethefranchiseeswhattheywantedandinreturnthe company received the authority to determine the menu and makeparticipation in purchasing and marketing cooperatives mandatory, and anagreementthatallstoreswouldberetrofittedeverysevenyears.Alongwiththiscameanincreasedroyaltystream.

HudsonandMooreknewthecompanyhadtostandforsomethingandcraftedfourcorevaluestoguidethemontheirjourneyofchange.

TheSonicRoadRulesToofferspecialitemsthatsurpriseanddelightourcustomers

Topromoterespectforeveryonetouchedbyourbrand

Toemphasizetheimportanceofrelationshipsasawayoflife

Toreflectanentrepreneurialspiritandthepoweroftheindividual

Afteryearsofhavinghadthesubfranchisorsandfranchiseescallingtheshots,many executives might have been tempted to use their new powers in anautocraticordictatorial fashion.TohavedonesowouldhaveviolatedHudsonand Moore’s road rules and instead they chose to involve and listen to thesubfranchisorsandfranchiseesregardingmenus,retrofits,andadvertising.

“Therewasnowayweweregoingtouseournewpowerandshoveanythingdown their throats,” saysHudsonof the franchiseeorganization. “Weengagedeveryone in the turnaround process but with the knowledge that when wereachedthefinishline,everybodywasgoingtohavetosteptotheline.”

Hudson and Moore’s listening paid off. “One of our subfranchisors in theCarolinas was distraught at the prospect of a consistentmenu,” says Hudson,“andwasafraidwemightgetridoficecream.Whenhetoldusthathistopstoredid30percent of its revenues in ice cream, insteadof shuttinghimdown,wedecided we’d better listen to him. As a direct result, in 1996 we introducedfountainandfrozenfavoritesandbeganpromotingit.

“Sales,”Hudsonreports,“absolutelywentthroughtheroof.We’dneverseenanythinglikeitinourhistory.Afternoons,evenings,weekends,werejammed.”Becauseof thehighmarginsgatheredon icecreamsales, the restaurantsweresuddenlymakingmoremoneythaneverbeforeandwentalongwithHudsonandMoore’splans.

Hudsoncredits thechangedcultureat thehomeoffice to:aconsistentmenuchainwide;theretrofitofallthestores;andamarketingbudgetthatnowexceeds$100 million annually and closely involves the franchisees in every decisionwithbuildingachainofdrive-inswheretheaveragestoregenerates$1millioninrevenueand$150,000inannualprofit.Consideringthatsomeownershaveasmanyasthirtytotwohundredlocations,theeconomicsareveryattractive.

Today, as demonstrated by their financial performance during the past tenyears,Sonicisamodelofculture,creativity,andefficiency.

WhenwebeganpressingHudsonas towhySonic isn’t ineverystateof theunion and why it doesn’t have ten thousand restaurants instead of threethousand, his responses said almost everything we needed to know about thecompanyandwhatit’sbecome.

“We’re just not that greedy,” he said. “We’re not capital constrained and

couldgrowfaster,butgeographyandstorecountjustaren’tthatimportanttous.We can grow by a couple of hundred locations each year without evenexpandinggeographicallyoutofthethirtystateswe’rein.Moreimportanttousis growing profitably, making certain all our partners do well, being veryrespectfulofourbrand,makingcertainwegrowtherightkindofteammemberssowecancontinuetoexpand,andgrowingjudiciouslywhereitmakesthemostsense.”

Ratherthanrelyingonmagicaltacticsorlockingthemselvesintoatimetableforhowmanyrestaurantsthey’dhaveinfiveyears,HudsonandMooreexecutedonthebasics:havingallrestaurantspurchasetogethertoensuresignificantcostsavingsandqualitycontrol,implementingmarketingcooperativeswithfinancialmuscle for media advertising, consistently upgrading the appearances of alllocations,andofferingastandardmenuchainwide.

Hudson and Moore know that by growing same-store sales every year,patientlyaddingrestaurantsattherateofacoupleofhundredperyear,ensuringthateveryvendorandsupplierbecomesavaluablepartner,makingcertainthatasilo never rises again, and by consistently and steadfastly executing andachievingtheirshort-termgoals,thecompanywillbearoundtoachieveitsfulleconomicpotential.

We found the same thing everywhere we looked. These remarkablecompanies,whoseconsistentrevenuegrowthplacestheminthetopone-tenthof1percentofAmericancompanies,areabletogrowrevenuesbecausetheyaren’tburdenedwithdeliveringonafive-yearplan.They’refree tomaster thebasicsinsteadofconstantlyplayingcatch-uportryingtoexplainawayvariancesfromtheirplan.

ImagineItandThen...GetBacktoBusiness

In1982DotFoodshelditsfirstnationalsalesconference,attendedbysixpeopleinameetingroomat theKnightsofColumbushall inMountSterling,Illinois.“Wedidn’tevenhaveaconferenceroom,”saysCEOPatTracy,“sotherewasnowhereelsetoholdit.Atthebeginningofthemeeting,”herecalls,“Iwrotethenumber one hundred million dollars on a flip chart and never mentioned the

numberduringthemeeting.Finally,at theendof themeeting,someoneasked,‘What’s that number mean?’ and I told everyone that if we paid attention tobusinessandexecutedwell,thatsomedaywe’dhitthatnumber.”

Within six years Dot Foods broke the $100 million number and everyoneaskedTracywhichnumbercamenextandhesharedanothernumber:1billion.Thecompanyachievedthatgoaltwelveyearslaterintheyear2000andiswellon its way to the 2 billion dollar mark in revenue. “Sure there are other bignumbers we’d like to hit,” Tracy says, “and if we stick to our knitting andexecutewellwe’llachievethemsomeday.Butwe’veneverreallysaid that thetarget is thisnumberor thatnumber.”Hesaveshis importantcommenton thesubject for last: “Volume is vanity and profit is sanity and we’re far moreinterestedinbeingsanethanweareinbeingvain.”

You’d never catch Tracy and his siblings allocating resources to handlerevenues theymight hit someday. They’dwait until theywere closing on thenexthurdleandoperatingatmaximumefficiencybeforecommittingtofacilitiesdesigned to handle a sales volume that might never happen. Dot Foods iscommitted to profitable growth and won’t undertake any initiative that mightendangertheirlong-termprofitability.

YouNeedtoSeetheTarget

CharlieMills,CEOatMedlineIndustries,anothercompanybasedinthenation’sheartland,sharesthesamefeelingsaboutgettinglockedintolong-termplansandachievingbigelusivenumbers.“Look,”hesays,“everyoneofourfivethousandteammemberswantstodowellfinancially.Byacceptingtheobligationtoallowourworkers’paycheckstogrow,we’relockedintoimprovingsaleseveryyear.And we have to do that in an ultracompetitive industry that actually facesdeflationeveryyear.”

When quizzed as to whether Medline, which is currently closing in on $2billioninannualrevenues,canonedayachieve$10billioninannualsales,Millstakesonanincredulouslook.“Jason,youneedtobeabletoseethetarget,”headmonishes.“Ifwecontinuetoexecutewell,remaindebtfree,andprovideteammembers and customers a better future, then we’ll continue to do better year

afteryear.Ifwedothosethings,wecanenvisionacompanydoingfourbillionin sales.” He concludes his thoughts on the subject with, “but let’s hit thatnumberbeforewethinkaboutabiggerone.”

KeepDoingWhat’sWorking

O’Reilly CEO David O’Reilly recalls how, at a family get-together nearlytwentyyears ago, his brother said, “Somedaywe’ll haveonehundred stores!”O’Reilly says that everyone laughed and his brother protested and offered up,“Yes,we’regoingtohaveonehundredstoressomedayandwhenwedo,we’llgo to Hawaii together.” At the time the chain had twenty-five stores andO’Reillysays,“Noonecouldpossiblyimagineeverhavingonehundredstores.”

Thecompanydidgrowtoonehundredstoreswithinsevenyears(theyneverdidtaketheHawaiitriptogether)butO’Reillysaysthathittingabignumberandhavingalocked-infive-yearplanwasn’tinthecards.“Wenever,andIwanttoemphasize the word ‘never’, had a plan to hit 200, 400, 800, or 1000 stores.Instead,weallagreedthatwe’dneverhavesomefarawaytargetwecouldn’tseebutjustkeepdoingwhatweweredoingandgrowingconsistently,steadily,andprofitably.Whereverthattookuswasjustfine.”

Don’tChaseNumbers

According to Robert Silberman, CEO of Strayer Education, his mission is tobuild a nationwide university for working adults thatmakes getting a collegedegree possible for people who would otherwise not get one. While theconsistentrevenueandoperatingprofitgrowthofStrayerhasbeennothingshortof remarkable, Silberman insists, “We simply aren’t focused on revenue oroperatingprofitgrowth.”

ForseveralyearsStrayeraddedthreeadditionalcampusesannuallyandinthepasttwoyearshasopenedfivenewcampuseseachyear.“We’dliketocontinueadding five campuses each year,” says Silberman, “but it’s easy to chase

numbers andwewon’t do that.We’ll only expandby that number ifwehavesufficientinternalpersonneltoofferanextremelyhigh-qualityeducation.”

Silberman won’t grow for the sake of growing in order to hit some bigmagical number. “I actuallyworrymore about overgrowth than anything elseandIspendalotoftimewithmyboardandwithinvestorscautioningthemnotto invest with us if they want us to quickly chase numbers. In any trade-offbetweengrowthandquality,we’regoingtochoosequalitybecauseinthelongrun,that’showwe’llsucceedinbuildinganationwideuniversity.”

The short-term objective thatmattersmost to Silberman is quality and he’sunwillingtoconsiderallowingthatcommitmenttobeendangered.

“What about analysts and investors,” I wondered. “When they see thecompellingratesofreturnthatadditionalcampusescangenerate,don’ttheypushyoutoexpandfaster?”

“For themost part,” Silberman says, “analysts and investors want to knowwhatwe’redoing,andwhyandwhen theydo, theyappreciateourcandorandthe honesty.” Silberman’s final take on the subject of being pressured byinvestorstogrowfasterwasanespeciallytellingone.“Ibelieve,”hesaid,“thatover the long run a company gets the investors they deserve, and we’re realhappywithours.”

Don’tLetPlansWeighYouDown

KeithCollins, seniorvicepresident andchief technologyofficer atSAS, says,“The greatest thing about JimGoodnight andSAS is thatwhen everyone toldhimheneededthisbiggrandiosefive-yearplan, itsimplynevermadesensetohimandhedidn’tdoit.Wedon’thavefive-yearplansatSASbecausewedon’twanttogetweddedtothemorhavethemweighingusdownlikeanchors.”

Goodnightsays,“Inthetechnologyindustryeverythingchangessoquickly.Ifyoustucktoafive-yearplanyourproductwouldbeirrelevantbythetimeyougottotheendofit.ImagineignoringtheearlystagesoftheInternetorwirelesstechnologyinourbusiness.Itwouldbesuicidal.”

AnotherSASexecutiveechoesthesentiment,saying,“Oneofthereasonsthis

companyworkssowellisthatwe’renotlockedintoaplanbutinsteadsticktoourknittinganddowhatwedobest.Wenevertrytogowildordothingsthatwouldbeunnaturalforusinordertogainmarketshare.Wetakecareofourcorebusiness,”hesays,“andthenslowlyexploreotherareas.”AgreeingwithCollins,headded,“Ifweweretieddowntoachievingaspecificfive-yearplan,we’dloseour sense of innovation, commitment to our customers, and our competitiveadvantage.”

Companies that think big and act small can achieve remarkable revenuegrowth by staying focused on the execution of their important short-termobjectiveswhileconstantlymaintainingawatchfuleyeonthelong-termhorizon.

ThinkBIG,ActSMALLTIMEHORIZONS

•Don’tgetlockedintolong-termplansbasedonfairytalenumbers.

•Don’tbecomepreoccupiedwithtomorrow.Takecareofcustomerstoday.

•Don’tletgreedcloudyourvision.•Don’tobsessonthebigsomethingyou’retryingtoachieve.Takeitinbite-sizedpieces.

•Settargetsthatpeoplecanseeandbelieve.•Keepdoingwhat’sworkedinthepast.•Don’tchasebignumbersforthesakeofthebignumbers.•Don’tletlong-termplansbecomeanchors.

4

LetGoCABELA’S

“Ifsomethingisn’tworking,fixit,andifitcan’tbefixed,thengetridofit.”

DennisHighby,CEOofCabela’s

It’s not so much the things they do that allow the nation’s best revenue-producingcompaniestogrowtheirrevenuesbydoubledigitseveryyear.It’sthethingstheydon’tdo.

Most companies waste so much time trying to resuscitate yesterday’sbreadwinners,defendingpastdecisions,assuagingexecutiveegos,andtinkeringwithbrokenprocessesthattheydon’thavetimetoconcentrateontheimportantthings,likeaddingcustomersandgrowingrevenues.Theyalwayshaveacrisistodealwithorafiretoputout.

•GECapitalspentyearspouringhundredsofmillionsofdollars(bysomeestimatesmorethan$1.4billionovermanyyears)intoMontgomeryWardeventhoughthecompanyhadhadatagonitstoeforgenerations.Itcouldn’tadmitithadmadeamistake,cutitslosses,andmoveon.

•GeneralMotorstriedtofoistadeadbrandontheAmericanpublicbyquadruplingtheadvertisingbudgetofOldsmobiletoalmost$400millionwiththeirdisastrous“It’snotyourfather’sOldsmobile”campaignwheneveryonealreadyknewitwasn’tyourfather’sOldsmobile...itwasGranddad’s.

•AndmaybethemarketshareofApplemightbegreaterthan2percentifSteveJobshadn’twaltzedonstageataMacworldExpodecadesagoandannouncedthatthecompanywouldneverchangethewayitdistributeditscomputersandthen,becauseabigegowasontheline,proceededtodefendthatpositionforyears.

Whenconfrontedwithproblems,mostcompaniestrytomakesmallchanges

orBand-Aidfixesandhopethingsgetbetterorthattheproblemgoesaway.Thisapproachdoesn’tworkandensuresthatthey’llwastevastamountsoftimeandenergy. In stark contrast,

whenthecompaniesweresearchedconfrontachallenge,theproblemchildmaygetasecondchance;otherwisetheyquicklyinventanewwayofdoingthings,jettisontheoldway,andgetonwiththeimportantbusinessathand—findingcustomersandgrowingrevenues.Oneof thecharacteristicsofour topninecompanies is that eachproves the

propositionofthinkingbigandactingsmallbymasteringtheartofabandoningproducts,services,andprocesseswhosetimeispast.

Inhavingmasteredtheartoflettinggoandchallengingthewaythingshavealways been done,Cabela’s has built one of themost successful business andretailorganizationsinU.S.history.

TheCabela’sStory

In 1961 Dick Cabela, an avid outdoorsman from Chappell, Nebraska, foundhimself at an outdoors and sporting goods show in Chicago.Walking up anddowntheaisles,hesawanitemthatintriguedhim:fishingfliesforonlypenniesapiece.

Dickboughtabunchofthem,andwhenhereturnedhomeranaclassifiedadinaCasper,Wyoming,newspaperoffering“12hand-tied flies for$1.00.”Theadgeneratedonlyoneresponse.Hemulleditover,abandonedhisoriginalplananddecidedtorunasmallclassifiedadinanationalsportinggoodsmagazine.Thenewadread“FreeIntroductoryoffer!5hand-tiedflies...25¢Postage...Handling.”Ordersstartedpouringin.

Each evening,Dick and hiswife,Mary, sat at the kitchen table filling thatday’s orders and inserting a simple mimeographed catalog of other outdooritems for sale. Their firstwarehouse, built the next year,was a small shed intheirbackyard.DickrecruitedhisbrotherJimtojointhefledglingenterprisein1963.Noneofthethreetookanymoneyoutofthecompanyforyears,spendingitinsteadonequipmentandinventory.By1964thenewbusinessmovedintoitsfirstheadquarters;thebasementoftheirfather’sfurniturestore.

Today,Cabela’sproducesmorethan7,000catalogpagesannuallyandsendsoutmorethan120millioncatalogseachyear;itsmammothoutdoorstores-cum-museums are the top tourist attractions in nearly every state where they’relocated; theworldheadquarters inSidney,Nebraska, is thesizeof six footballfields;andmorethan1millioncustomerscarryaCabela’sVisacardissuedbytheirownbank.

TheDifferencebetweenMerchantsandRetailers

One of the big reasons for Cabela’s continued success is that the company ismadeupofauthenticmerchants.AccordingtoCEODennisHighby,whojoinedthe firm in1976, “Agoodmerchant is a personwho is an enduser, someonewhogoesoutinthefieldwithaproduct,usesit,andgetssweatyanddirtywithit.”

Highby says that most retailers have become so burdened with regulationsregarding samples that they’ve ceasedbeingmerchants. “Atmost companies,”

hesays,“ifasalespersoncameinandofferedabuyerarodandreelandsaid,‘Goaheadanduseit,’hewouldn’tbeallowed.AndifthesalesmanaskedyoutojoinhiminAlaska foraweekand tryouthisgear, that’dbe totallyoff limits.Wehaveour rules,butourmerchandisers reallyenjoy tryingnewgear, seeingwhatdoesanddoesn’twork,andbeingoutinthefield.”HighbysaysitgivesthemerchandisersatCabela’sadistinctcompetitiveadvantage.

Towalk the halls of Cabela’s headquarters is to witness the pages of theircatalogs come alive. Almost all of the 1,040 people who work there inmerchandising, catalog design, production, and other departments becomeproducttesterswhenthey’reaskedtowearapairofshoes,outerwear,orcasualclothingforayear.“Somepeoplelovetheprogram,”Highbysayswithagrin,“while others hate it. Ourmerchandisers ask people to sign something out towearoruseforafullyear,andjustwhenthosenicenewshoes,waders,orcoataregettingbrokenin,theyhavetobringthembackin,givethemupandweripthemapartanddissectthem.”

One-thirdofCabela’sproductscarrythecompany’sownlabelandhavebeendesignedandpatentedinhouse.Highbysays,“Wehavelotsofpeopleherewhohavepatents, includingmyself.There isn’t anywayyoucan invent somethingandgetitpatentedunlessyou’reanaviduserandseeaneedformodificationorimprovement.”

There’smoretothemagicoftheCabela’sexperiencethansimplybeingabletopurchase thesameinnovativeandhigh-qualitymerchandise that’sused(andoftendesigned)bythemerchantsthemselves.SincethedayDickandJimCabelastarted thebusiness, they’vesharedanearly religiouszeal forexceedingeverycustomer’sexpectations.Thatcommitment tosatisfyingcustomershasbecometheunifyingethosoftheorganization.

Dennis Highby says, “Lots of companies say they’re committed to thecustomer,andinmanyinstancesit’ssimplynottrue.Whetherit’sapairofshoesthat haven’t fit quite right for the year a customer has owned them, ormerchandise returned sixmonths after the purchase, our answer is always thesame,” Highby says, “Yes, we’ll take it back and exchange it or give thecustomertheirmoneyback.”

Such largessedoesn’t extendonly to shoes andouterwear. “Justyesterday,”Highbyrelates,“Iheardastoryaboutoneofourcustomerswhowasonaneight-thousand-dollarhuntingtripthroughourtravelandadventureagency.Wepride

ourselvesonsendingpeopleonlyongreattrips.However,onthisparticulartripthe customer didn’t really have a chance to hunt because he was kept busyhelping the outfitter set up camps for the next guy coming in.We want thiscustomertobehappyandtellhisfriendsthatCabela’s treatedhimrightsowewrotea refundcheck for the full eight thousanddollars, apologized, and fixedtheproblemsoitwon’thappenagain.”

AbandoningaLogo

Contrary to that wholesome value of “stick-to-it-tiveness” that people inAmerica’s Midwest pride themselves on having, Cabela’s has proven itselfremarkably adept at letting go of merchandise, products, and processes thatmightstandinthewayofitsgrowth.

Highby recalls attending a seminar in Chicago on the subject of makingcompany catalogs more effective. The expert conducting the workshop hadcollectedcatalogsfromthecompaniesinattendanceandwasusingtheminhispresentation, citingwhatwas right andwrongwitheach.Highby recallsbeingdutifullyproudofthecurrentCabela’scatalog,especiallyinlightofthefactthatthecompanyhadrecentlypassedthe$100-millionmarkinrevenue.Finally,theexpertheldupaCabela’s catalogandbegancriticizing it, saying, “Oneof thethingswrongwith this catalog is thaton thebottomof thecoverpage it says,‘quality,service,price,andsatisfactionguaranteed.’”InHighby’sversionofthestorytheteachercontinuedhislecturebypointingout,“theproblemwithtalkingaboutquality,service,price,andsatisfactionbeingguaranteedisthateverybodysaysitandnobodybelievesit.”

Highby and the Cabela brothers could have returned home to Sidney andthumbed their noses at the instructor’s advice. After all, they were the realsuccess story; already doing more than $100 million in annual revenue. Butinstead, inHighby’swords, “We spent nearly amonth stewing on the subjectandconsideringifweshouldchangethefrontofourcatalog.”HavingspenttimewithHighbyandtheCabela’steam,hisuseoftheword“stewing”isappropriate.Soon after meeting them, it was clear that once they get hold of an idea,someonewouldhavemoresuccesswrestlingaboneawayfromarabiddogthangettingthemtogiveitupuntiltheywerefinishedwithit.

In dollar terms, Cabela’s was already the largest outdoor sporting goodscompanyandatriptoEuropeconfirmedthatnocompanytherewaslarger.“Wetraveled all over,” saysHighby. “Amsterdam,Munich, London, and found alltheselittledinkystoresandholesinthewallandfinallyrealizedthatindeedwewere thebiggest.Off themastheadandcatalogcame the too-familiar“quality,service,price,andsatisfactionguaranteed”thathadbeenusedoncatalogssenttohundreds of thousands of customers over the years. It was replaced with thenewly trademarked “World’s Foremost Outfitter.” Later came “World’sForemost Bank,” “World’s Foremost Hunting and Fishing Consultants” (theOutdoor Adventures division), and the “World’s Foremost Outfitter” retaillocations.

LettingGoofMerchandise

Cabela’s has spent forty years cracking the code on how to economicallyproduce compelling, jam-packed, full-color catalogs. They’ve turned catalogsalesintoafinitescienceandcanpredictwithinapercentagepointpreciselythetotalsalesthateachcatalogwillgenerate.

“Letmeshowyouanexampleofhowwework,”saysHighby,grabbingandrandomly opening a catalog. “See this?” he asks. “It’s page 684. We knowexactlywhatitcoststoprepare,produce,andmailthissinglepageandweknowexactlywhattheitemsonthepage[thepagehewaspointingatfeaturedturkeyfryingkits, foodoil filterpumps,andcajunmarinadekits]have togenerate ingrossprofittomakeitbackintoacatalogagain.”

“What would happen,” I wonder, “if an item generated sales but failed toreturntheanticipatedgrossprofit?”

“First,”heanswered,“there’dbealotofquestionsforthemerchandiserwhoselectedtheitem.Ifthemerchandiserhadasoliddefense,suchasabadpictureor botched copy, the item might be given one more chance. But it wouldn’thappentwice.Ourbusinessisbuiltonknowingpreciselyhowmanycalls,hits,faxes,andmailorderswe’regoingtoreceive,whenwe’llreceivethem,andthedollarsthey’llgenerate.”

Wepushedhimfurtherandwonderedwhatwouldhappentoamerchandiser

whoconsistentlymadebadchoicesforinclusioninthecatalog.“Ifyou’reaskingifthey’dbefired,”heresponded,“theanswerisno.Weneedlotsofgoodpeoplehere for all theworkwehave to do andwe’d find thema job thatwas bettersuitedtotheirskillset.”

Each year the company abandons approximately 15 percent of the itemscarriedinpreviouscatalogsthatfailedtoachievethecompany’srequiredgrossprofit. Each year the company also reinvests a significant portion of theiroperatingprofitsintonewspecialtycatalogsandtheexpansionoftheirmailinglist.Beingexpertsatforecastingtherevenuesandprofitsthateachcatalogwillgenerateprovidesthecompanyauniquecompetitiveadvantage.

AbandoningtheTraditionalApproachtoRetailStores

WhenDennis Highby arrived at Cabela’s in themid-1970s the companywasalready active in retail with a small store in Sidney, Nebraska, that had “onestore manager, a single employee, and a single game trophy hanging on thewall.” Retail was decidedly second string to the catalog business which wasgrowing20to40percenteachyear.

Eventually,theteamdecidedtoopenitsfirstlargestore—threehoursoutsideSidneyonInterstate80—inKearney,Nebraska.Itwasasurprisehitandledtothe decision in 1991 to open Cabela’s 89,000-square-foot flagship store inSidney,Nebraska.At this point, opening retail storeswas still not part of anygrand strategy—the Sidney store was built to showcase the catalog offerings.However, itwasanother surprisehit.According toMikeCallahan, seniorvicepresidentofretailoperationsandmarketing,theflagshipstore,locatednextdoortothecompany’sworldheadquarters“inatownofsixthousand,acountyoftenthousandandhoursawayfromthenearestmetropolitanarea,drawsmorethan1millionpeopleandringsupsalesofmorethanfortymilliondollarseachyear.”

Before joining the company,Callahanhadbeen themerchandisingmanagerforachainoffortysportinggoodsstoresinUtahand,uponarrivalatCabela’s,hesayshewashorrifiedbywhathefound.“Iwasmentoredundersometoughsporting goods businessmen,” he says, “who’d come out of the war surplus

businesswhereeverylastinchoffloorspacewasdevotedtosellingmerchandiseandvisualdisplaywasnonexistent.”CallahansoondiscoveredthatJimandDickCabelaandDennisHighbywereabandoningthetraditionalrulebookaboutretailstores.

“Icouldn’tbelieve,”hesays,“theamountofnonsellingspacebeingbuiltintothe Sidney store. Everywhere you looked there were going to be mountainspacked with wildlife, larger-than-life bronze statuary, and aquariums teemingwith fish. The leadership had the vision,” he says admiringly, “to abandontraditionandsay,‘thisiswhoweare,thisiswhatwe’reabout,andthisiswhatwestandfor.’”

Basedonthesuccessoftheflagshipstore,Cabela’shaddevelopedastrategytoplace stores in the right locationsbasedon a numberof factors including acriticalmassofhunters,fishermen,andoutdoorenthusiasts.Thecompanysoonbegan planning their next store and, again bucking conventional wisdom thatdictatesstoresmustbelocatedindenseurbanareas,theyselectedanotherrurallocation: Owatonna, Minnesota, population 35,000. The only change in theMinnesota store was to double the new store’s square footage to more than150,000squarefeet(morethanthreetimesthesizeofafootballfield).Itquicklybecame Minnesota’s second most popular tourist attraction, trailing only theworld’slargestmall—theMallofAmerica—inpopularity.

InshortordertherewereotherretailoutletsinEastGrandForks,Minnesota;Prairie du Chien,Wisconsin;Mitchell, SouthDakota; andDundee,Michigan,wherethestoreismorethan225,000squarefeetanddoesmorethan$400persquarefoot insalesinanindustrywhereone-thirdof that isconsideredasolidperformance. In 2004 Cabela’s opened its first East Coast store in Hamburg,Pennsylvania. The Pennsylvania store is nearly 250,000 square feet and isexpected to draw 7 million visitors and customers during its first year ofoperation. In 2004 Cabela’s also opened a 176,000-square-foot store inWheeling,WestVirginia,adjacent toa595,000-square-footdistributioncenter.ThecompanyannounceditwouldbuildtwostoresinTexas—oneinFortWorthand one in Buda—as well as one in Utah. The current plan is to have adestinationstoreineverystateandCanadianprovincebytheendofthedecade.

LettingGoofPayPlans

Therearefewplacesthatexecutivesfeartotreadmorethantheareaofchangingpayplans.Thebelief thatpeoplearefiercelyprotectiveof theirpaychecksanddon’twantmanagementtinkeringwithandchangingthemhasbeenproventimeandagaintoanyonewho’severtriedchangingapaystructure.

WhilenobodyidentifiedDaveRoehrasCabela’sgo-toguy,itquicklybecameobvious tomyteamthat that’s theroleheserves.Roehr,whosecurrent title ispresidentandCEO,alsoheadsCabela’sWorld’sForemostBank, the issuerofthecompany’sVisacards.AccordingtoDennisHighby,“HepreviouslyservedasVPandCFOofthecompanybeforewestartedformalizingtitles.”

RoehrsaysoneofthemostimportantthingsCabela’severabandonedwasitsformer compensation plan in favor of a company-wide, performance-basedstructurethathewaschargedwithmovingthroughoutthecompany.“Itwasrealhodgepodge,”hesays.“Peoplegenerallygotthesamebonuseseachyearsimplybecause they’d gotten one the year before. We really didn’t have acomprehensive program. It had been cobbled together over the years as thecompany had grown and inmost cases it rewarded revenue growth instead ofprofitablerevenuegrowth.”

We wondered if it was difficult selling the new plan inside the company.Roehr says, “Pick the words you want to use to describe the reactions: fear,trepidation,anger,frustration.Wehaditall.Itwasabigsalesjob.Butassoonasthefirstyear’sbonuscheckswerepaidout, thecultureabsolutelychangedandourrealdramaticprofitgrowthbegan.”

In addition to equity-based compensation being available toworkers, underthechangedplan,whichhasnocaps, thecompanysetsaside15percentof itsprofits each year for distribution to all exempt employees. (In 2003 the bonuspooltotaledalmost$20million.)ThenRoehr,Highby,andJimCabelaanalyzethe company’s performance and allocate a percentage of the pool to variousdepartmentsbasedontheircontributiontothecompany’soverallperformance.

Next,themanagerofeachdepartmentawardsbonuspaymentstoindividualsbased on their performance and contributions to the company that year. It’s agenerous program, and in many instances the bonus exceeds an employee’sannualsalary.

Roehrsaysthebenefitsoftheperformance-basedcompensationplanarewellworth the effort of selling it to the company. “It’s forced everyone to worktogetherasateam,”hesays.“Interdivisionalrivalrieswereeliminated.There’s

nosenseinbeingaloneranger.Companypoliticswereeliminatedandpeopleletgooftheirlittleterritories.”Becausetheprogramissogenerousandthere’snoupperlimittohowmuchanindividualcanearn,Roehrsaysthatthere’sbeenahugeunintendedbenefitaswell.

“Wesuspected that theprogramwouldprovideusextremely low turnover,”he says, “and it’s accomplished that because no one wants to leave such agenerous compensation program behind. The unintended benefit occurs whenwe’rerecruitingpeopletojoinus.Peoplewhowantthespecificdollaramountsof their individual compensation program agreed to in advance,” he says,“probably aren’t right for Cabela’s. This is a company where you come onboard,joinateam,pitchinanddowhateverneedstobedoneandaregenerouslyrewardedforyourefforts.”

KnowingWhentoStickItOut

EventhoughCabela’shasbecomemasterfulatlettinggooflogos,merchandise,processes,conventionalwisdom,andpayplans,DennisHighbycautionsagainsttossingthebabyoutwiththebathwater.“Wealmosthadacategoryfailureafewyearsago,”hesays,“withourSaltWatercatalog.Itwasasmallcatalog,about120 pages, and it simply wasn’t working. Our merchants were frustrated andbeating themselves up and starting to think, ‘We’re inNebraska, what doweknowaboutsaltwater?’”

Highby’ssuggestiontothemerchantgroupwastoadd100pagesandnearlydoublethesizeofthecatalog.Hesays,“TheylookedatmelikeIwascrazyandasked,‘Whyintheworldwouldwedothat?’”

Highby continues, “I told them that as good merchants we had to trysomethingbeforekillingitoff.Ifsomethingisn’tworking,fixit,andifitcan’tbefixed,thengetridofit.”AccordingtoHighby,“Theydiditanditturnedouttobeahugehomerun.”

At Cabela’s and all the other companies we studied, we observed whatappeared to be an unspoken rule: if it was a good enough idea to try, then itdeservedonedramaticreinventionbeforebeingtossedout.

AdaptingtoPublicOwnership

Whenwe identifiedCabela’s as a company that qualified for inclusion in thebook,itwasaprivatelyheldcompany.In2004,withhalfofCabela’sstockstillownedby the two foundingbrothers, thedifficultdecision to finallygopublicwasmade.Most oftenwhen companies go public it’s for one of two reasons:either they need capital for growth or it’s an estate planning tool for thefounders.

“Inthelatenineties,”saysHighby,“webeganaskingwhatweweregoingtodo with the company. We were asking the question because if one of thebrotherssuddenlywasn’taroundoneday,wecouldhavehadarealbigproblem.We looked at selling but knew that anyone interested in buying it wouldprobablythinkit’stoohardtorecruitpeopletoSidney,Nebraska,andusethatasa reason to justifymoving the company. Jim andDick live here in town andwantedthecompanytostayhere.”

Highbysays,“Ifthecompanyhadbeensoldtoanothercompanytherecouldhavebeenabigmess:a strategicbuyerprobablywouldn’thavepaidwhat thecompanywasworth,andabuyerfromthefinancialcommunitymighthavetriedrampingupthecompanytooquicklyinordertodotheirownIPO.Soinordertokeepthecompany’scultureintactadecisionwasmadetogopublic.”

Willgoingpublicchangethecompany?“Idon’tthinkso,”respondsHighby.“We’reinitforthelonghaulandhavepromisedcontinuedannualgrowthinthesixteentoseventeenpercentrange.Aslongaswedothat,”hesays,“long-terminvestorsshouldseeanincreaseintheirsharevalueeachyear.”

IfThere’sNoProfitinIt...LetItGo

Wequicklydiscernedthattheartofabandoningwasn’tlimitedtoCabela’s.Onething that separated all the top nine companies from their lesser performingrivalswas that each has demonstrated the ability to let go of processes, profitcenters, and even legacies when they risk distracting the company from therealization of continued revenue growth and the achievement of its full

economicpotential.DotFoodswasnoexception.

In 1986, as the big warehouse clubs were taking off, Dot Foods begandistributingtothem.Inonlyfouryears,thatpieceofbusinessgrewtomorethan25percentof thecompany’s totalandwasveryprofitable.Thensuddenly, theindustryrapidlyconsolidated.Therewasintensedownwardpressureonalreadyslimmarginsandasthesupplychainchanged,DotFoodslostamajorcontract.

Instead of abandoning one-quarter of their total annual revenues, mostcompanies would have desperately tried to replace the supply contract andslashed their own costs even further to accommodatemargins thatwere beingcontinually compressed.According toPatTracy,Dot’sCEO, “Wepackedourbagsandpainfully left thatbusiness inorder toapplyourbusinesscapacity inotherareas.”

Dot Foods, which was founded as a distributor of dry-milk solids to foodmanufacturersandicecreammanufacturingplants, isevenconsideringleavingthat business. Today, because that portion of the business requires moreattention than its revenues and profits justify, Pat Tracy says the family mayconsiderdivestingitselfofit.

Dotfoodshasdemonstrated itswillingness toabandonunprofitablebusinessunitsand isevenprepared to letgoof its legacybusiness for thegreatergoodandfutureoftheorganization.

LettingGoof“WhatYou’veAlwaysBeen”

Medlineisacompanythathashistoricallymanufactureditsownproducts.Abigpartofitssalespitchtoexistingandprospectivecustomershasbeen,“Becausewemanufactureourownproducts,wecandeliver themtoyouatasubstantialsavings.”

However, according to John Marks, the company’s director of corporatecommunications, in recent yearsmany large hospitals and health-care systemshave consolidated the number of vendors they work with in order to gainefficiencyandcostsavings.

To keep business it already had, Medline had to become a distributor of

competitors’ products as well as a manufacturer of its own. “There was riskinvolved,” says Marks, “because we were entering an entirely differentbusiness.”Medlinedemonstrateditsabilitytoletgoofegosandthewaythingshadalwaysbeendoneandasaresult,accordingtoMarks, thefirmhasgainedsignificant and profitable business and has become one of the nation’s fourmajordistributorsofhealth-caresuppliesinthenation.

LettingGo...attheLastMinute

AtPETCO,ChairmanBrianDevineprideshimselfoncreatingandnurturingaculturewhereworkersandexecutivesareencouragedtochallengethedirectionofthecompanyorsuggestnewwaysofdoingbusiness.

“Recently,” according to Brian Shaw, the company’s director of strategicdevelopment,“executivesanddesignersat thecompanyhadspentmore thanayeardevelopinganewstoredesigntocarrytheretailchainintothefuture.Thefirst test store was already open and everyone agreed that the new designrepresentedthefuturePETCOstore.

“Then,” says Shaw, “one of the company’s junior executives presented adaring new store design to senior management. He was surprised to find anopen-mindedaudience.”Hissuggestion,accordingtoShaw,“wastoexpandtheaquaticsdepartmentbeyondanything thedesign teamhad imagined,andplaceanelaboratecollectionof tanksanddisplays smack in themiddleof the store.Theproposednewdisplayincludedeverytypeofaquariumimaginablefromlivereeftankstokoiponds.”

Shaw says, “The idea was a completely new one; customers would walkaroundtheracetrackand,whilebeingawedbytheaquaticspresentation,wouldbe simultaneously exposed to all the othermerchandise in the store includingdog,cat,bird,andsmallanimal.”

The proposed changes were dramatic considering that fish had alwaysoccupiedjustasmallportionofasinglewallinthetypicalPETCOstore,andthemerchandise had been a limited assortment for beginning and intermediatehobbyists.“Adoptingthenewdesignwouldmeanthecompanywouldalsohaveto significantly change its merchandising strategy to appeal to advanced

hobbyistsaswell,”Shawsays.

“Eventhoughtheexecutivesbeingshownthenew,last-minuteproposalwereall personally invested in and had signed off on the prototype,” says Shaw,“everyoneinthemeetinggotexcitedabouttheproposedchangebecausetheideahadthewowfactorthatallretailersconstantlyseek.

“Immediately,”herecalls,“ateamwascreatedtoplanforateststore.Withinsixmonthsitwasopenandallnewstoresandremodelsreflectthenewdesign.”

There’snotasnowball’schanceinhellthatthescenarioplayedoutatPETCOwould occur in most companies. In most businesses the junior executivewouldn’thavegottenontheagenda,muchlesshavefoundareceptiveaudience.Either the ideawouldhavebeendeep-sixedbyotherswithegoson the lineorstolenawayandpresentedatalaterdateasbelongingtothem.AtPETCO,ideasthatmake you gowow aremore important than defending past decisions andmassagingexecutiveegos.

AWordofWarning

Stunning execution is something that separates great companies from themediocre.Occasionallyexecutiontakesawhile.Theartoflettinggoshouldn’tbeconfusedwitheitherconstantlycomingupwithnewstrategiesor failing toproperlyexecuteastrategicplanalready inplace.Astrategicplanshouldonlybethrownoutafterit’sbeendeterminedthattheexecutionwasaserrorfreeaspossible.

Companies that consistently grow their revenues prove the proposition ofthinkingbigandactingsmallbynotallowingyesterday’sbreadwinners,asame-old philosophy, and huge egos to get in the way of their biggest objective:finding,keeping,andgrowingtherightcustomers.

ThinkBIG,ActSMALLLETTINGGO

•Whenit’sDOA,buryit.•Leaveyesterday’sbreadwinnersbehindwhentheynolonger

•Leaveyesterday’sbreadwinnersbehindwhentheynolongermakesense.

•Ifitwasworthdoingthefirsttime,itprobablydeservesonereinvention.

•Ifreinventingitdoesn’twork—letitgo.•Don’tdefendthewaythingshavealwaysbeendone.•Egosaren’tavalidreasonforcontinuingtodothingsthesameway.

•Constantlysearchfor“wow”inordertoreplace“okay.”•Traditionalapproachesseldomyieldgiantresults.

5

HaveEveryoneThinkandActLikeanOwnerKOCHINDUSTRIES

“In a market economy, the decision-making ability naturally flows topeoplewho create value and away from thosewho don’t, and therebysufferlosses.”

CharlesKoch,chairandCEOofKochIndustries

Since1960thestockmarket(usingtheS&P500andassumingthereinvestmentof all dividends) has grown more than ninety-fivefold. Using this sameassumption, GE, constantly heralded as the world’s best example of a well-managedcompany,hasgrownmorethansixhundredfold.Butduringthesametimeandusingthesameassumption,KochIndustries,basedinWichita,Kansas,hasgrownmorethanthirteenhundredfold,ortwelvetimestherateoftheS&Pand100percentmorethanGE.

Koch Industries is one of the most efficient, consistent, productive, andprofitable companies in the world. Its unparalleled forty-year track record iscompellingevidencethattheyknowmoreaboutconsistentlyincreasingrevenuesandprofitsthananyothercompany.

One of the primary reasons for the remarkable performance of KochIndustriesisthatithascreatedandsustainedanenterprisewhereeveryonethinksand acts like an entrepreneur. The lessons to be learned fromKoch are betterunderstoodwhenthecompany’sgenesisandevolutionareknown.

KochIndustries

KochIndustries’predecessorfirmwasco-foundedbyFredC.Kochin1940withroots in the refining industry. Today the privately held company is led by hissonsCharlesandDavidandviewsitselfnotasaproduct-focusedcompanybutas“acollectionofcapabilitiesonacontinuoussearchtocreatevalue.”

Thecompany’sannualrevenuescurrentlyexceed$50billion.AndaccordingtoForbes,it’sthenation’ssecondlargestprivatelyheldfirm.Currentownershipactivitiesrangefromranchingtorefiningandpipelinestoplastics.ThelistoftheareasinwhichKochIndustriesisinvolvedmightsoundlikeaportfolioofless-than-sexybusinessesbut,asyou’llread,nothingcouldbefurtherfromthetruth.

TheEarlyYears

Charles Koch’s father put him to work at age six, pulling dandelions at thefamily’slargeWichitaproperty.“Wehadaquartersection”saysKoch.“Icouldhave pulled thoseweeds twenty-four hours a day and never gotten them all.”Eventhoughthefamilyhomewasacrossthestreetfromacountryclub,there’dbenogolfortennisforCharles.“BythetimeIwasnine,”hesays,“myfather

decidedIwasn’tbusyenoughandputmetoworkbalinghay,diggingditches,andworkingintheshopdowntown.”

At theageofelevenCharleswas sentoff toa seriesofboardingschools inColorado, Texas, and Arizona. Finally, after being kicked out of a militaryacademyinIndianafollowinganepisodeinvolvingbeer,hisparentssenthimtoTexas to livewithanuncleand tofinishhissenioryearofhighschool.Whiletherehescoredaperfectonehundredon themathfinalandwasrazzedbyhisfriends.“Whydidn’tyoujustfinishenoughproblemstogetaseventyandpassinstead of a hundred?” they teased. ButKoch’s aptitude formath earned himentrancetoMIT.

“IlovedMIT,”hesaysoftheschoolwhereheearnedabachelor’sdegreeandtwomastersinsixyears.WhatKochenjoyedsomuchaboutMITisreflectedinthe character of the company he leads. “I’ve always been a free spirit and arebel,” Koch confesses, “always bucking the system in boarding andmilitaryschools.ButMITwasgreat.Youdidn’thavetogotoclass,youdidn’thavetodoanythingotherthancompleteyourprojectsandpassthetests.”Eventually,itturnedoutthatcompletingprojectsandconstantlybeingtestedwouldbecomeabigpartoftheKochculture.

AfterKochcompletedhisstudiesatMIT,he joineda topconsultingfirminBoston.BeforelonghisfatherwasimploringhimtomovebacktoWichita.“Heworkedonmeformorethanayear,”recallsKoch,“andfinallytoldmehewasinpoorhealthandeitherIhadtomovebackandrunthingsorhewasgoingtosellthecompany.”

Koch,astrong-willedindividual,hadhesitationsaboutgoingbacktoWichita.“I’dseenothersonsgotoworkfortheirfathers,anditwasalwaysanightmare.They were never allowed to develop or grow.” But according to Koch, hisexperiencewithhisfatherwasjusttheopposite.

TheSonTakesOver

“The company my father owned,” says Koch, “was a crude oil gatheringcompanycalledRockIsland.ButtherewasalsoasmallcompanynamedKochEngineeringCompany,sellingasingleproduct,thathe’dputinthenamesofmy

threebrothersandme.AssoonasIwalkedin,”saysKoch,“myfathertoldmetogoandrunthatcompany.”Hisfatherofferedonlytwopiecesofadvice.ThefirstwastoheadtoEuropeandfigureoutwhetheritmadesensetobuildafactoryinorder to replace the inconsistent fabricators they’d beenusing, and the secondwasawish:thathisson’sfirstdealwouldbealoserbecauseotherwise“you’llthinkyou’realotsmarterthanyouare.”

KochgotaEuropeanfactoryup,running,andprofitableanduponhisreturnto Wichita, Charles arranged for Koch Engineering to begin offering alliedproductsforrefineriesandchemical-processingplants.Itwasn’tlongbeforetheearnings of Koch Engineering were approaching what the total revenues hadbeenwhenKoch tookover.After that his father askedhim to takeoverRockIslandaswell.

In short order, Koch and Sterling Varner, his second in command at RockIsland, began plotting ways for the company to becomemore aggressive andgrowmorequickly.“Onetime,”saysKoch,“myfatherwasleavingonatriptoAfrica,wouldbeunreachableforweeks,andknewwewerecontemplatingtwopossibleacquisitions.”His father’s sternwarning to theduowas toagreeonasingleacquisitionbutundernocircumstancestodothemboth.

“Themoment he was on the airplane,” he recalls fondly, “we bought bothcompaniesandsenthimatelegram,whichwasreadaloudinfrontofhisentireexpedition.”According toKochhis fatherwassoangry thatwhenhe returnedhomeandCharlespickedhimupattheairport,hewouldn’tevenspeaktohim.“Only later,”Koch sayswith a smile, “after both purchasesworked outwell,wouldmyfatherbegrudginglyadmitbothmadesense.”

TheRealLearningBegins

ItwasaboutthattimethatCharlesKochbeganreadingPhilosophyofScience(ajournal committed to furthering study of and free discussion about thephilosophy of science from diverse standpoints). “I’m not someone who canhandlemore thanonebucket,”hesays.“Ican’thaveabusinessbucket inonehand and a philosophyof sciencebucket in another so itwasnatural to beginintegrating them.” The more Koch read and learned, the more voracious his

appetitebecame.“Idevelopedtwopassions,”hesays.“Onewastobuildagreatcompany and the other was to understand the principles that lead to peace,prosperity,andsocialprogress.

“Ibeganstudyinghundredsofbooks,”Kochsays,“andhadsomanythatmybookshelves were overflowing and there were so many on the floor I had totunnel through them.” Koch read everything he could get his hands on:economics,history,philosophy,psychology,andthehardsciences.KochrecallsthatwhilereadingabooktitledWhyWagesRisebyF.A.Harper,thefounderofthe Institute of Humane Studies (later chaired by Koch), he had his eurekamoment. “I thought tomyself, ‘MyGod, if I keep readingand learning, I canfigureoutthewaytheworldworks!’”

One of the books that impressed Charles Koch was an arcane text titledEupsychianManagement by AbrahamMaslow. (“Eupsychian” was coined byMaslow and comes from “eu”meaning good and “psyche”meaning soul . . .thusmeaninghavingagoodsoul.)“WhatMaslowdid,”saysKoch,“wasputonethousandpeopleonanislandandthengothroughathoughtexperimentonhowtheywould organize themselves. Even though hewas kind of a socialist,” hesayswithafrown,“thewaythesepeopleorganizedthemselvesandcooperatedwith one another ledMaslow to conclude that people can only truly gain bymakingotherpeoplebetteroff.”ThisledKochtoconcludethatacompanycanonlyachieveauthenticsuccessbycreatingvalueforothers.Althoughthebookhadbeen longoutofprint,Kochhad it reprintedandgavecopies tocompanyemployees.

EachtimeKochreadsaworthwhilebookandmakesadiscovery,heintegrateshisfindingsintothewaythecompanyconductsbusiness.Manyofthesefindingsled to his belief that responsibility and accountability are intertwined with asenseofownership.“Eventhewayweinterviewandhirepeoplecameaboutasaresultofabook,”hesays.“AreyoufamiliarwiththeformerFreudianKarenHorney’s book, Neurosis and Human Growth: The Struggle Toward Self-Realization?”

Iadmitthatthisisonethathadneverappearedonmyradarscreen,andKochexplains, “She came to theUnited States fromGermany, repudiated Freudianphilosophyandwroteinthisbookaboutsomethingshecalled‘vindictivegloryandvindictivetriumph.’Shesaidpsychologicalhealthisbeingcomfortablewithandbeingabletofacewhoyoureallyareanddealwithreality.”

Koch says, “I’d always wondered why some people work to destroy anyevidenceoftheirshortcomingsandwreakdestructiononanyonewhoattemptstopoint them out. As a result of Horney’s book, the way Koch Industriesinterviews people changed and questions were added to identify defensivepeople and learnwhether theywouldbewilling to admitwhen they’dmadeamistakeorwouldinsteadtrytocoverthemup.”

MarketBasedManagement

By the timeKoch’s father died in 1967,CharlesKochwas in charge andhadbegun systemizing the implementation of all the things he’d learned. Thecollection of everything Koch learned was eventually given a name: MarketBasedManagement®.

Koch Industries’ MBM is essentially a laissez-faire, market-influencedapproachtomanagementwherethevaluethatanemployeecreates,nothistitleor place within the formal hierarchy, determines his responsibilities and pay.Applying MBM and using its tools keep the organization flexible andentrepreneurial. It is passionately believed, constantly reinforced, and lived bythepeoplewholeadKochIndustries.WhileCharlesKochwill tellyou there’sstillmuchprogresstobemadetowardfull implementationthroughouthisverylargeorganizationofoldandnewKochcompanies,it’sdesignedtoensurethateveryonethinksandactslikeanentrepreneurorowner.

KochIndustriesMBM®

Vision:Continually findingnewways togenerate superior earningsthrough Koch’s core capabilities: MBM, operations excellence,trading,transactionexcellence,publicsector.

VirtueandTalent:Havingtherightpeoplewith therightvalues intherightjobs.

Decision Rights: Allowing the people with the best knowledge to

makethedecisions.

Knowledge Processes: Creating value by learning, knowledgesharing,andmeasuringkeybusinessdrivers.

Reward for Value Created: Compensation programs based oncreatingvalueensure the right talentbeingattracted,motivated, andretained.

VisionThevisionofKoch Industries isn’t a catchy logo line. Instead it’s atacitunderstandingsharedbyeveryonethatthecompanyiscommittedto:

• experimental discovery; • creating real value; • gaining a competitiveadvantage in all their business units; and • eventually creativelydestroyingtheminresponsetomarketchanges.

VirtueandTalentInChapter1welistedthetenguidingprinciplesofKochIndustries as an example of a highly successful company’s standing forsomething.Koch’sguidingprincipleshaveteeth.“Ifwe’vemadeamistakeandhiredsomeonewhodoesn’tagreewithprinciplesoneandtwo,”saysanadamantKoch,“wehave toget themoutof thecompany immediately.Wecannot takeanyriskwithsomeonewhowillcreatelegalorintegrityissuesforthecompany.Peoplearethemostproductiveandhavepassionfortheirworkwhentheyagreewiththevaluesofthecompany.Thosewhodon’tmaystillbegoodpeople,butwouldbehappiersomewhereelse.

“A culture based on vision and virtue can only exist,” Koch says, “wheneveryoneinthecompany”:

• knows and practices the principles; • understandswhat the company istryingtoaccomplish;•understandstheirspecificroleintheachievementof theobjectives; and • is prepared tohave their recommendations anddecisionschallenged.

Decision Rights One of the ways Koch Industries tries to ensure thatdecisionsaremadeinthecompany’slong-terminterestisbyhavingthepeoplewiththebestknowledgemakethem.CharlesKochsays,“Inamarketeconomy,decision-making ability naturally flows to people who create value and awayfrom thosewhodon’t, and therebysuffer losses.Westrive toensure the samethinghappenshere.Decisionsaren’tsetbysomeone’spositioninthehierarchybut more by their competitive advantages.” He says, “We stress the value of

quickdecisions.Thingsarehappeningquicklyinthemarketplace,it’sconstantlychangingandwecan’tdilly-dallyaround.”

Knowledge Processes Ensuring that valuable knowledge is constantly kept

flowingthroughtheorganizationisamajoremphasisforKochIndustries.Thisefforthasfivemajorcomponents:

• getting information on key industries, customers, competitors, andmarkets; • constantly measuring progress on compliance andprofitability, down to the smallest practical level (by project, product,plant, or customer, for example); • teaching Market BasedManagement®, focusing the firm’s guiding principles and enhancingemployees’ economic thinking skills; • the Koch Challenge Process,which is designed to ensure that projects and deals are constructivelychallenged from above and below, to apply the best knowledge inmakingdecisions;and•internalcommunicationandknowledgesharing.

As new employees get hired or join the company through acquisitions, theMarketBasedManagementteamhastheresponsibilitytohelpthemunderstandand apply Market Based Management and the company’s guiding principles.Koch’s internal communications director produces a newsletter crammedwithinformation aboutKoch’s diverse businesses that goes out tomore than thirtythousandKochemployees. Inaddition,hecompilesdetailedquarterlyprogressupdates,whichcoverkeycomplianceandprofitabilitymeasuresforeachofthebusiness groups and are presented to employees by each business leader.BreakingnewsfromKoch’scompaniesgetstoemployeesviae-mailsfromJoeMoeller, Koch’s president and COO, and all company leaders work toaggressivelyseekoutandactuponemployeeinput.

Reward forValueCreated Each yearmany ofKoch’s nonhourlyworkers(whohavetheirownbenefitspackage)areevaluatedandareeligibletoreceivebonusesbasedonhowmucheconomicvaluethey’vecreatedforthefirmduringtheprevioustwelvemonths.“Themarketsendsclearsignalsaboutwhatpeoplevalue and does a beautiful job of rewarding entrepreneurs for the value theycreateinthemarketplace,”saysKoch.“Ifanentrepreneurcreatesanewwidgetandsellsamilliondollars’worthofthem,consumerswilllethimkeepabitofthevaluehecreated,maybefiveortenpercentafterhepayshisemployeesandother costs. Our compensation system is modeled after that and anchored in

objective criteria, but it’s still innately subjective.Wemeasure everythingwecanandtrytoascertainwhocontributedtothegrowthofKoch’svalueinayear.Let’s say you created ten million dollars’ worth of value for Koch and themarket for that would permit you a five-percent return. We’d work towardbringingyourtotalcompensationinlinewiththatfivehundredthousanddollars,combiningcash,deferredcompensation,shadowstock,orotherbenefitsthatyouvalue.”

Home,HomeontheRange

KochIndustriesevenusedMarketBasedManagementtodramaticallytransformtherevenueandprofitperformanceofthecompany’s270,000-acreBeaverheadRanchnexttoYellowstoneParkinMontana.

“RayMarxer,ourranchmanager,”saysKoch,“absorbedthespiritofMarketBased Management, thought and acted like an owner and improved carryingcapacity at the ranch by eight percent, increased the calf crop from ninety toninety-fivepercent,increasedweaningweightstwentypercent,andatthesametimecutoperatingcostsbytwenty-fivepercent.Andhediditallwithlessthanhalfasmanyfull-timeemployeesastheranchhadpreviouslyemployed.

“First,” says Koch, “Marxer had the vision to see that the ranch could bedramatically improvedand that it requiredamuchmore stable,dedicated, andtalented workforce. Next he looked at virtue, talents, and incentives anddeterminedthatpeopledon’tgointoranchingforthemoneybutbecauseofthelifestyle,agoodpartofwhichisworkingwiththeirfamilies.So,hechangedtherule that family members couldn’t work on the ranch and built houses forfamilies on the ranch with privacy and room for gardens. That immediatelyallowedhimtorecruitandretainasuperiorworkforce.

“Then,” saysKoch, “he examined decision rights and knowledge processesand recognized there was no accountability, so he set up well-defined,measurableareasofresponsibilityandauthority,andalignedtheincentives.

“Atthesametime,”saysKoch,“themanagerdramaticallyimprovedtheranchenvironmentally.He increased the seasonalpopulationofdeer and antelope totwo thousand each and elk tomore than four thousand, reintroduced cutthroat

trout,wonsevenmajorenvironmentalawardsincludingonefromtheEPAandthe Smithsonian, all because of innovative land use processes. Beaverheadbecame the first ranch in the country to be certified by the Wildlife HabitatCouncil.”

KochIndustries’SecretWeapon

The phrase “creative destruction” was first used by Harvard professor JosephSchumpeter in 1942, when he argued in his bookCapitalism, Socialism andDemocracy “that capitalism is a form of economic change that can never bestationaryand that less effective firms,products, andmethodsmust constantlybe eliminated.” When Charles Koch, chairman and CEO of Koch Industries,readthosewordshetookthemtoheart.AtKochIndustriestheinterpretationofcreative destruction means that every business owned by the company couldeventuallybesold(onrareoccasionsshuttered)andreplacedbyothers.

Currently the Koch Industries portfolio is comprised of more than onehundredbusinessunitsoperatingintwelvedifferentbusinessgroups.

TheCurrentKochPortfolioAsphaltCapitalmarketinvestments

ChemicaltechnologyCommoditytrading

FertilizersFibersandresins

MineralsMunicipalfinanceNaturalgasliquids

PetroleumandchemicalsPipelines

PulpandpaperRanching

Ifyouwereabusinessowner,andanothercompanyofferedyoumorefor itthan you thought it wasworth, you’d probably sell the firm. Similarly, if thebusiness was failing to meet your expectations, you’d consider selling it toanother party or shutting it down. And that’s exactly what happens at KochIndustries.

Each year every Koch business unit takes part in an exercise to assess itsmarketvalue.Theresultsoftheexercisemightmeanthebusinessunitwillspendanother year within the Koch family of companies, it occasionallymeans thebusiness will be sold off, and in the rarest of instances, it might mean thebeginningofashutdownprocess.

“Each year,” says Charles Koch, “we determine the present value and themarketvalueofeachbusinessunit.”

HoldValue The present or hold value of a business unit is determined by

evaluatinghowmuchcapitalthebusinessunitrequires;measuringitscashflowandoperatingprofits;andaskingthemostimportantquestionthatcanbeaskedatKoch:whatisthebusiness’srateofreturnoncapitalandequity?“Thegistofthe exercise,” according toKoch, “is to determinewhat the business is reallyworthtous.”

MarketValueAccordingtoKoch,“Themarketvalueissimplywhatanother

companyiswillingtopayusforthebusiness.

“Weanalyzethenumbersandthefuture,”saysKoch,“andifthemarketvalueisgreater than theholdvalue,wesell it,providedwewouldn’tbegivingupacorecapabilityintheprocess.”FollowingarethebusinessesthatKochhassoldorexitedinrecentyears:

Activatedcarbon

AirqualityconsultingAnimalfeedBroadbandtradingBusinessaircraftCanadianpipelineCarbondioxideCeramicproductsChemicaldevelopmentChromatographyCoalminingCommerciallendingCoolingtowersCrudeoilgatheringCryogenicsystemsDrillingrigsExplorationFeedlotsFiberglassproductsGasprocessingGrainmillingGraintradingImagetransmissionInternationalMeatprocessingMedicalequipmentMicroelectronicchemicalsPizzadoughPowergenerationPropaneretailingRefineryengineeringServicestationsSlagcementSpecialtychemicalsSulfurplantdesignSulfuricacidTankersTelecommunications

TenniscourtsurfacesTrucking

“Although it could seem otherwise, this is actually themost compassionateway to treat a business,” he says. He explains his commitment to creativedestruction by saying, “It goes right back to the original premise for thiscompany.Theonlyreasonweexististocreatevalueandifwe’renotdoingthatbetterthananothercompanycan,theyshouldhavetheopportunity.Ifabusinesscandobetterunderdifferentownership,theemployeeswillbebetteroff.”

Koch says there are many reasons why a business unit’s market value isgreater than its hold value. “Other companies might have greater capabilitiesthanwe do, theymight have a different point of view regarding the future, alowercostofcapitalthanours,theremightbegenuinesynergyintheiracquiringsomethingwehaveandperhapsweprovedourselves incapableofcreating thevaluewethoughtwecouldadd.”

Units the company is most reluctant to sell are its trading, refining, andchemical-basedbusinesses.Kochsays,“Trading,refining,andchemicalsareourlaboratorieswherewe’ve historically demonstratedwe can invent, create, anddevelopotherbusinessforsale.Sothatfactorsintotheholdvalueofthosethreebusinesses.Generally,anytimethemarketvalueisgreaterthantheholdvalueadealgetsdone.”

Kochbucksconventionalwisdom,shunstraditionalthinking,andsayshistoryhas proven his belief that existing to create value and utilizing creativedestructionare thesurestways tosucceed inbusiness in the long term.“Sincethe S&P 500was created in 1957,” he says, “fewer than ten companies havegrownmore than themarket as awhole.What does that tell you about doingthingstheconventionalway?”

ACommonFinding

One finding that ties together all the companies we identified is that eachcompanyworkshardtonurturecultureswhereeveryonethinksandactslikeanowner.

BrianLinneman,COOofCabela’s, says that financial rewardsareonlyonepartofgettingpeopletothinkandactlikeowners.“First,”hesays,“youhavetocreateanenvironmentwherepeopleareencouraged toact likeentrepreneurs,”andcitesoneofhisownexperiencesthattookplacewhileservingasthefirm’scorporatelogisticsmanager.“Icameupwithanideaaboutchangingthewayweflowalltheproductsoutofourdistributioncenters,”hesays.“Itwassomethingthatwouldhaveamonumentalimpactonourbusiness.”

Whenhecompletedhisanalysis,hewenttohisbossandtoldhimhethoughtthe company should do it. To his surprise, his boss said, “Go for it, do it.”Linneman was shocked and said, “Wait a second, isn’t there somebody or acommittee I have to go in front of to get permission?”Linneman’s boss said,“Nope,justgodoit.Whatareyouwaitingfor?”

When asked what would have happened if his idea hadn’t worked out,Linnemansays,“Wehaveanattitudeherethatyoucan’tmakemistakesifyoudon’ttrythings“andifthingsdon’tworkoutorifyoumakeabaddecision,youraiseyourhandandsay,‘thatonewasmine.’

“Once people are thinking and making decisions like owners,” saysLinneman,“thenextnaturalstepistofinanciallyrewardthembasedonthevaluetheyaddorcreate.”Wefoundittobeafairlycommonpracticethatbonusesaregranted not for the achievement of a specific set of numbers but instead foroverallcontributionasdeterminedbypeople’smanagers.Linnemansaid,“Trustme, if you’re doing the right jobofmanagingpeople, youknowexactlywhatthey’redoingandcontributinganddon’tevenneedtouseapieceofpaperwhenitcomestobonustime.Wealwaysknowwho’scontributingandwhoisn’t.”

HavingaRealStake

In1957theautopartscompanythatemployedseventy-two-year-oldCharlesF.O’Reilly andhis sonCH started amajor reorganization that forcedCharles toretireandhissontomovetoKansasCity.Neitheragreedwiththoseplansandtheydecidedtoformtheirowncompany,O’ReillyAutomotive.CharlesandCHofferedjobstoanumberofpeoplewho’dworkedforthepreviouscompanywithoneproviso:eachhadtobecomeanowner.

CEODavidO’Reilly,grandsonandsonof thefounders,says,“IwasaveryyoungboyatthetimebutrememberDadandGranddadinsistingthatifsomeonewantedtobeinvolvedinthenewcompanytheyhadtomakeaninvestment,”hesays.“Whetheritwasonehundreddollarsorathousand,theyallhadtobecomeowners.”

O’Reillysays fondly,“Iworkedat thestores in juniorhighandhighschoolandkneweveryoneofthepeople.Everyoneofthemtreatedthecompanyliketheir own because itwas theirs.Working late, driving hours on aweekend todeliverapart,itdidn’tmatter.Theywereowners.”AccordingtoO’Reilly,“Oneofthebigreasonsforeventuallygoingpublicwassowe’dbeabletoextendtheoriginalformulaofeverybodybeinganownertoeveryone.”

Withoutquestionthemoststableperformerinthefast-foodspacehasbeenSonicDrive-In.AndaccordingbothtoCliffHudson,CEO,andformerpresidentPattyeMoore, “it’s not because everyone thinks and acts like an owner, it’s becausetheyareowners!”

Hudson credits founder Troy Smith with the vision to build a company ofowners.“Youcanownonestore,”hesays,“andbeanon-siteowner-manager.Oryoucanownmultiplelocationsbutineachoneofthosestoresyou’llhavealocal manager—maybe a twenty-year-old kid—who’s gone to the bank andborrowed some money in order to become a manager.” And according toHudson, “If you’re a very large operator with fifty stores you’ll also have agroupofsupervisors,eachhandlingsixtotenstores,andthey’llbeowners,too.”

“SinceyouhavefranchiseeswhohaveborrowedthemoneytobecomeSonicmanagers,”saysPattyeMoore,“youobviouslyhavepeoplewhoaretunedintorevenues and profits, but more important, tuned in to customers. These arepeoplewhomaybestartedasacarhoporacookandhaveworkedtheirwayupand have become upstanding business folks in the communitieswhere they’relocated.”

HowmuchmoneycanaSonicmanagermake?AccordingtoPresidentScottMcLain, “a typical storemanagerwill borrow roughly ten thousand dollars inreturn for a fifteen to twenty percent share of a store’s annual profits and aminimal twenty-four thousanddollar salary. If thestoregeneratesonehundredand fifty thousanddollars in annual profits, themanager can earn total annual

compensationofaroundfifty-fourthousanddollars.”Accordingtothecompanythere’snocaponhowmuchamanagercanmakeandtherearemanywhoearnmorethan$100,000annually.

“Even ourCarhops think and act like owners,” saysMoore. “At other fast-foodrestaurantsallyou’vegotisaminimum-wagehairyarmholdingyourbagof foodoutawindow.ButatSonicevenourCarhopshave theopportunityofthinkingandactinglikeownersandmakingtipsthatcanmorethandoubletheirhourlywage.”

Mooreillustratesherpointwithastory.“Recently,Iwasatoneofourstoresin Georgia and saw something that happens all the time. I was sitting in myrental car waiting for my order and another car pulled up alongside me, andbefore they’d turned off their engine the Carhop was there with their orderplayingagameweplayatallourrestaurantscalledbeatthecustomer.”Mooreexplains that beat the customer is Sonic’s way of responding to regularcustomerswhoalwaysdriveinatthesametimeandorderthesamething.“Weloveit,”shesays,“whenwecandelivertheirorderbeforetheyplaceit.”

Barbie Stammer, president of a group that owns 150 locations, began as aCarhopataSonicDrive-Inthirty-oneyearsago.“Idon’tcarewhatanybodytellsyou,” she says. “Whenyouownpartofwhereyou’reworking,yousimplydobetter.BecauseIownpartofthiscompany,”shesays,“thereisn’tamomentI’mnot thinking about it.” She’s known locally as the “Sonic lady” and that, shesays,isgreatwithher.

RulesforGettingEveryonetoThinkLikeanOwner

DevelopanInstitutionalizedAppetiteforKnowledgeKnowledgehelpsgrowrevenues. Charles Koch set out to learn the secrets of peace, prosperity, andprogress and endedupuncovering a set of truths that allowedhis company toturninoneoftheworld’sbestforty-yearfinancialperformances.Whenworkersseeotherworkersaroundthembeingrewardedforknowledgethatcreatesvalue,they’lleventuallyjointheclub.

HaveaSetofRulesEverygameworthplayinghasasetofrulesandbusinessisn’tanydifferent.Haveaninviolatesetofrulescenteredoncreatingvaluethateveryoneintheorganization—includingmanagersandexecutives—canplayby.

Build a Vision Based on Value Urge everyone to look through theirmarketplace lenses, alwaysaskingwhethereverything theydocreatesvalue inthemindofthecustomerandmarketplace.

ProvideEveryonewithaRoadMapBusinessownersknowhowthey’llbe

measured.Ifworkersareexpectedtothinkandactlikeowners,theymustknowandsharethesamedefinitionofvalue,tacitlyunderstandtheirroleincreatingit,and understand precisely how they’ll bemeasured. Constantly guide, counsel,andredirectthemtothecreationofvalue.

MaketheRightDecisionsBusinessownersget tomakedecisions.Createa

structurewheredecisionsaremadebytherightpeoplewiththerightinformationat the right time.Let teammembersearn the right tomake increasingly largerdecisionsbasedontheirtrackrecordofpastwinningdecisions.

Loosen thePurseStrings andRewardPeopleBasedon theValueThey

CreateOwnersarecompensatedforthevaluetheycreate.Ifworkersandteammembersareexpectedtothinkandactlikeowners,theyneedtobecompensatedin the same way. Furnish team members a sufficient annual salary to attractthem. Then define and quantify the value they’re responsible for creating andpay them generously for the value they create. At Koch Industries it isn’tunheard of for a worker with a $70,000 base salary to earn an additional$100,000to$200,000inbonuses.

Successfulownersknowthatthevaluebarisconstantlybeingraisedandtheywon’t continue to reap the same rewards by standing still. When a workercreatesextraordinaryvalueand iscompensated fordoingso, the resultsofherefforts should become the new standard within the organization. In this wayeveryonewithintheorganizationbenefitsfromthevaluecreatedbyoneperson.

KnowtheHoldandMarketValuesofEverythingOwnersknowwhattheirholdings are worth both to them and the marketplace. Engage workers in arigorous annual exercise to determine the value of the enterprise. Consistentimplementationof this exercisewill eventually result in all participants’ beingonthesamevaluepage.

LearnfromFailureEffectiveownersdon’ttakechancesonthingsthatcould

kill themand learnfromthose thatdon’t. Ifworkersareexpected to thinkandactlikeowners, thelessonslearnedfromfailuremustbesharedwiththemandmustbecomeanacknowledgedpartofthecompanystory.

ProvingthePropositionofThinkBig,ActSmall

More than a decade ago, an interviewer asked David Koch, EVP of KochIndustries, about the big challenges facing the company during the comingdecade.His responsewas,“Asyougetbigger, it’sachallenge tomaintain thesame environment that existed when you were small. But with all the effortwe’re putting into maintaining a small company culture I believe we will besuccessful.”

ThinkBIG,ActSMALLTHINKLIKEANOWNER

•Maintainavoraciousappetiteforknowledge.•Haveasetofrules.•Knowthatauthenticsuccessisachievedbycreatingvalueforothers.

•Grantdecisionrightstothepeoplewiththebestknowledge.•Compensatepeoplebasedonthevaluetheycreate.•Knowtheholdandmarketvaluesofyourbusiness.•Realizethatattemptstoeliminateallfailureensuresoverallfailure.

failure.

6

InventNewBusinessesDOTFOODS

“Our company wouldn’t be here today if we’d only stayed in ouroriginalbusiness.”

PATTRACY,CEOofDotFoods

Inourbook It’sNot theBigThatEat theSmall . . . It’s theFastThatEat theSlow,mycoauthorandIquotedCharlesDarwin:“It’sthemostadaptableofthespecies that survive.” Following publication I received a number of e-mailsinformingmethatwewereinerrorandthatthecorrectquoteshouldread“It’sthestrongestofthespeciesthatsurvive.”

It’sworthyofmentionhereforthreereasons:

•Thereaderswhoe-mailedwerewrong.InOntheOriginoftheSpeciesbyMeans of Natural Selection, Darwin indeed concluded the opposite ofwhatmanypeoplebelieve.“It isnot, [emphasisadded]”hewrote,“thestrongestofthespeciesthatsurvive,orthemostintelligent,buttheonesmostresponsivetochange.”

• Darwin’s discoveries and words also beautifully explain why mostcompanies simply can’t consistently grow their revenues. Manybusinesspeople incorrectly believe that brute strength ensures survival,see it as a virtue, thinkof themselves as strong anddon’twant todealwith any evidence that contradicts that belief. In fact, history hasrepeatedlyproventhatrawmusclealonebringslittlelong-termvaluetoacommercialenterprise.

• Darwin’s theory of evolution also concisely explains why only a verysmall number of companies—those that are the most adaptive—havebeenabletoachievetheirdynamicandconsistentrevenuetrackrecords.

Anothertraitofcompaniesthatconsistentlyincreaserevenuesistheirabilitytonimbly reinvent themselvesas required.Andnocompanyhasdoneabetterjob of reinvention than family-owned Dot Foods. At first blush the company

appearstobethequintessentialall-Americanrags-to-richessuccessstory.Closerstudyrevealsacompanythatowesitsabilitytoconsistentlyincreaserevenuestoitsmasteryof thebasicsandthe inventionofabrand-newbusiness that tookasmallcompanyintothebigleagues.

DotFoods

Back in1960,afteryearsofworking forotherpeople,RobertTracy (RT), themanagerofadairyplantinMountSterling,Illinois,decidedtofulfillhisdreamand go into business. He took on as a partner someone with a factory thatproducedmilkpowderusedbydairiesinthemanufactureoficecreamanddairyproducts.Itwasagutsydecision.Heandhiswife,Dorothy,alreadyhadsevenchildren;theyhadnomoneyandhadtomortgagetheirmodest$20,000home.

BorrowingDorothy’snickname,RTcalledthecompanyDotAssociatedDairyProductsandsetupshop in thefamilyhome.Hesoldanddistributed themilkpowder his partner produced.Dorothy handled the books, and deliverieswere

madefromthebackofthefamilystationwagonandtwoleaseddeliveryvans.

“Thefirst fewyearsweregoodones,”recallsRobertandDorothy’ssonandcurrentCEO,PatTracy.“During the1960s,everysmallcityhad threeor fourdairy and ice cream plants and larger cities like Saint Louis had as many asthirty.”Each represented a prospective client forDotFoods andRT called onthemall.Hemadethesalescalls,Dorothydidthepaperworkwhilekeepingthehomefiresburning,andacoupleofpart-timedriversdidthedeliveries.”

Withinafewyearsthereweremorebabiespressingforspaceathomeandabusiness that required newpremises andDot Foodsmoved into the back of afarmtractorandimplementdealershipinMountSterling.Tracyrecallsthetimesfondly. “They’d be fixing tractors in one room, and you’d walk through thatroomintoanotherandfindyourselfinalittlewarehousefullofmilksolids.”

When asked to describe his father’smanagement styleTracy says hewas aconsummatesalesmanwhowantedtorunabusinessbytreatingpeoplethewayhe’d want to be treated and respecting everyone as valued family members.Tracy’seyesgetmoistwhenhetalksabouthismother’scontributions.

“Just imagine,” Tracy says with a smile, “how you’d feel if you were awomanwithsevenkidsrunningaroundthehousewithmanymoreonthewayandyourhusbandcamehomeandsaid,‘Hon,I’mleavingmywell-payingjob,mortgagingthehouse,goingintopartnershipwithsomeoneyoudon’tknowandbytheway,theofficewillbehereinthehouse,you’llhavetobethesecretaryanddothebooks,helpmakedeliveries,andentertaintheclients.’”OneofPatTracy’svividmemoriesisofhismothercrammingthechildrenintothestationwagon, loading the back with bags of milk powder, and making emergencydeliveriesaroundthestate.

During the twenty-five years that followed, RT expanded the products thecompanydistributed.Besidesdistributingdry-milksolids,Dotaddedcorn-syrupsolidsusedintheproductionofsoft-serveicecreamandsherbetsandchocolateproducts used to flavor milk and ice cream. The company became an almostindispensablepartnerforsmallindependentdairies.

By1980thefamilyhadgrowntotwelvechildren,thecompany’sofficeshadmovedtoaseriesofmodestpolebarnsonthewestsideofMountSterling,thedairy distribution business was doing $60million a year and had a relativelysmallamountofdebt.PatTracysays,“ItwasreallyadreamcometrueforMomandDad.”Butthedreamwouldn’tlastlong.

ConsolidationHappens

AfterearninganMBAfromtheUniversityofIllinois,Tracyjoinedthecompanyfull-time as a salesman and quickly recognized a dark cloud looming on thehorizon, one he believed put the company’s future in jeopardy. “Two of thestatesIcoveredwereAlabamaandMississippi,”Tracysays,“anditseemedthatevery time I traveled there I hadone less account to call on.First, thereweretwenty-fourcustomersandafewmonthslaterthereweretwenty-oneandayearlateronlyeighteen.

“Insomecases,”Tracysays,“cooperativeswerebuyingthelocaldairiesandeither closing them or consolidating them into larger centralized operations.Othersmallplantswerebeingforcedtoclosebecauseofincreasedgovernmentregulation and restrictive labeling laws. Much of what we sold was in smallpackagesandonceplantswereconsolidatedtheystartedbuyingtheiringredientsin tanker-sized quantities. It became pretty obvious,” he says, “that we wererunningoutofcustomersandhadtofindanotherbusiness.”

Accordingtofamilymembers,RobertandDorothyTracyhadeverythingtiedupinthecompany.Theylived(andcontinuetolive)inaverymodesthomeandthey’dnevertakenanycashoutofthecompany,choosinginsteadtoreinvestalltheir profits into the business. They had no outside assets and their entire networthwasinstockofacompanywhosecustomersweredisappearing.

PatTracycreditshismotherand fatherwithallowing thechildren to searchforotheropportunities:waystoreinventtheirbusinessutilizingthecapabilitiesand facilities they’d developed. “Mom and Dad were already in theirmidsixties,”hesays,“whenweproposedthatwegetthecompanyintothefoodservice business in a big way. I believe,” Tracymaintains, “thatmost peoplewho’dfoundedtheirownbusinesseswouldhavepoundedtheirfistonthetableandsaid,‘We’reinthedairyandicecreamdistributionbusiness.That’sallthereistoitandthat’swherewe’regoingtostay.’”

Pat Tracy’s idea required borrowing $4million for a new facility and if itdidn’tworkout therewouldbedifficult times ahead. “Allwecould tellMomandDadisthatwe’dmakeitworkandthatthey’dneverhavetopersonallysignforanotherloan.

“Wehadafamilymeeting,”Tracyrecalls,“andfollowingthediscussionDad

looked at our mother and asked, ‘Well, Mom, what do you want to do?’ ”According to Tracy, she met her husband’s eyes and said, “Well, I’ve beenfollowingyourleadalltheseyearsandit’sdoneprettywellforus,soI’mwithyouonwhateveryouwanttodo.”Tracysayshisdadturnedtothekidsandsaid,“Well,let’sgoforit.”

ThinkingBig

The “it” that Pat Tracy and his siblings had in mind for the company wasrevolutionary. “For the prior ten years the company had been peripherallyconnected to the food service business and had a pretty good idea of how itworkedandtheproblemswithinthebusiness.”Itwasintheproblemsinherentinthefoodservicebusinessthattheyspottedanopportunity.

“Historically,” says Tracy, “you had thousands of food service distributorsdealing directlywith the foodmanufacturers and itwas an inefficient processfilledwithproblems.

“Foodmanufacturers,”hesays,“hadalltheseminimumpurchaseamountssothat food service distributors were forced to purchase five or ten thousandpounds of product at a time. Because of the large minimum orders required,many of these distributors were forced to order product that might last themanywhere from six to twelve weeks at a time.” Tracy says the system didn’tworkformanyreasons.

“Mostfoodservicedistributors,”hesays,“weren’tabletopredictwhattheirspecific product needs would be that many weeks in advance and wereconstantlyrunningoutofspecificproducts.Butwhentheyfoundthemselvesoutofoneparticular item, theyweren’table toquicklyordermorebecause they’dbeenbundling all kindsof stockkeepingunits [SKUs] inorder to achieve themanufacturers’minimumordersize,andtheystillhadlotsofinventoryinstock,justnottheitemthecustomerneeded.”

TypicalScenariofromtheFoodServices

IndustrybeforeDotFoodsXYZFoodServiceDistributors—withrestaurant,hotel,andhospitalclientsinaparticulargeographicarea—receivesanurgentcallfromarestaurantwantingthreecasesofaspecificbrand’slow-fatmayonnaise.

Unfortunately, the food service distributor is out of the product andunabletoordermorefromthemanufacturerbecauseitisn’tpreparedto place another ten-thousand-pound minimum order. Meanwhile,theystillhaveeight thousandpoundsofvariousotherproductsfromtheirlastorder,whichisunusedandwastingspace.

“Besidesthesedistributors’havingalltheircapitaltiedupininventory,”says

Tracy, “there were big warehouses they had to build to store it in andtremendous logistical problems. Imagine what it was like with everymanufacturer’s trying to maintain a relationship and do business with everydistributor?”

To illustratehispointTracy takesapieceofpaperandbeginsdrawingdotsand lines. “Imagine,”he says, “that eachof theeightdotson the left are foodmanufacturersandthedotson therightrepresentdistributorsandeverybodyistryingtodobusinesswitheveryoneelse,”suggestingthementalpictureabove.

“Bytheway,thatexample,”saysTracy“isonlywitheightmanufacturersandeight distributors. There are thousands of food manufacturers in the UnitedStatesandmorethantenthousandfoodservicedistributors.Imaginewhatitwaslikewith eachmanufacturer trying to do businesswith each distributor.Whatyoubasicallyhadwasnumerousindividualinefficientsupplychains.”

Pat Tracy envisioned a business model that accomplished the following:

Insteadofmanydifferentinefficientproductshipments(resemblingabowlofspaghetti), Pat Tracy envisioned a model that looked like this:

“Our idea,” says Tracy, “was to buy directly from the manufacturers,warehousethefoods,andprovideaweeklydeliverytodistributorsthatallowedthemtoplaceanorderfromavarietyofmanufacturerswithoutaminimumordersize. If theyonlywantedonecaseofaproduct, thatwouldbe fineand they’dnever be more than four days from receiving an order instead of waiting forweekstoreceiveitfromthemanufacturers.

“Forfoodservicedistributors,”Tracysays,“itwoulddramaticallyreducetheamount of capital they’d have tied up and reduce the space required forwarehousing.We’dbecomeaone-stopshoppingserviceforthemsotheycouldactually go out and grow their businesses without growing their physicalfacilities.”

Theoretically,DotFoodswouldmakemoneythreeways.

•Theywouldpurchasefulltruckloadsofgoodsfrommanufacturersandselltheproductsatslightlyhigherthantruckloadprices.

•ThemanufacturerswouldcompensateDotFoodsforhandlingthetransportationoftheirgoods.

•DotFoodswouldreceiveasalesanddistributionallowancefromthemanufacturersforrelievingthemof,orassistingthemwith,thosefunctions.

Asyou’lllearninthenextfewpagesittookyearsbeforethecompletemodelworked.

AlmostMissingtheOpportunity

Yearsearlier,DotFoodshadalreadyinadvertentlygottenintotheredistributionbusiness. “Amanufacturerof ice cream flavors came tous in themid-1970s,”recallsTracy,“and toldus theyhad foodservicedistributors throughout Iowa,Minnesota, and Illinois who were pooling together to purchase truckloads oftheir various syrups. The problem was that whenever one of the distributorswantedtoplaceanordertheothersweren’treadyforanotherone.”TracysaysthatDotagreedtomaintainthesyrupintheirinventoryandsellanddeliveritasneededtothefoodservicedistributors.

Because themanufacturer no longer required ten-thousand-poundminimumorders or the pooling of orders to fill trucks, its business grew, market shareimproved, and customers were happier. Tracy says that when Dot beganwarehousinganddeliveringsyrups,everyoneinthecompanywassoenamoredof and focused on the original ingredient businesses that they didn’t pause toconsider the futurepossibilities.“Later,”saysTracy,“aswebegan reinventingthecompanythefirstquestionweaskedwas,‘Whatelsecouldwebesellingtothese distributors?’ ” As Dot began moving into redistribution they startedofferingitemslikemilkpowder,peanutbutter,salt,andpackagedsugar.

Rejection

Their new idea looked good on paper and was warmly greeted by the foodservice distributors who would be able to purchase only the products theyneeded on a weekly basis. But the reception Dot Foods received frommanufacturerswasafrigidone.

“Assoonaswetoldmanufacturersthatwewantedtobuytheirproductsandthensellthemtotheircurrentcustomerstheylookedatusasifwewerecrazy,”saysTracy.Wrinklinguphisfaceandpursinghislips,Tracyimitatesthetypicalresponsehereceivedfrommanufacturers in theearlydays,“ ‘Now, letmegetthisstraight,youwanttobuyourproductsandsellthemtopeoplewe’realreadysellingtoandwhy...ifyoucananswermeandaren’tjustsmokingsomethingfunny...wouldweeverwanttodothat?’”

Tracy was always ready with good answers and would start his pitch byexplainingtothemanufacturersthatthereweremanyvalidreasonsforsellingtoandredistributingthroughDotFoods.Firsthe’dtellthemthatbysellingtoDotFoodsthey’dbeimprovingtheirservicetotheircustomers,whowouldnolongerhavetopurchasethousandsofpoundsatatime.Thenhe’dpatientlyexplainthatselling through Dot would also provide better customer service to themanufacturer’sclients,whichwouldinsulatethemagainstcompetitorswhowereconstantlytryingtotaketheirbusinessaway.FinallyTracywouldpromisethatDotFoodswouldeventuallyhavelotsofothercustomers towhomtheywouldsellthemanufacturer’sproductssothemanufacturerwouldultimatelyhaveevenmoredistribution.

“Most manufacturers simply couldn’t get past the fact that we’d be sellingtheirproducttocustomerstheyalreadyhad,”saysTracy,“andweweretrulytheRodneyDangerfieldofbusiness.Wecouldn’tgetanyrespect!”

In many cases Dot Foods was initially forced to do unfavorable deals andevenpay listprice tomanufacturers for theirproducts. “Wehad tohave somemerchandiseinstocksothatpotentialcustomerswouldseewehadafewthingsto offer and would give us the time of day. Finally, with a small amount ofproducts in stock, the company started selling to its few nondairy customers,hopingtoswellitscustomerranks.

“Our customers started buying fromus on aweekly basis,” explainsTracy,“andwithinashorttimetheyfoundtheyenjoyedtheshortleadtime,andhavingnoneedtobuythousandsofpoundsofitemsatatime.They’dcallusandsay,‘Thisisnice.Ilikeitbutwhydon’tyoucarrythisorthatproductfromsuchandsuchmanufacturer?’We’dexplainthatwewantedtocarrythemanufacturer’sproducts they were asking about but that we couldn’t get the manufacturer’sattentionorevengetatelephonecallreturned.”

EventuallyDot’scustomersbeganputtingsomepressureonthemanufacturersforthem,twobuyinggroupsdecidedtoexperimentbyallowingDottodistributetheirprivate-labelproductsandthebusinessslowlybegantogainsometraction.Withinafewyearsthenewbusinesswasgeneratingabout$15millioninannualrevenueswhilerevenuesintheoriginalmilksolidsbusinesshadflattened.

“Weneeded some real horsepower tomake this thing happen,” saysTracy.“Peoplewhocouldtaketheconcept,gooutandsellit,andmakethingshappen.”

RecruitingaSalesForce

“We were struggling,” explains Tracy. “We didn’t have the money to recruithigh-pricedtalentandbeinglocatedinabunchofQuonsethutsinaruraltownoftwothousandpeopledidn’thelp.Peopletookonelookandsaidtothemselves,‘Whoa,what’sthis?’”Finallythecompanyturnedtoahomegrownresource:thetwelvebrothersandsistersthatRTandDorothyhadraised.

“Of the twelve children,” he continued, “each completed an undergraduatedegreeandmanywentonforadvanceddegreesinlawandbusiness.”Aseachofthebrothersandsistersfinishedtheireducations, theyreturnedhometoMountSterling and went to work for the company. “On the one hand, we felt anobligationtoprovideeveryoneanopportunityandontheotherhand,theywerealso coming back to the area because of family attachments.RT andDorothyencouraged, but did not pressure sons or daughters to return to the business.Theywere,however,delightedeachtimeonemadeadecisiontodoso.”

Allthebrothersandallbutoneofthesisterseventuallyjoinedthecompanyassalesreps,barelyearningalivingwage.“Duringthefirstpartoftheweek,”saysTracy,“we’dmakeoursalescalls;thenonWednesdaysheadbacktotownandfuelthetrucks,changetiresanddowhateverhadtobedoneandthenspendtheweekendsloadingthetrucksforthenextweek’sdeliveries.”

GainingTraction

“Ittookusatleasttentofifteenyears,”Tracyexplains,“beforewereallybegangainingmomentum.Wehadmanyofthefamilymembersouttheremakingsalescalls and, as we added additional lines, more distributors were willing to dobusiness with us. The more distributors we signed up, the more themanufacturers became interested in doing business with us. Finally themanufacturersbegancallingusandsaying, ‘We’veheard froma lotofpeoplethat they’ddistributeourproducts if theywere able tobuy it fromyou.We’dliketogetintoyourprogram.’”

Today Dot Foods has more than two thousand employees and generates

annualsalesof$2billion.One-thirdofthecompany’steammembersdrivethetrucks that deliver the goods to the company’s 3,500 distribution customers;seven hundred work inside the warehouses; and seven hundred work inadministrative, IT, accounting, and sales functions. Historically, the companyhas doubled its revenues every four to five years, and Tracy expects thecompany’sgrowthtocontinueatadouble-digitpace.Inthenextchapteryou’llfind more innovative win-win solutions that this company and others haveinventedtoensuretheircontinuedgrowth.

ActingSmall

TheTracy familyneverstoppeddreamingand thinkingbig; theywanted tobethebiggestandbest in thenation.Still, theyachievedtheirobjectivebyactingsmall: 1.Mind Your Resources Inside all the restrooms at the Dot Foodheadquartersare signsurgingusers to turnoff the lightswhen they leave.Thereminders are a testament to the thrift of the company’s founders but also ametaphor for the ethoswithin the company.The firm isn’t cheap or frugal somuchasitiscompletelyrespectfulofallresources.Eachexpenditureanduseofaresourceiscarefullyscrutinizedandconsidered.

2.MaintainUtilitarianFacilitiesThecompanymovedfromthefamilylivingroomtoasingleroombehindatruckandimplementdealershiptoastringofQuonsethutsandpolebarns.Itmovedtoalargemodernfacilityonlywhenitmadefinancialsense.EveryDotFoodfacilityisneat,clean,andfunctionalandnothingelse.Therearenopalacesandnomonumentsandthecompanyhasneverbuiltanythinginordertoindulgeanexecutive’sego.

3.PutthePeoplewiththeMosttoGainorLose

onYourFrontLinesDotFoodsdidn’thavethemoneyordesirablelocationrequiredtorecruitandhireexpensiveheavy-hittingsalespeople.Thismayactuallyhavebeenthecompany’sluckiestbreakbecausewhenDot’ssalespropositionfailedtoimmediatelyhithomeruns,chancesarethatmostsalespeoplewouldhavefounditalltoohard,startedcomplaining,andeitherquitortriedtoconvincethefamilyithadabadidea.

Insteadthecompanyturnedto thepeoplewiththemosttogainorlose.Allbuttwoofthetwelvechildren became salespeople at one time oranother and hit the streets, sold to clients, andhelped build the company. The lesson forbusinesses that want to grow revenues is that asales forcecomposedofpeoplewith themost togain or lose will work longer, harder, andmorecreatively and collaboratively than any outsidersthey could hope to hire. In the process they’llprovethatthemathreallydoeswork.

4.LetVolumeDrivetheNeedforExpansion,NottheOtherWayAroundWhendiscussingexpansionandgrowth,PatTracyfrequentlyinvokesoneofhisfavoriteexpressions.“Volumeisvanityandprofitissanity,”hesays,pointedly

describingthecompany’sviewsongrowth.“Ourexpansionwasdrivenbythemanufacturersandourcustomers,”saysPatTracy.“Wealwayskeptoureyesonadjoiningstatesandeventuallymanufacturerswouldtellustheyhadcustomerstherewho’dbuytheirproductsfromusifwe’dstartdoingbusinessthere.We’dgointothenewstatewithonlyafewcustomers,”hesays,“assignasalespersontotheterritoryandbuilditfromthegroundup.”Thecompanyneverexpandedforthesakeofexpansionorunlessitwouldbeprofitable.

5.NeverForgetYourRootsMountSterlingisn’taneasyplacetogetto.It’safive-hourdrivesouthwestofChicagoandtwohoursnorthofSt.Louis.Thetown’spopulationisonlytwothousandandtherearejusteightthousandpeopleintheentirecounty.AndyetDotFoodshasremainedheadquarteredintownandhousesitslargestdistributionfacilitythere.“MomandDadstartedthecompanyhereandwefeelaresponsibilitytothetown,”maintainsTracy.“Ourmostimportantreasonforstayingisthatwe’vebeenblessedwithawonderfulworkforce.”CitingtheworkethicofpeopleintheMidwest,Tracysays,“Ourtruckdriversarethebestintheworld.Whiletheturnoveramongtruckdriversatmostcompaniesisaboutseventypercentayear,our

turnoverrateisfrequentlyinsingledigits.”Tracysaysthatthecompany’sworkforcehasrepaidthecompany’scommitmenttothemwiththeirfiercedeterminationtodotherightthingandtakecareofthecustomeratallcosts.

6.ControlYourGrowthSomecompanieswilldoanythinginordertogrowrevenuesasfastaspossible.Unscrupulousfirms(dosomemobilephoneserviceprovidersringabell?)promiseprospectivecustomerseverythinganddelivernothing,hopingcustomerswon’tnoticethehorribleservicetheyreceiveandevenchargecancellationfeeswhencustomerswanttogetoutofabaddeal.

Dot Foods could easily ramp things up andincrease business at an even faster rate than theimpressivedouble-digitrevenueandprofitgrowthnumbersithasturnedineachyear.Insteadithaschosen to grow in a steady and controlled way.Each year the company accepts another 150 to200newdistributioncustomersandaddsonly25to30newmanufacturers.Suchdeliberategrowthenables it to protect capital and ensure that thecompany’s inside sales and customer serviceteams are able to support growth and maintainextraordinarily high levels of customer

satisfaction. The company isn’t so greedy as toneeditalltomorrow.

7.StayTruetoYourPrinciplesandValuesThere’salargesignthatgreetsvisitorsoutsideDotFoods’homeofficeinformingeveryoneofthecompany’smission:TOPOSITIVELYANDSIGNIFICANTLYCONTRIBUTETOTHESUCCESSOFOURBUSINESSPARTNERS.Thecompanypridesitselfonhavingnevervariedfromthatfoundingbelief.

InventingNewBusinesses...Continued

Koch—ANewUseforLeftovers

InChapter5wenotedthatoneofthebusinessareaswhereKochIndustrieshashistoricallyrefusedtosellisitsrefininginterestsbecauseitusestheseaslabstocreate other businesses. One such new business, invented by the company, isvintageCharlesKoch.

When the in thing in the oil and gas industry was to build new refineriesdesigned to process sweet Texas crude (the champagne of crude oils), KochIndustries had serious doubts. They reasoned that with enormous capacity forprocessingsweetTexascrudecomingonline therewouldbe increaseddemandfortherawmaterialthatcouldtheoreticallyincreaseprices.(Thefirstruleofallmarketsisthatthegreaterthedemandthehighertheprice.)Withsomanynewrefineries processing the same crude oil in the same way with identicalequipment, Koch couldn’t see how it could gain a competitive advantage. Itdecided to zig while everyone else was zagging and invested heavily inexpanding its Minnesota refinery, which was designed to process the least

desirableofallcrudeoils—heavy,sourcrudeoil.Thisrawmaterial issothickandviscousthatdilutingagentshavetobemixedintoitjusttokeepitmovingthroughpipelines.

Whether a company is processing sweet Texas crude or heavy, sour crudedoesn’tmatterwhen it comes to the finishedproduct.Theprocessedoutputofboth rawmaterialsmustmeet thesamerigidenvironmentalstandards.Thebigdifferenceisinthevastamountsofby-productsandgunkthatprocessingheavycrudescreates—by-productsthatcompaniesmustdisposeoforhopetosell.

Oneby-productisasphalt,andtodaytheKochMaterialsGroupsellsenoughasphalt to pave more than 125,000 lane miles of roads each year. Instead ofsimply selling the asphalt it produces, the company began wondering how itcouldupgradeasphalttogiveroadbuildersadifferentiatedproduct.TheanswerstheycameupwithbecameKochPavementSolutions,whichdevelops,tests,andmarkets innovative paving solutions, and Koch Performance Roads, anengineeringandpavementdesignfirmthatdesignsandoverseestheconstructionof high-endurance roads, layer-to-layer for specific areas. Over the past fewyears, these two businesses, invented byKoch Industries, grew towhere theyhavecombinedannualsalesofmorethan$1billion.

SAS—ANewPricingModel

Most software companies are actually sales companies built around a singlesoftwareproductor idea.Theirbusinessmodel issimple:sellasmuchstuffaspossible for as much money as possible in order to hit the current monthly,quarterly, or yearly target. The problem with the model and what preventscompanies that practice it from consistently growing their revenues is thatthey’re always startingover.Theywork themselvesoutofbreath selling to asmanyclientsaspossibleandwhenthemonthoryear isover, they takeadeepbreathandareforcedtostartalloveragainandrepeattheprocess.AfterawhileitallbecomeswhatYogiBerrareferredtoas“déjàvualloveragain.”

In Chapter 2 you read that SAS invents and provides software to theirbusinessandgovernmentclientsworldwide.ButSASdoesn’tsellanysoftwareto anyone. Instead they’ve adopted a licensing model and this is what hasallowed them to become so formidable in terms of consistent financialperformance.

Kelly Ross, vice president, U.S. commercial sales, the Americas, isresponsiblefor40percentofSAS’sannualrevenuesbutbeganhercareerwithanothersoftwarecompany.“Itwasastart-upcompanyandfunforawhile,”shesays, “but after we’d made some sales and were trying to survive onmaintenancerevenuefromthem,thecompanystartedtodryup.

“Oneofthefoundersofthestart-upwasamentortome,”shesays,“andItoldhimthatthingsweren’tlookinggoodforthecompanyandIwonderedwhetherIshouldbelookingsomewhereelse.HesaidIshould.

“WhenIinterviewedwithSAS,”shesays,“thetwothingsIlikedmostaboutthecompanywerethelicensingmodel,whichwasdifferentfortheindustry,andthesecondthingthatwasappealingtomewasthatinordertogenerateanannualrenewal every year, you have to have very strong relationships with yourcustomers.

“Whenthebulkofyourrevenuesarebasedonrenewingthesamecustomersevery year,”Ross says, “genuine value is placed on thework you do and thelong-termrelationshipsyoubuild.That’svastlydifferent,”sheadds,“thangoingoutandgettingthebigdeal,thequickhit,andthenmovingontothenextone.”

SASrenewsan impressive95percentof theircustomerbaseeachyear.Therevenuesfromthoserenewalsaccount for80percentof thefirm’s totalannualsales.Rosssays,“It’seasytocalculatewhatthenewsalesgoalneedstobebylookingat the renewal revenuebaseand retention rate, factoring inwhatwe’lllosetoconsolidationsandthefewcancellationswereceiveandthendetermininghowmuch new business we need to add in order to hit our target of fifteenpercentrevenuegrowtheachyear.”

Ross says that an insight provided by Jim Goodnight greatly assisted therevenuegenerationprocess.“Jimtoldthesalesorganizationtostopfocusingonnew sales but to focus on total revenue.” That resulted in SAS’s salesdepartments becoming equally focused on growing existing clients into largercustomers. Ross says her sales staff devotes as much time to analyzing anddiagnosing the needs of current customers as they do to pitching for newbusiness.Rossadds,“Theonlywayyoucankeepexistingcustomersandgrowthem is by delivering superlative customer service and that occurs only byhelpingthemgrowtheirbusiness.”

HypotheticalRevenueGrowthModelofSellingversusLicensingCOMPANYA

ACompanyThatSells

Setanannualtarget($1billion)MaintenanceFees($150million)NewSalesRequired($900million)

COMPANYB

ACompanyThatLicenses

Setanannualtarget($1billion)LicenseRenewals($800million)NewSalesRequired($200million)ExistingCustomerGrowth($100million)NetNewSalesRequired($100million)

Comparetheannual15percentmaintenancefeechargedbyCompanyAandthe80percentlicensingrenewalfeechargedbyCompanyB:whichonestandsagreaterchanceofachievingconsistentrevenuegrowth?

How would Company A generate nine times as much new business asCompany B?Would its sales force be nine times the size, would it price itsproductatninetimesasmuchorwoulditsimplycountonbeingninetimesmoreaggressive?Alongwithninetimestheeffortwouldinvariablycomeninetimesthenumberofmanagementchallengesandheadachesaswell.

Almost by necessity, Company A would be forced to build a slamming,hitting,hard-closingsalesmachinewhileCompanyBwouldhavemoretimeandresourcestoanalyzecustomers’needsandbuildlong-termrelationships.

By practicing an alternative way to price software Jim Goodnight assuredSAS a consistent flow of revenue and an environment devoted to customer

satisfaction.

Companiesthatthinkbigandactsmallareconstantlysearchingforinnovativemeanstoturnconventionalwisdomupsidedown.Theydreamaboutnewwaystoaddvaluewhilemaximizingtheuseofeveryresourceathand.

ThinkBIG,ActSMALLINVENTNEWBUSINESSES

•Figureouthowtoturnyourbusiness’sasphaltintonewroads(Koch).

•Insteadofsellingyourproductorserviceforcash,licenseitandhavetheclientpayarenewalfeeeachyear(SAS).

•Figureouthowtomakewhatyousellextraordinarilyspecialtothebuyer.Peopleandcompaniespayapremiumforprestige(Strayer).

•Examinethesmallestrevenuecentersinyourbusinessandaskyourselfthequestion,“Withsomereinventioncanthisbecomeabrand-newbusinessunit?”(Dot).

•Listallthedisorganizedsupply-chainprocessesthatlooklikelogistical“spaghetti”inyourbusinessandfigureouthowtobringsimplicityandordertopartofthemarketplace.Peopleandcompaniesgladlyoutsourcelogisticsthatenhancetheirbusinessopportunities(Dot).

•Pretendyouknownothingandtrulylistentoyourcustomers,vendors,suppliers,andthemarketplace.Theywillleadyoutonewbusinessopportunitiesripeforinventionorreinvention.

7

CreateWin-WinSolutionsMEDLINEINDUSTRIES

“Wego in, showourcustomershowwe’llachieve their target savingsonalinebylinebasis,agreetopayapenaltyifwedon’t,andshareanyadditionalsavingswiththem.”

CHARLIEMILLS,CEOofMedlineIndustries

Salesandsellingaretoughwork.Andthere’snothingharderthantryingtosellthe same stuff offered by other salespeople and companies.When there’s nocompetitive advantage to distinguish a good, product, or service from thecompetition’s, theonly thing left to talkabout isprice.Thatdiscussionalwaysendsupinthesameplace;theprospectivebuyerwantsitcheaper.

To defuse the issue of price, some companies and salespeople resort tocounting on friendships to get their deals done, piling on loads of freebies,makingoutlandishclaimsandpromisesorofferingmoreaddedvalue(meaningloweringthepricewithoutadmittingit).It’shardformostprospectivebuyerstorelentandsayyes.Theydon’tknowwhotobelieve,mightnotgetwhatthey’vebeenpromised,andmightevengetrippedoff.

Atbest,salesandsellinghavehistoricallybeenanadversarialprocess.

Every company we identified in our research has succeeded in taking theadversarialstingoutofsales.Eachhas institutionalized theartofauthenticallydiagnosing therealneedsof itscustomersand thencraftingwin-winsolutions.Because they think big but act small they intrinsically understand that it’s notabouttryingtomasteranadversarialprocess(whichwillneverbemastered)butinsteadcreatingenvironmentswhereeverybodygenuinelywins.

There’snobetterexampleofacompanycommittedtothecreationofwin-winsolutionsfortheircustomersthanMedlineIndustries.

MedlineIndustries

Medline, with nearly $1.9 billion in annual revenues, manufactures anddistributes more than 100,000 medical products, medical-surgical items, andtextiles to hospitals, extended care facilities, surgical centers, home careproviders,physicians’offices,andretailoutlets.Medlinehasvirtuallyeliminatedthemiddlemanbymanufacturingmorethan70percentoftheitemsitsellsandthen distributing them directly to customers from its twenty-five distributioncenters. Unlike many of its competitors, Medline carries zero debt. Andaccording to current CEO, Charlie Mills, an energetic and committed familyman inhisearly forties, itwashisgreat-grandfather thecompanyhas to thankforstartingabusinessthatforeshadowedthepresentMedline.

“In 1910,” says Charlie Mills, “my great-grandfather A.L. started a smallbusiness inChicagomakinguniforms for thepeoplewhoworked in thecity’smeatpackingplants.Itwasn’tlongbeforefriendsofmygreat-grandmother,whowere hospital volunteers, suggested that the couple start sewing and sellingmedicalgarmentsaswell.”

ThelifelongambitionofA.L.MillswastoreturntohisnativeArkansasandassoonashisson(Charlie’sgrandfatherIrv)wasoldenoughtorunthebusinessheturneditovertohimandwentbacktoArkansas.“Whenmygrandfatherwasrunningthebusiness,”saysMills,“itbecamemoreandmoremedicalgarmentsand fewer other fabrics and uniforms.”By the 1940s the companywas doingseveral hundred thousand of dollars annually and employed thirty people.“WhenWorldWarTwobegan,”hesays,“fabricwasrationedandonlyavailableformedicalpurposesandthecompanyswitchedexclusivelytotheproductionofhospitaluniforms,surgicalgowns,andbedding.”

By the 1950s the company, known as Mills Hospital Supply Corporation,slowlybegan takingonothermedical linesandopenedup severalwarehousesaroundthenation.In1961,withthecompanyapproaching$3millioninannualsales, Irv Mills decided to retire, pulled the plug, and sold the company topublicly tradedCencoInstruments.Mills’s father,JimMills,andhisuncleJonMillshadjuststartedworkingforthecompanywhenMills’sgrandfathersolditandallof them, includingGrandfatherIrv,went toworkfor thenewcompanyandspentfiveyearswithit.

Eventually,JimandJonMillsfoundworkingforthecompanythathadboughtthe family business frustrating.They felt stifled by the lack of innovation andcommitmenttocustomersandcustomerservicethathadbeenhallmarksofMillsHospital Supply. In 1966 they left Cenco and founded Medline as a directcompetitorwiththeirpreviousemployer.

“Medline started with ten people,” says Mills, “and within two years weopened our first garment factory in Indiana,manufacturing scrubs and patientgowns.”AtthesuggestionofIrvMillsthenewcompanybeganinnovatingtosetthemselves apart in the marketplace. “Until Medline came into being,” saysMills,“allhospitalgownsandscrubswerewhite.Ourcompanywasthefirsttooffer theminothercolorsandwithprintingon them.Thatmightseemtobea

smallinnovation,butitreallyhelpeddifferentiateusandgrowthebusiness.”

FromtheverybeginningMedlineranafiscallyconservativeoperation.Whilesales and profits grew, Jim and JonMills agreed to retain all the company’searnings for future growth. Medline continued adding salespeople, promisedstockinthecompanytoeveryonewhostayedforthreeyears,andbegangrowingsteadily.

CharlieMillsrecallsthatMedline’sonemajormisstepoccurredin1972whenthecompanywentpublic.“Thecompanybelieved,”saysMills,“thatbygoingpublicitwouldhaveaccesstocapitalwithwhichtoacquireothercompaniesandthatitwouldprovideitwithfavorablepublicityandpress.Insteadallitendedupwithwerelotsofadditionaltime-consumingreportingrequirementsandlimitsastohow it could run itself.”There’dbenomorehoardingof retainedearnings;shareholdersinpubliclytradedcompanieswantcashdividends.Medline’sforayintothepublicmarketslastedonlyfiveyears.

“Our stock opened in 1972 at thirteen dollars a share,” says Mills, “andquickly shot up to twenty-six dollars. But during the next five years as ourearningswentuptwohundredandfiftypercent,thestockwentdowntoaslowassevendollarsashare.”Thefamilydidn’tsellanyoftheirsharesandfinally,in1977,boughtthemallbackatthirteendollarsandbecameaprivatelyownedsubchapterS company that essentially functions as apartnership.Today fifty-fivenonfamilymembersandvariousmembersoftheMillsfamilyownthecompany.“We don’t think of ourselves as being family owned,” says Mills. “We’reactuallyemployeeowned.”

Medline does nearly $1.9 billion in annual sales, has six manufacturingfacilities inNorthAmerica,and twenty-five joint-venturemanufacturingplantsworldwide. The companymanufacturesmany of the 100,000 products it sellsand bymaintaining twenty-five distribution centers,Medline is able to sell ineverystateandmorethantwentycountries.

WeuncoveredsevenwaysthatMedlineprovesthepropositionofthinkingbigandactingsmall:

1.SellDirectly

“The products we manufacture,” says Charlie Mills, “make up more than

seventy percent of our revenues.Bymanufacturing and selling directlywe’vebeen able to eliminate the distributor and take one level of cost out of theprocess.”Asaresult,Millssays,“Thepriceswechargeusersaregenerallylessthan[thoseof]ourcompetitors.”

Prior tothelate1980sthegovernmentandmosthealthinsurancecompaniesreimbursedhospitalsonacost-plusbasis.Thatallchangedwiththeintroductionof a system that paid a fixed fee for medical procedures. For the first time,hospitals had to become extremely cost conscious and naturally gravitatedtoward the lowest-cost quality manufacturer. Mills says that the fixed feereimbursement scheme provided and continues to give a boon to low-costMedline.

2.LoveYourCustomers

“Ournextcompetitiveadvantage,”saysMills,“isthatwe’reproudtobeagreatsalesorganization.We lovecallingoncustomers,workingwithandexceedingtheirexpectations.Mygreat-grandfatherandgrandfatherweresalesmen,soaremy dad and uncle and sowas every other key executive in the company.Mycousins Andy and Jimmy are great salesmen and call on many of our bestaccounts.We’ve always viewed a large sales force as being vital to our long-termgrowthandneverhesitatedtohiresalespeopleandcontinuallytrainthem,believing that in the future, they’d be responsible for making us moreprofitable.”

WhileCharlieMillshasthetitleofCEO,hiscousinAndyservesaspresident,andAndy’sbrother-in-lawJimmyAbramsservesasCOO,Millssays thetitlesare virtually interchangeable. “The three of us run like a partnership and onlyhavethetitlesbecausetheoutsideworldexpectstheretobeaCEO,COO,andpresident.”

Somethingelsethethreemenshareistheirloveofsales.“Weallworkedassalespeopleandevennow,” saysMills, “we’reeachon the road, almost everyweek,takingcareofcustomersandcloselyinvolvedinthesalesprocess.”Millseven met his future wife while both were working as salespeople for thecompany,andhistwocousins’wiveshaveworkedinsalesforthecompany.

3.StayPrivate

ThethirdcompetitiveadvantageMillscitesisMedline’sprivateownership.“Wehave several major competitors,” he says, “and we’re probably hell on thembecausewe’reabletobesofastandflexible.Eachofthemispubliclytradedandis forced to spend a lot of timemanaging analysts, earnings expectations, andshareprices,andprovidingguidance,whilewe’reable to focusexclusivelyonour core business.”Millsmaintains that publicly traded companies are almostrequired to be short-sighted thinkers, living quarter-to-quarter, while Medlinecanmaintainalongertimehorizon.

“Ihaveagoodfriend,”hesays,“whojuststartedanewsalesmanagementjobwithapubliclytradedcompany.InJanuary,thisguy’sfirstmonthonthejob,thenumbers were disastrous because the company had tried to jam everything itcouldintoDecember.That’sthekindofthingwe’dneverdobecauseit’ssimplyshort-sighted.”

While five of the nine companies profiled in this book are publicly traded,they all have similarly avoided thinking small—focusing on hitting quarterlynumberstopleaseWallStreet’sexpectations.

4.StayDebtFree

Medlineisdebtfree.“Ifweneedtopurchaseanewpieceofequipmentorbuildanadditionalwarehouse thatmightnotbecomeprofitable forayear,”hesays,“wehavetheabilitytodoit.We’retrulyacompanycommittedtoalwayshavingabetterfuture.”Heexplainshispointfurtherbysaying,“Ifwehadtospendalotofmoneythisyearthatmightmakeourcurrentyear’sperformancelookbad,butitguaranteedusabetternextyear...we’ddoitinasecond.”

5.Don’tLetSalespeopleSayNo

Most consumers would agree that it seems that the representatives of mostcompanies are anxious to tell customers that “it can’t be done.” The fifthcompetitiveadvantagecitedbyMills isextraordinary foracompanywith fourthousandworkers.

“We have a rule,” he says, “that only amember of the seniormanagementteamcaneversay‘no’toacustomer.Wewereearlyadopterswhencustomerstoldustheywantedtoorderbycomputer,weroutinelymakeproductchangesasrequested and we’ve even opened up new warehouses when customers haveaskedforthem.Unlessasalesperson’sanswerisyes,”hesays,“thecustomerorthesalespersonhastoescalateit.”

6.Don’tLetExtraLayersofManagementSlowThingsDown

Charlie Mills says that Medline’s sixth competitive advantage is vital to thesuccess of the company. “We make decisions quickly and act fast,” he says.“Several months ago,” he explained, “Johnson and Johnson announced theywere leaving thegauzewound-careproductbusiness inhospitals.Themomentthey made the announcement, we roughly estimated the amount of sales wethoughtwe could pick up, started runningmagazine and trade journal ads thenext day, and immediately began running heavy production.When there’s anopportunity wemove quickly. There aren’t any layers of management whosepurposeistoslowdownopportunitiesatMedline.”

ThisfindingechoesthebestpracticesofcompaniesIprofiledinmylasttwobooks.Lessbureaucracyplusspeedequalstheabilitytoseizeopportunity.

7.BeaLittleEntrepreneurial

ThefinalcompetitiveadvantagethatMillssaysmakesuptheMedlinecultureisthe firm’s entrepreneurial culture. “We’re a little entrepreneurial,” says Millscitingthefollowingexamples.“Severalyearsago,wewent intothedisposablegownbusiness.Itrequiredaninvestmentoffivemilliondollarsandhasworkedoutverynicely forus.But thingsdon’t alwaysworkout sowell.At the sametime,wewentintononmedicaluniformsforhospitalandhealth-careinstitutions,andthatonehasn’tgeneratedthesaleswehopedfor.”

At various times during our research, Charles Koch, David O’Reilly, PatTracy,andtheotherCEOswestudiedalsousedthewords“little”or“small”todescribe the entrepreneurial bent of their respective companies. Make lots oflittle bets and take small chances, but don’t make a bet so big that it would

upendthefirmifitdidn’tworkout.

SeparateSalesForces

Medlinemakesmore than 100,000SKUs available to their customers. Such ahugenumberofitemswouldmakeitverydifficultforasalespersontoevenbeaware of all the company’s offerings much less have adequate productknowledgetorepresentthemall.Medline’sresponsetothispotentialdilemmaisanotherexampleofhowthecompanythinksbigbutactssmall: theyhavefourseparatesalesdepartmentscoveringthenation.

“Upuntil1985,”saysMills,“thecompanyhadasinglesalesforcethatcalledon all prospects and customers. That year we came out with a sales forcededicatedtonursinghomesandlong-termcarefacilities.Eventhoughhospitalsandnursinghomespurchasesomeofthesameproducts,thesalesapproachusedoneachisvastlydifferent.”

Reorganizingthecompanyintotwoseparatesalesforcesworkedsowellthat,within a few years, Medline added another sales force dedicated to skin andwound care. “We acquired the right to represent the products of another skin-carecompany,”saysMills,“andsowetookovertheirsalesforce,addedinoursalespeople who’d been selling skin and wound care, and began growing aseparate sales force. Our fourth sales force sells textiles: linens, sheets,pillowcases, mattresses, lab coats, and reusable gowns.” Medline has 300salespeopleintheirnursinghomeandlong-termcaremarkets,another350inthegeneral hospital line, and approximately 50 each in the textile and skin-andwound-caresalesforces.

MakingInternalBusinessUnitsCompete

Here’sanotherexampleofhowMedlinethinksbigandactssmall.Ithasdivideditself into fourteen separate product divisions responsible for the tens ofthousandsofitemsitmanufactures.Themanagersresponsibleforrunningeach

productdivisionare forced to run theirownsmallbusinessunitandserve realcustomers:thesalespeopleofthecompany,whocanchooseamongthevariousofferingsofall theproductdivisions.Millsprovided the followingexampleofhowthingsworkatMedline:“TakeKenChua,forexample.He’sthepresidentofourDynacorDivision,whichmanufacturesplasticutensils, smallprocedurekits,andurologicals.He’s inchargeofabout$150million inannualsalesandcompletelyresponsiblefortheproductshisdivisionmanufactures:theirquality,cost, and the gross profit they generate. Because his division’s products areprimarilysold throughoursales teams,hehas toconstantlyfigureoutways tocompete against the other product divisions who are fighting for top-of-mindconsciousnesswiththesalesforce.

“Product divisions compete for training timewith new sales reps, and eachwould like as much time as possible with our new people. The better theyperform, themore time they get. Each product division also competes for theamount of promotional attention they receive from the company. They alsocompete for promotion timewith the sales force and for howmuch time eachdivision’sproductspecialistsareallowedtospendinthefieldmakingsalescallswiththesalespeople.”

By fostering internal competition, Medline harnesses the speed andcompetitivenessofsmallerinternalbusinessunitstodrivetheefficiencythatissovitalinabusinesswiththinningmargins.

SharetheWealth

Manycompanieshavemadeongoingcostcuttingstandardoperatingprocedure,placingtheblameforsuchmeasuresoneverythingfromrecessions(therewerenineteen in the last century, an average of one every five years) to economicimplosions (the dot-com debacle) and investors’ demands for consistent profitgrowth. Unfortunately these companies seem oblivious to the fact that, at itsbest,costcuttingonlyaccomplishesatemporaryremission,andthatincreasingrevenueistheultimatecure.Nonethelessmanycompaniescontinuetoslashthesizeoftheirsalesdepartments,captheamountofcommissionsthatsalespeoplecan earn, and offload seasoned, high-priced sales talent. Such an operationalphilosophyisanathematotheexecutiveswholeadMedline.

“Mostofourcompetitors,”saysCharlieMills,“havecutbackonthenumberofsalespeopleinthefield,giventhestaffthatremainslargerterritories,andtriedtohandlesalesin-houseoronthetelephone.That’ssomething,”hesays,“we’dnever do. We do the opposite and believe in maintaining and generouslycompensatingalargesalesforce.Weseeitasaninvestmentinthefuture.”

Mills believes it’s faulty reasoning to think that cutting the size of orcompensationofthesalesforcecanhelpacompany.“It’sveryeasytocalculatethatbycuttingyoursalesexpensesbyfifteenpercentinanygivenyearyou’dbeable tomomentarily increase profits andperhaps havevery little effect on thecurrentyear’ssales.It’stheyearafter,thefuture,thatyou’dbedamaging.”

EachofMedline’smorethansevenhundredsalespeoplehasanannualquotathataveragesslightly less than$3millionforastartingsalesperson. Insteadofpaying a commission on the gross revenues they generate, a system thatencourages salespeople to constantly ask management for price reductions,Medline ties their salespeople’s compensation to profitability by payingcommissionsbasedongrossmargin.Attheendoftheyear,ifasalespersonfailstoachievetheirquotatheydon’tgetabonus,whichcanbe20percentof theirannualcompensation.

The average sales representative at Medline earns more than $100,000annually; some make as much as $500,000; and the top salesperson in thecompanytakesinmorethan$800,000.Althoughquotasareincreasedeachyear,the firmdoesn’t cap thecommissions itpays itspeople.Mills says, “WehavemanysalespeopleinthecompanyearningmoremoneythantheCEOandthat’sthewayitshouldbe.Afterall,thetopexecutivesalsohavestockthatappreciatesbasedontheworkthesalespeopleperforminthefield.”

ProvidingWin-WinSolutions

Medline salespeople are trained to sell solutions to the customer’sproblems—notjustproducts.Theideaistoputeveryone—customers,thecompany,andthesalespeople—inawin-winposition.

OneofMedline’suniquesellingpropositions is itsability toessentially takeoveraportionof thecostreductionfunctionsforhealth-careproviders.“Asan

example,” saysMills, “consider a hospital that’s spending ten million dollarsannuallyonsuppliesandwouldliketoreducethatbyfivepercenttonine-point-fivemillion.We’llgoinandshowthemhowwe’llachievetheirtargetsavingsonaline-by-linebasis,agreetopayapenaltyifwedon’t,andshareanysavingsabovethefivehundredthousanddollarswiththem.”

Mills points out that the $500,000 cost savings described in the previousexample drops straight to the health-care provider’s bottom line and becomesoperatingprofitforthem.“Doyouknowhowmuchahospitalornursinghomewould have to increase their revenues in order to increase their profits by$500,000?”HeanswersbycitingtheexampleofSt.Mary’sHealthcare,whichestimateditwouldhavehadtoincreaserevenuesby$28.5milliontoachievethe$570,000itsavedusingMedline’sguaranteedsavingsplan.

Thechallenge,ofcourse,isnotjusttodreamupsolutions,buttoeducatethecustomerabouthowhecandirectlybenefit.

Medline’sFuture

Not a single CEO or company executivewe studied, including CharlieMills,evermade—ontherecordoroff—abig,overwhelmingannouncementofwheretheircompanywouldbeonedayorhowitwouldconquertheworld.It’sanotherexample of their humility, but it’s also as if each leader has learned that bigaspirations are best kept quiet lest they be hexed by talking about them.Practicallyspeaking,thegreaterthenumberofpeoplewhomoneboastfullytellswhatoneisgoingtodoormakehappen,thegreaterthenumberofpeoplewho’dbehappytoseeonenotachieveit.

The only time Charlie Mills became less than forthcoming was when weaskedaboutMedline’sbiggoalsandthefuture.Hewasjustashesitanttoissuesweeping proclamations or share big dreams as all the other CEOs, and histentativenessprovidesafascinatinginsightintothemindsofthepeoplewholeadallthesecompanies.

“Foranumberofyears,” saysCEOMills,“wehadagoal tohitonebilliondollarsinsalesby2000andweachievedthatnumber.Thenwesaidwewantedtotargettwobillionby2006,whichwe’llachieve.”

When quizzed as to whether Medline will ever be a $10-billion company,Mills responds, “Whoa, that’s too far out there.You need to be able to see atarget tocommit to it.We’vehadsomediscussionsaboutbeinga four-billion-dollarcompanysomeday,”hesays,“andI’msurewe’llgetthere.Youneedtotake it one small step at a time.” While Mills remained tight lipped aboutspecificfuturedollartargets,hewasn’treluctanttodiscusstheneedforgrowth.

CommittedtoGrowth

“We’veseencompetitorsgetsoldoff,beacquired,orgobankrupt,”saysMills,“becausetheirsalesstagnatedandtheircostsdidn’t.That’sscaryandonegoodreasontobecommittedtogrowth.Additionally,we’reinanindustrythatdoesn’treally have any inflation . . . if anything, we have deflation with constantpressurefromhealth-careproviderstolowerthecostsofwhattheybuyfromus.Soifwehavetolowerourpriceseachyear,that’sanothergoodcaseforconstantsalesincreases.”

Millshituponthesamethemewe’dheardfromsomanyoftheleadersofthecompanieswestudiedwhenheadded,“Wehavefour thousand teammembersworkingwith us, and each of themwants to do better andmakemoremoneynextyearthanthisyear.Inordertobeabletoaffordtopaymoreandmotivatethemtodobettereachyear,wehavetogrowasacompany.”ThefinalreasonthatMedlineiscommittedtogrowthinvolvesanechooftheword“stewardship”weheard somany timesduringour research. “It’s pretty sobering, isn’t it?” asuddenlyseriousMillsasks.“Yourparentsputyouinchargeofacompanythatwas growing when they gave it to you. It’s your job to be a steward of theresourcesandcontinuethewonderfulworktheybegan.”

Almost one hundred years ago A.L. Mills accidentally stumbled into thesolutions-providingbusinesswhenhefiguredoutthatthemeatpackingplantsofChicagoneededareliablesourceofinexpensiveuniformsfortheirworkers.Hiswife sensed opportunity when friends suggested the couple investigate thepossibility ofmanufacturing uniforms for hospitals. TodayMedline thinks bigbutMills runs the company as though itwere a small businessby relentlesslysearchingfornewwaystocustom-tailorsolutionsforitsclientsandbeingawareofeveryopportunitythatpresentsitself.

All of the companies we quantifiably identified for inclusion in the bookeither sell their services and products based on providing solutions to theircustomersandpartners(O’ReillyAutomotive,Cabela’s,Medline,SonicDrive-In, PETCO), or their entire business model is predicated on the creation ofsolutions(Strayer,DotFoods,SAS).Hereareseveralotherexamples.

SolutionProvidingatCabela’s

Weuncoveredoneofthemostinnovativeusesofwin-winsolutionsatCabela’s.When the company’s second store, located inMinnesota, opened and quicklybecamethatstate’ssecondlargesttouristattraction,thefirmknewithadlandedonawinningformula:hugemegastoresdesignedasmuchastouristattractionsas retail outlets. Obviously the companywanted to open asmany of them asquicklyastheycouldabsorbthegrowth,butagiantquestionarose:howwoulditcomeupwithmoneytobuildthem?

Goingpublicwasanoption thatmighthaveprovided thecompanywith thecapital needed to grow quickly, but the founders were fiercely privateindividuals not ready tomake thatmove. Therewas also concern aboutwhatkind of receptionWall Streetwould give them. They’d built amammoth andwildlysuccessfulcatalogoperation,butwhatkindofstorywould theyhave totellwithonlytwostoresoperational?Mighttheinvestmentcommunitydismissthemastwo-trickponies?

Borrowinglotsofmoneyfrombankswasanoption,buttheCabelabrothersdidn’t cotton to lettingabunchofbankerscall the shots abouthow to run thecompany. The same was true for the issuance of bonds, which would haveresultedinscoresofperformancecovenantsbeingplacedonthecompany.

Theever-enterprisingDaveRoehr,thenservingasCabela’sCFOandamasteratthinkingbigandactingsmall,hitonanidea.Theremustbealotofstates,hereasoned, that would welcome a major tourist attraction like Cabela’s and beprepared to underwrite most, if not all, of the cost. “Why wouldn’t stategovernmentsusetheincrementaltaxrevenuescreatedbyCabela’shelpfinancetheretailstores?”

Economicdevelopmentbonds(alsoknownasSTARbonds,forsales,taxand

revenue) work like this: a government body issues bonds to finance theinfrastructureimprovementsthatwillallowanewindustrialandmanufacturingparktoopeninablightedsectionof its townorcity.Thebondsmightpayforsewage,water,andelectricalsystemsaswellasaportionofanewfreewayandexits.Thenthesalestaxesgeneratedbythenewindustrialparkareusedtopayoffthebonds.Theoretically,thedeveloperwinsbynothavingtopayforcostlyinfrastructure improvements,and thegovernmentwinsbyhaving renovatedanarea designated for rehabilitation.The problem that almost stymied the use ofeconomic development bonds to finance Cabela’s stores was that whilegovernmentshavemoneyformanufacturingandtourism,there’dneverbeenaninstanceofusingeconomicdevelopmentbondstofinanceretaildevelopment.

Theanswer,ofcourse, is thatCabela’s isasmucharetaileras it isa touristdestination. Thus the sponsoring government wins big time by having helpedcreateamajortouristdestination,andCabela’swinsbyhavingthecostsofthestoreunderwrittenbybonds,whichallowsittoconserveoperatingcapital.

Another win-win example at Cabela’s is its in-house travel agency thatarranges outdoor adventure ranging from white-water rafting trips in SouthAmericatophotosafarisintheSerengeti.ThedepartmentwasstartedwithjustoneemployeeandasecretarytoassistCabela’scustomerswiththeiradventuretravel plans. But according to CEO Dennis Highby, it dramatically exceededeveryone’sexpectationsandhasbecomeastellarperformerwithinthecompany.“It’sfascinatingthewayitworks,”saysHighby.“Acustomercalls,andafterwedeterminewheretheywanttotravel,howmanypeoplethere’llbe,andthethingstheywanttodo,wethensupplythemwithalistofclothingandequipmentwehighly recommend. Even though the travel division makes money, we makemore money supplying the travelers. It’s a real win-win. By being properlyoutfitted, our customersget the trip of a lifetime andwedowell in return forputtingittogether.”

SolutionProvidingatPETCO

Inrecentyears,mostmajorretailorganizationshavedonethemathandfiguredout that itmakesa lotmoreeconomicsense tokeepexistingcustomers than itdoes to constantly fight for new ones. As a result most retailers have

implemented loyalty programs that provide customers with cards that recordtheir shoppinghabits andwhich, in return,offerdiscountsor rewards for theirloyalty.Most of these programsworkwell at improving customer loyalty andsupplyingthecompanywithawealthofusefuldata.

The purpose of most loyalty programs is to make customers faithful to aparticular store.Forexample:agrocery storewitha loyaltyprogramwants itscustomerstoremainloyaltoit.Thestoredoesn’treallycarewhatthecustomerpurchasesaslongashedoeshisgroceryshoppingthere.We’veallseenthelongseriesoflow-pricecouponsprintedonthebackofeachsalesreceipt.Giventheamountoftechnologyavailabletoday,manycustomersfindthemselvespuzzledwhentheypurchaseatwelve-packofCokeandfindacouponfortwodollarsofftheirnextpurchaseofPepsi.Ifastorewastrulyconcernedaboutincreasingitscustomers’ loyalty, you’d imagine it would give them coupons for the thingsthey actually buy.Of course, the little secret is that stores sell space on theircouponstowhatevercompanyiswillingtopayforit.Moststorescouldcarelesswhatacustomerbuys,aslongasshecontinuestoshopintheirstore.

WediscoveredaloyaltyprogramatPETCO(profiledinthenextchapter)thatspeaks to theethosof thecompanyand is anauthenticwin-win for all partiesconcerned. Brian Devine, PETCO’s chairman, says, “Our central philosophyhere is tomaximize the sales andprofits that our vendors can generate in ourstores. If we accomplish that, they’ll be delighted with us, want to do morebusiness,andgiveusabiggerpartofthepie.”

Nearly80percentofPETCO’s sales aregeneratedbycustomersusing theirloyalty card. It’s a card that company executives say is designed to alloweveryonetowin.“Ourloyaltyprogram,”saysDevine,“isbuiltonloyaltytoourcustomersandtoourmanufacturers,andthatmakesitunique.

“Occasionally,” Devine says, “we’ll run a buy-ten-get-one-free promotionalevent.WhenacustomerbuystenbagsofScienceDietdogfood,wewon’tgivethem a free bag of anothermanufacturer’s product that paid us a promotionalfee.They’llgetafreebagoftheproducttheyliketobuy.”

Devine says the loyalty programs ofmost retailers drive him crazy. “Whenyougo intomost storesandbuyMinuteMaidorange juice, they’llgiveyouacouponforTropicana.They’reallowingonemanufacturertocannibalizeanothercompany’scustomer.Whatwealwayswant todo isprotectourmanufacturersandgrowourrelationshipswiththem.

“Forexample,”Devinesays,“ifyou’reacustomerwhobuysScienceDietorIAMS or Nutro One, you’ll only receive offers from us for that specificmanufacturer.Infact,ifsomeonehasbeenacustomerofonebrandofdogfoodfor several years and then suddenly stops buying it,we’ll go into reactivationmodeonbehalfof thatmanufacturerandsenda five-dollaroffer trying towinthemback.”

One of the other ways PETCO works to garner the loyalty of both itscustomers and its vendors is by helping vendors grow the total volume ofbusiness theydowithacustomer.“Ifwenotice thatacustomerbuysacertainbrandofdrydogfood,buthasn’tpurchasedthatbrand’sbiscuitsorwetfood,wemightgo so far as to send thema fifty-percent-off coupon for that company’sotherproducts.”

Does PETCO’s approach to loyalty work? “We generate double-digitresponse rates,”Devine says, “which is like hitting the ball out of the park indirect-mail marketing. The objective is to grow the manufacturer’s business,createloyalcustomersforit,andwhenthathappens,wewin,too.”

SolutionProvidingatKochIndustries

InapreviouschapterwedetailedhowKochIndustrieshadcreatedtwoentirelynewbusinessesoutofasphalt,oneoftheby-productsofprocessingheavycrudeoil. One of those businesses, Koch Performance Roads, Inc., (KPRI), artfullydemonstratesthevalueofgenuinewin-winsolutions.

Severalyearsago, thestateofNewMexicowasfacedwith thechallengeofupgrading Route 44 from San Ysidro to Four Corners. The highway had anotoriousreputationasatwo-waydeathtrap,andgovernmentstudiesestimateditwould take twenty-sevenyears tocomplete thewideningof the road to fourlanes,givencapitalconstraints.

Koch Performance Roads, a division of Koch Materials, came up with aproposal for New Mexico that bordered on genius. Koch entered into anagreementtoprovideinnovativepavementdesignandconstructionmanagement,backed by a long-term performance agreement or warranty. This agreementshifted the responsibility toKPRI formaintaining thepavement’sperformance

for twenty years. The state paidKoch $62million at final completion for theperformance agreement, which Koch will use to maintain the pavement fortwentyyears,andmakeaprofit.

Anotherkeyelementof thedealwasrelievingthestate’scapitalconstraints.Koch helpedNewMexico’sDepartment of Transportation use a new form ofbond financing: the stateborrowedagainst futuregas tax revenues, so it couldaffordtobuildtheroadallatonce.

ThroughKoch’sinnovativeapproach,NewMexico’sRoute44wasupgradedtofourlanesinthreeyears,savingmorethan$89millionforthetaxpayers,whogotasafer,moreefficientroadtwenty-fouryearssooner.

SolutionsOfferGenuineValueandHigherMargins

Imagine two fruit salesmen each trying to sell a bushel of apples that lookexactlyliketheotherguy’s,anddesperatelyfightingtoconvinceacustomertobuyhisapplessohecanhithisquarterlytarget.

Eachsalesmanwouldprobablypromisethattheirappleswerefresherthantheotherguy’s.Eachmightconjureuptalesofappellationsandtheorchardswheretheir applesweregrown.But to thebuyer theymight lookexactlyalike.Eachcouldpromisetosellhisapplescheaperthanhiscompetitor’sandbeforcedtowaitwhile the prospective buyer checked to find out the commodity’s currentmarketprice.

Meanwhile,whilethefirstapplesalesmanwasonthephonetryingtogetthehomeofficetoauthorizelowerpricesandthrowinahalfbushelforfree,arealsolutionproviderwouldhaveswoopedin,learnedthatwhatthebuyerwasreallyinterestedindoingwiththefruitwasmakingfruitsalad,bundledtheapplewithcomplimentary goods, presented her with the most delicious fruit salad evertasted,andclosedadealthatallowedthebuyertopaytheinvoicethedayafterthey’dreceivedtheirshipment.

Assimplisticasitis,theprecedingexampleembodiesmostofwhat’swrongwiththetraditionaladversarialsalesprocessandwhat’scorrectaboutprovidingsolutions. The traditional sales process relies on relationships, big claims and

promises, and a constantly lowering of prices. Solution providing relies onidentifyingaprospect’srealneedsandthenofferingacustomizedplanthattakesinto consideration the requirement that all parties should have their needsprofitably met. In industries that face increasing commoditization, solutionprovidingbecomesallthemoreessential.

Businesses hopeful of replicating the outstanding financial performance(increasing revenues by double digits every year for ten consecutive yearswithoutamiss)of thesecompanieswillhavetobecomeauthenticprovidersofsolutions.

ThinkBIG,ActSMALLCREATEWIN-WINSOLUTIONS

•ImplementtheRuleofNo.Noone’sallowedtosaynotoacustomer.EveryanswerthatpreviouslyrequiredanowillescalatetomembersofseniormanagementwhoneedtoexplainWhytothecustomer.

•Createseparatesalesforcesifnecessary,sothatsalespeoplehavethetimetobecomebettersolutionproviders.

•Don’tcutorcapcommissionsormakeacross-the-boardreductionsinsalesexpensestoimprovetheshort-termfinancialpicture.Itwillbringyoucertaindisasterthefollowingyear.

•Paypeopleforbringingingrossmargin—notgrossrevenues.Gettheminvestedinprofitability—notrevenuegeneration.

•Negotiateanannualrevenueandgrossprofitquotaforeveryoneandtieatleast20percentoftheirannualcompensationtotheirachievement.

•Whenmakingdecisions,makecertaintoask,“Isthisawin-winapproach?”Ifitis,goforit.Ifitisn’t,makeitone.

•Alwayssearchforothersolutionsyoucanofferyourclients.MedlineowesitsexistencetothewifeofA.L.Mills,whofolloweduponasimplesuggestionfromfriendstoconsidersewinghospitalandsurgicalgowns.

•Sharethebigdreamsforyourbusinesswithveryfewpeople.

•Sharethebigdreamsforyourbusinesswithveryfewpeople.Themorepeoplewhoknow,themorethere’llbeexpectingyoutofalloverornotmakeit.

8

ChooseYourCompetitorsPETCOANIMALSUPPLIES

“ItellourbuyersnottobuyitifWal-Marthasit,orwe’llenduplookingstupid.”

BRIANDEVINE,chairmanofPETCO

It’salmostimpossibletonameabusinesscategorythathasn’tbecomecrowded.Whether it’s home improvement, airlines, fast food, discount and warehouseretail, entertainment, software, cell phones, travel and leisure, or almost anyother category you can think of, the business universe is jammedwith peopleandcompaniestryingtofindauniquecompetitiveedge.

Companiesthattrybeingallthingstoallpeoplefinditimpossibletostandforsomething that resonates with the marketplace. Witness the generally poorperformanceandraftofcasualties in the troubleddepartment-store,cell-phone,andfast-foodindustriesduringthepastdecade.Ontheotherhand,iftheselectednicheistoonarrow,it’softenimpossibletogainfinancialtractionorbuildarealbusiness.

All the firms we identified and studied who’d significantly grown theirrevenues for ten consecutive years or longer have carefully chosen thecompetitorstheygoupagainst.

Few leaders and companies have done as well at choosing and defining aspace and selecting their competitors while thinking big and acting small asChairmanBrianDevineandPETCO,thepubliclytradedcompanyheleads.

PETCO

Justshyof$2billioninannualrevenues,PETCOisaleadingspecialtyretailerofpremiumpetfood,supplies,andservices.Averaging15,000squarefeet,eachof thefirm’snearlysevenhundredsuperpetstores in theUnitedStatescarriesmore than ten thousand high-quality pet-related items. PETCO is second tocompetitor PETSMART in total revenues, but dramatically outperforms it intermsofconsistentrevenueandoperatingprofitgrowth.

Most of the other companieswe studied startedmodestly, held on to a bigidea,andgrewduetotheperseveranceoftheirfounder(s)orfoundingfamilies.The story of PETCO is filled with the same collection of challenges thatconfrontmanybusinessesduringtheir lifespan,anentrepreneurial ideathatgotstuckandstumbled,anumberoffalsestarts,emptycoffersandunpaidbills,andmore than a few dark days. PETCO’s story has a happy ending because of abuyoutartistwhosawabigpotentialpayoffintheconsolidationofanindustry,andaspecialtyretailinggeniuswhoknewhowtoputallthepiecestogether.

TheEarlyYears

Forty years ago, one of the owners of a Missouri-based distributor of petsupplies andproductsmoved toSanDiego,California, andopenedapet storecalled UPCO, an acronym of the parent company’s name (United PharmacalCompany). Deciding that UPCO wasn’t a great name for a pet store—thinkhairballshere—butlackingthecashtoredoallthesignage,theyfiguredoutthatby adding two letters and dropping one, the name could inexpensively bechanged toPETCO.During thenext twentyyears the companybumpedalongandslowlygrewtoencompassthirtysmallstoressellingpetfood,products,andsupplies.

In1988AndrewGalef,aLosAngelesinvestor,reasoningthatthebusinessofpet food and supplies was ripe for consolidation, approached Boston-basedleveraged buyout firm Thomas H. Lee about doing a deal. Together theypurchased PETCO and quickly bought two more small chains: The PetDepartmentStores,basedinLosAngeles,andWellPet,basedinOregon.First-year revenues totaled slightly less than $500,000 per store and the chaincontinued operating under three separate names. Well Pet outlets were smallstores offering high-touch service; The Pet Department Stores were twice thesizeandofferedtwicethenumberofSKUs,andthePETCOstoreswere,inthewords of a company spokesperson, “small, down and dirty stores with abouttwenty-fivehundredSKUs,”andextremelypromotionallyoriented.

By 1990 total annual spending on pet food and supplies had reachedmorethan $12 billion but no single company—including PETCO—was doingmorethan$100million:apaltry1percentmarketshare.TheexecutivesatThomasH.Lee began searching for someone capable of turning the company around,buildingitintoanationalfirmandthentakingitpublic.TheycalledtheheadofInternationalOperations forToys “Я”Us to discuss the job, but he told themtheywere talkingwith thewrongperson and suggested they speakwithBrianDevine.

TheNewLeader

In the late 1960s an idealistic youngBrianDevinewas living inWashington,D.C.,andworkingforthefederalgovernmentonaprogramhedesignedtofightdomestichunger issues.Hesupplementedthegovernmentworkhedidforfree

bydoingpart-timebudgetingand forecastingwork for a companycalledLashDistributors.Atthetime,toymanufacturersrefusedtoselldirectlytotoystoresandwould only dealwith distributors. LashDistributorswas the name of thecompanyanenterprisingCharlesLazarussetuptosupplyhisfledglingchainofninestores.

On the sameday that thegovernment released funding forDevine’s hungerprogram,hereceivedacallfromLazarustellinghimtocometotheofficeandtalkaboutajob.“Iwalkedintothemeeting,”Devinesays,“andCharlesthrustatest at me and said that I had ten minutes to complete it. It turns out that Ifinishedthetestinlessthantenminutesandmyscorewasevenbetterthanhis.”DevineacceptedLazarus’s jobofferand joined theeightpeoplewhomadeupthehomeofficeofToys“Я”Us.

Devine spent eighteen years working side-by-side with Charles Lazarus,growingToys“Я”Usfromninestoresintwocitiesdoing$20millioninannualsalesintoa$4.5billionpowerhousethatdominatedtheAmericantoyandgamespaceinthe1970sand’80s.AfterleavingToys“Я”Usinthelate’80s,hetookthe reins at Krause’s Sofa Bed Warehouse, where he successfully generatedenough cash to allow the founding family to buy the company back. WhenPETCO called, Devine was living on the East Coast, between CEO jobs andreadyforanewchallenge.

“When the call came,”Devine says, “I’dneverheardofPETCOand calledmyson,whowaslivinginLosAngeles,andaskedhimtocheckoutthestores.Hecalledmebackand toldme itwas thegreatest storehe’deverseen, that ithadafountainfordogstoslurpwaterfrom,abakerywheretheybakedanimalbiscuitsand thathe’dendedupbuying twopuppy toys.Hedidn’tevenhaveadog.

“IflewoutonaThursday,”saysDevine,“andtheyaskedmetostayoveruntilthe following Monday so I’d be able to meet some of the people from thecompany. During theweekend, I visited about thirty stores and theywere allvery bad. The only nice one was the store my son had visited. Some peoplewouldhavebecomedepressedvisitingallthoseemptystores,”saysDevine,“butallIsawwasagiantopportunity.”

ThefollowingMondayDevineshowedupat thecompany,andit turnedoutthatmeeting someof the peoplewhoworked for the companyactuallymeantwalking into a room filled with PETCO managers and executives and

conductinganon-the-spotstaffmeeting/audition.Followingthemeeting,Devinespentahalfhouralonewitheachofthepeoplewho’dbeeninthemeetingaskingthem questions. “I wanted to know,” he says, “what was good about thecompany, what was bad, who the good and bad people were, and what theyviewedastheopportunities.”

Devinewas offered the job and received a bonus. “It turned out,” he says,“thatthepreviousteamhadcookedthebooksabitandsotheownersfiredthepresident,CFO,and theVPsofoperationsandmerchandising.Thegoodnewswas that I was allowed to bring in my own people, the bad news is that thecompanywasseriouslyunderwater.”Devineisalsoverycarefultopointoutthatsome of the people who’d been with the company in human resources andinformation technologywere very talented and are stillwith PETCO today asseniorexecutives.

OurresearchuncoverednofewerthanfifteenstepstakenbyBrianDevinethatnotonlysavedPETCO,butalsoprovided thesolidfoundationused toachievetheirremarkablyconsistentrevenueandprofitperformance.Hisactionplanisaworthymodelforallmanagers,executives,andentrepreneurscommittedtotheachievementofdramaticandconsistentrevenueincreases.

1.CreateOneBrand

“ThefirstthingIdidwaschangethenamesofallthestorestoPETCOandputthemunderthesamebrand,”saysDevine.“Itmadenosensetotrytobuildthreeseparatebrandsand try toplease threegroupsofcustomersbecausewewouldhavehadthreetimesasmanychallengesand,attheendoftheday,wouldhavefailedtobuildarecognizablenationalbrand.”

2.GainControl

“Systemsanddistributionultimatelywinthegameforyou,”saysDevine,andheimmediately moved to control inventories by installing a point-of-sale (POS)system.“Wewerescanninggoodsbackinthe1960satToys‘Я’Uswhenhardlyanyoneelsewasdoingit.Weneededtogetcontroloftheinventoriesandfigureoutwhohadwhat andhowmanyof them.”An integralpartofDevine’sPOS

systemwasautomatedpurchaseordersandreplenishmentthatpromisedthattheinventorythatwassellingwouldbeavailableinthestores.

Onthedistributionfront,Devineimmediatelyopenedadistributioncenteronthe EastCoast to complement theWestCoast facility. “Conventionalwisdomdictates that if you’re a regional business, you should grow outward,” saysDevine. “The problem with that is that as most regional companies growoutward,theirsystemsstartbreakingdown.”CreditingCharlesLazaruswiththeidea,DevinesaysheadaptedthestrategicplanfromToys“Я”Us,openingbothanEastandWestCoastdistributionfacility,determinedtofillintherestofthecountryascapitalpermitted.

3.PickYourCompetitorsCarefully

Devine’snextmovewastodeterminethespacePETCOwouldoccupy,andwhoit would compete against. “I looked at every store that sold pet food andsupplies,” he says. “I wanted to know how they were doing, how busy theirstores were, and how the stores performed financially. I needed to figure outwhatweweregoingtobe.

“There’s one major competitor,” says Devine, never mentioning them byname,“whohasalwaysusedpriceastheirsoledriver.WhenIfirstshoppedtheirstores, I saw concrete floors,merchandise stacked thirty feet high, and powerequipmentgoingupanddowntheaisleshonkingatyouwhileyouweretryingtoshop.” Devine instinctively knew he couldn’t afford to, nor did he want tocompeteinthatlow-marginspace.

To thwart the nonstop barrage of unpredictable price promotions from thiscompetitor, PETCO copied a tactic used by other retailers and prominentlybegan displaying signs within their stores touting GUARANTEED LOWESTPRICESandofferingtomatchitsprices.Fewpeopleactuallygotothetroubleofbringinginanadfromacompetingstore,andDevinefiguredthepromiseofmatchingacompetitor’spricewouldbluntthepriceattackofotherstores.

One of the lessons that’s served Devine well at PETCOwas rememberingwhat happened to Toys “Я” Us after he left. “Toys ‘Я’ Us was a specialtyretailer,” he says, “where customers would constantly walk in and exclaim‘Wow, look at this place.’ Their undoing began when they beganWal-Mart-

izing their stores andcustomerscould find the samemerchandiseatWal-Martandatalowerprice.”Lessthan1percentofthetenthousanditemscarriedinaPETCOstorecanbefoundinaWal-Mart.“Fromthebeginning,”hesays,“ItoldourbuyersthatifWal-Marthasit,don’tbuyitorwe’llenduplookingstupid.”Devine’sguidancetohisbuyersistofindbetteritemsinthesamecategorythatthecustomerwon’tmindpayingforbecauseoftheproduct’sextraattributesandbenefits.

After analyzing the percentage of grocery goods sold in PETCO’s stores,Devinequicklydecidedhewouldn’tcompetewithgrocerystoresorcarrythepetfood items they sell. “We actually threw them all out of our stores,” he says.“Thosebig twenty-and forty-poundbagsofpet food ingrocery storeshave asmuchaseighty-fourpercentwasteandfillversussixteenpercentnutrients,”heargues. “And while pets will eat a lot of it, it’s because they aren’t gettingenough nutrients. We decided we would only sell the best things to ourcustomers,andthatallowedustomakeaconsciousdecisionnottocompetewithWal-Martortheotherbigchaindiscounters.”

AsDevinecontinuedstudyingthemarketplace,hediscoveredthatcompetitorsfeaturing aquariums and fish had significantly higher traffic than stores thatdidn’tand inhis firstyearhebeganexperimenting.“Duringmyfirstyear,”hesays,“Igotpermissionfromtheboardtoopentwonewstoresandrenovatethreeothers. We took out some slower moving merchandise and replaced it withaquariumsandfishandincreasedoursalespersquarefootbyfivetimes.Anareaoffloorspace,”hesays,“thathadpreviouslyaccountedforthreepercentofsaleswassuddenlycontributingfifteenpercent.”

DevineandhisteamconcludedthatPETCOwouldbecomeaspecialtyretailerofhigherend,unique,healthy,andinnovativeproducts,offeringahighlevelofserviceandconvenience.Theydecidedthey’drefusetocompetewithstoresthatrelied only on price, with grocery stores, or with general merchandise chaindiscounters.Theymadeabetthatbyofferingawowexperiencethey’dbuildaloyalbaseofavidfans.

4.MakeHonestytheOnlyPolicy

“WhenIgothere,”saysDevine,“thecompanywasonworkoutwithourbankers(meaningPETCOwasunabletopaybacktheirloansasagreedandthebankwas

workingwiththemtowardtheobjectiveofbeingpaidoff)andonCODwithourvendors.Wewereseriouslyunderwater.”

Devinebeganmeetingwiththecompany’svendorsandhadthesamestraight-from-the-heart message for each. “I told each of them that I wouldn’t havejoinedthecompanyifIdidn’tbelievewe’dsucceedinturningitaround,thatweneeded their support and thatwhenwe asked them formerchandise to pleasesendit,andtotrustme,thattheywouldbepaid.

“We ended up building some great relationships during that time,” Devinerecalls. “IAMS Corporation had a new president, and following ourconversation,hepickedupthephoneandtoldhispeopletosenduseverythingweneededandthatwe’dpaythemwhenwewereable.Anothervendorpartneris Aspen,” says Devine. “A week before we were scheduled to send them$125,000,Icalledandtoldthemwewouldn’tbeabletopaythemnextweekasplanned and that we needed another $175,000 worth of product.” Devinefinishesthestorybysaying,“Theguyputthephonedown,calledtheCEOonaspeakerphoneandexplainedwhatwashappeningandwanted toknowwhat todo.Iactuallyheardhimsay,‘Sendhimwhatheneeds.Ifhewasgoingtostiffushewouldn’tcall.Shipittothem.’”

“Later,” Devine says, “they told us the reason they didn’t cut us off wasbecausewewerehonestwith them. Iguess itgoesback tomydaysat theoldToys‘Я’UswhereIlearnedthatwhenyou’rehonestwitheveryone,theylearnthey can rely onyou and they’ll bet alongside you that disaster can be turnedintovictory.”

AccordingtoDevine,thebankersatSecurityPacificweren’tasmovedbyhishonestyasthevendors.“Weworkedoutthebusinessplan,”hesays,“andwenttomeetwith the bankerwho’d been assigned toworkwith us. This guywasdressedincowboybootsandsuspendersthathekeptsnapping,”recallsDevine.“Hetoldus,‘I’mnot interestedinyourplan,Idon’twant to lookatyourplanandIdon’twantyouasacustomer.’”

Nottobedeterred,Devineandhisteampitchedthirtybanksandnoneofthemwouldlendthecompanyapenny.“Finally,”saysDevine,“twobankssaidyes.Wewentwiththebankthatwantedustoremainprivateinsteadofbeingrushedintoapublicoffering.”Usingtheproceedsfromthenewlineofcredit,PETCOwasabletoleaveSecurityPacificandbeginplottingforgrowth.

5.FixtheAdvertising

When Brian Devine took the helm, one of his first actions was to stop alladvertising.“Peopleprotestedandtoldmethatmillionsofcircularsandinsertshadalreadybeenprinted,”hesays.“Itoldthemtothrowtheminthetrashandatleastsavethecostsofdistribution.

“Thecompany’sadvertisinghadalwaysbeenaboutprice,”explainsDevine.“The company spent all their advertising dollars during the first week of themonthofferingdiscountedpricesonallpetfood.They’dadvertiseabagoffoodthatregularlysoldfor$28.95foralowballpricelike$19.99,andthey’dfillthestores,sellalotoffoodandnotmakeanymargin.Thenallthestoreswouldbedeadforthenextthreeweeks.Theyweredoingthesamethingthatdepartmentstoreshaddonetotheirwhitegoodsbusiness;trainingpeopletobuyonlywhentheywereonsale.

“The other problemwith the company’s advertising,” says Devine, “is thattheywerepaying for it and themanufacturerwasn’t contributing.” In theyearbeforeDevine’sarrival,PETCOhadspentmorethan$3milliononadvertisingbutonlycollected$200,000frommanufacturers.Bytheendofhissecondyear,PETCO’s advertising spending was back up to more than $3 million but thecompanywascollectingmorethan$2.5millionfrommanufacturers.“Betweenthe manufacturers paying for their advertising and the offers they wanted tomake,itrepresentedafivemilliondollarswing,”hesays.“Wewereabletoputthosedollarsstraighttothebottomline.”

Devinesayshisdecision tomomentarilystopalladvertisingwasn’tasbigariskasitmightappear.“Iknewthatcustomersweren’tgoingtochangethetypeoffoodtheirpetswereusedtoeating,thateventuallythey’drunoutandcomebackandpaytheregularprice.Withinafewweeks,IgotmyfirstletterfromaNutroFoodcustomercomplainingaboutpayingtheregularpriceandIknewwewereonourway.Bynothavingthosegiantsaleseverymonth,”headds,“withinaveryshorttimewehadthemostpredictableprofitmarginsI’deverseen.”

6.OfferaWowExperience

“From the beginning,” says Devine, “we were determined that the customer-service experience at PETCO would be both fun and exciting. We fervently

believethatifcustomershaveaneutraltopositiveexperiencewhileshoppinginour stores, they’ll come back. But a negative shopping experience,” he says,“willalwaysfailtowinacustomer.Ifastore’spricesaretenpercentmorethanitscompetitors’,butcustomershaveapositiveexperience,they’llcomeback.”

Within two years of his arrival, andwith the previous steps having alreadybeentaken,thecompanyhadopeneditsfirstten-thousand-square-footprototypestore featuring the primary colors of red, yellow, and blue for which thecompanyhasbecomewellknown,aswellasthepetfood,careitems,groomingdepartment,animaladoptionservices,birds,smallanimals,reptiles,andfishanda constant parade of customers. Theywere ready to go on a tear and capturemarketshare.

MostofPETCO’scustomersconsider themselves tobeparents to theirpetsand 70 percent are female. In an effort to provide a favorable shoppingexperience,wowtheircustomersandtrulybecometheplacewherethepetsgo,PETCO’sstoreshaveevolvedsignificantlyduringthepastdecade.Ratherthanbeing located near destination shopping centers like Home Depot or Costco,where customers tended to shop once every severalweeks, PETCO stores arelikely to be located in a community-based shopping center frequented one tothree times weekly by shoppers. Wanting stores that are easy to shop, thecompany limits store size to between twelve thousand and fifteen thousandsquare feet. They are open, bright, colorful, and odor free and have uniquefeaturessuchasdogbars,libraries,animalhabitats,andtheatricaldisplays.

7.ContinuetoDifferentiate

Itwould tempt credulity to assert thatonceDevine andPETCOhad taken thepreviouslydescribedsteps,somekindofamagical journeyto theachievementof consistent revenue growth suddenlymaterialized. Such is not the case.Thebusiness history books are full of stories of once great companies—includingDevine’salmamaterToys“Я”Us—wholosttheplotandendedupstuckinthemud.

PETCO owes its consistent financial performance to its ability to carefullychooseitscompetitors,itsmasteryoftheaforementionedbasics,anditsconstanteffortstodifferentiate.SomeofPETCO’sinnovationsweredescribedinearlierchaptersandinclude:thecompany’swillingnesstoscuttleanewdesignplanfor

itsstoreswhenastaffercameupwithabetterideaattheeleventhhour;waysformanufacturers to get their products inside PETCO stores even after thecompany’sbuyersdecidednottostockthem;andauniqueprogramdesignedtorewardcustomersforbeingloyal—nottoPETCO—buttothemanufacturer.

“Somepeoplelikethestatusquoandwanttokeepondoingthesamething,”saysDevine.“Webelievethatwehavetobeconstantlychangingandraisingthebar.Weworkveryhardnottoreacttoourcompetitor[againnotacknowledgingthem by name] but instead to react to ourselves. We are truly committed toconstantlyexaminingourexecutionandtryingtofigureoutwaystoimproveit.”DevineandanexecutiveteamheadedbynewlyappointedCEOJimMyers,whojoinedPETCOfromKPMGbeforeDevinetookover,andpresident/COOBruceHall,who has been atDevine’s side for nearly thirty years, have spearheadedthese andother initiatives; all designed to ensure continued long-term revenuegrowth.

8.Don’tLettheHomeOfficeScrewThingsUp

“We don’t have a home office,” saysDevine. “Home offices are places filledwith peoplewho get in theway of innovation and always causemore troublethan they’reworth. Insteadwehaveanationalsupportcenter.Thecompany isour collection of stores and we exist as a service to make certain they haveeverythingtheyneedtoservetheircustomers.

“The job of the national support center is to ensure that each of these‘companies’areprovidedwiththemerchandisetheyneed,customerswalkinginthe door and the training to know what to do and how to sell to them oncethey’reinthestore.Thestoresareourcustomersandourjobistoexceedtheirexpectations.

“Some retail organizationswho are forecasting a tough quarter are quick toreduce the number of employees in the stores. We would never injure ourstores,”hesaysemphatically,“sowe’dnevergetridofpeopleatthestorelevelor reduce advertising. Instead,we just don’t hire anybody here at the nationalsupportcenterandeveryoneworksalittleharderuntilwe’reovertheroughspot.The stores do it,” he repeats. “They are the company. The stores are thecompanyandmustneverbeinjured.”

9.GettheBestInformation

“Because we view ourselves as a collection of seven hundred separatecompanies,”saysDevine,“itrequiresthateachstorehasitsownassortmentofmerchandise.” He credits the company’s information systems as beingresponsible for thecompany’s routinelyachievingalmosteight inventory turnsannuallyinabusinesswherehalfthatnumberisconsideredimpressive.

Unless a company’s information systems are proprietary, they’re not acompetitiveadvantage.ThedifferencebetweentheuseofinformationsystemsatPETCOandmostothercompaniesisthatitutilizesthedatageneratedwiththeprecisionofarifleinsteadofashotgun’swidesprayofbuckshot.

“Withthedatawecollect,”saysDevine,“weknoweachindividualcustomer,exactly what they buy andwhen, andwe use our IS capabilities to keep andreactivate them if necessary.We’re not onlydoing it for us,” he says. “We’redoingitforthemanufacturer.

“Thewayweuseour information systemshasallowedus toachievehigherinventoryturnsthanWal-MartorBestBuywhilemaintaininghighmargins.”

10.ConstantlyTestNewThings

“Everyonehereatthenationalsupportcenter,”Devinesays,“isalwaystryingtocomeupwithnewproductswe shouldbe carrying, innovative formats for thestores, and unusual twists to the way we do things.We’re big testers, and ifsomethingworks in the testing stage, thenwe’ll roll it out across the nation.”PETCO’s institutionalized policy of testing first, and then rolling outinnovations, ismarkedlydifferent fromtheapproachusedbymanycompanieswho arbitrarily adopt new directions, change their entire chain, and end upsaying,“Oopsthatdidn’tworkoutasplanned.”

11.KeepYourGoodPeople

“Ournumber-onesecretatPETCO,”saysDevine,“is thatwenever losegoodpeople.WhensomeonecomesintomyofficetoresignIsimplytellthemthatIwon’taccepttheirresignationandthenIgotoworkonthem.

“I sit here and talk to them as long as it takes to have them rescind theirdecision.”Headdsthat“sometimesit’stakenaslongasthreedaysoftalkingtohavethemchangetheirmind,butgenerallythingsareworkedoutwithinonetotwodays.”

What’s Devine’s magic for being able to have someone intent on leavingchangetheirmind?

“Istartbyaskingthemiftheylikewhatthey’redoing,”hesays,“andthenIaskthemif theylike thepeople they’reworkingwithandwhether they’re inagreatindustrywithasuccessfulcompany.NextIaskthemifthey’remakingasmuchmoney as they want to make, if they like where they live, and if theirfamilyishappy.

“Thenwetalkaboutthecompanythey’reconsideringjoining.Isthatasgooda company, is that as nice a place to live andwill your family be as happy?Finally,”hesays,“Isimplyaskthemtostay,enjoywhatthey’redoing,andbehappy.

“We’ll always find away to keepgreat people,” saysDevine, “because it’speoplethatmakeanenterprisesuccessful.”

ItwouldbeincorrecttoconcludethatthequestionsaskedbyDevinetoretainthe people he wants to keep are evidence of a domineering or manipulativepersonality.Whileallcompaniesproclaimtheydon’twanttolosegoodpeople,one ofDevine’s distinct competitive advantages is that he’ll go to almost anylengthtokeepthemandmakethingsrightsothatpeoplewanttostay.

12.AlwaysBeHappybutNeverBeSatisfied

One day when Brian Devine and JimMyers had finished a businessmeetingwithsomepeoplefromoutsidethecompany,oneofthemaskedMyers,“Brian’snot happy, is he?”Myers deadpanned, “Brian’s always happy, he’s just neversatisfied!”

Devine’s indomitablewill to constantly grow, innovate,move forward, andhavefunprovideseveryonewhoworksforPETCOwithasensethattomorrowwillbeevenmorefilledwithfun,achievement,andprosperitythanthepresent.“We’re only at seven hundred stores,” says an ebullient Devine, “and we’vealreadyidentifiedonethousandfourhundredstoresites.Thatmeanswe’reonly

halfway to thegoalpost.Wecanreasonablyopenandabsorbabout fiftystoreseachyear,whichmeansthere’s lotsofworktobedoneduringthenext twelveyears.”

OnePETCOstaffersummeduphisfeelingsthisway.“I’vebeenherefortenyears and can’t imagine leaving because it’s so challenging and there are somanythingstodothatI’llnevergetitdone.AsfarasI’mconcernedthekeytolifeishavingafullplateandlotsofstufftoaccomplish.”

13.WorktoMaximizetheSuccessoftheCompany—NottheEarnings

Devinesaysthatonoccasionsomeanalystscomplaintohimabouthisnotdoingmore to maximize the short-term earnings. Devine’s response is always thesame.“We’vebeateneveryestimateforeveryquartersincewe’vebeenpublic.Butmy job is not tomaximize short-term earnings but tomaximize the long-termsuccessofthecompany.

“We try to grow our earnings twenty percent annually,” says Devine. “If Iwere so inclined I could put the screws down, fundamentally change thecompany, have a few spectacular years,make a tonofmoney formyself, andthenretire.WhywouldIwanttodothat?

“Our job,” says Devine, “is to constantly search for new ways to wowcustomers and to grow the long-term value of the company. If we do that,everythingelsewilltakecareofitself.

“Each year we build a budget,” says Devine, “and take it to the board forapproval.Thenwetell theanalystswhatweplanondoingandtheyinturnsettheexpectationofinvestors.ButonethingIalwaystelltheanalystsisthatwhenwebeattheStreet’sestimate,we’rekeepinghalfoftheadditionaldollarsinsidethecompanywhethertheylikeitornot.

“Weusethosemonies,”Devinesays,“toaddnewsystems,domoretraining,andtoincreasemarketingandthenumberofpeopleinthestores.”

14.“HugsandKisses”

“In order to keep our people happy,” he says, “we give them the unexpected.

Whenpeopledoagreatjobtheyrightfullyexpectagoodraiseandagoodbonus.But that isn’t enough.You’vegot todomore than that.”EvenBrianDevine’sHRdepartmentapprovesofhisversionofhugsandkisses.

“Eachyear,”hesays,“wepickouttenpeopleandgivethemasecondbonus,something completely unexpected. Sometimes we give them gigantic raises.Other timeswe give blocks of stock to peoplewho aren’t even in a qualifiedplan.Whateverwegive,”headds,“issignificantandmeaningful.”

FewthingsexciteDevinemorethantalkingaboutthenumberofmillionairesthatPETCOhas created.By the endof thedot-comdebacle,PETCO’s shareswere tradingat less than three times itsannualcashflow,competitorPets.comhadalargermarketcapitalizationthanPETCOeventhoughitwaslosingmorethan $100 million annually, and a decision was made to take the companyprivate.“Whenwewentprivate,” saysDevine,“theboardgavemeablockofsharesandtoldmetodistributethemtothetopfiveorsixpeople.Irebelled,”hesays.“Itoldthemthatthelistofpeoplewho’dbereceivingwasn’tfourorfivebutfifty-five.”

Fifteenmonthsafterbecomingaprivatecompany,PETCOwentpublicagain,creatingnearly$1billionofmarketvalueinthenewcompany,andDevinehadan additional fifty-five very wealthy disciples. “Only one of them has leftPETCO,”Devinesays,“andthatonedidn’tbreakanyone’sheart.”

15.TrulyPartnerwithVendors

During the interviewanddialogueprocesswithPETCO, I realized something;when thepeoplewho leadPETCOuse theword“partnering” todescribe theirrelationshipswiththecompany’svendorsandsuppliers,theyreallymeanit.

Brian Devine speaks frankly about manufacturers and buyers andrelationships with vendors and suppliers. “During my Toys ‘Я’ Us days,” hesays, “I’d have buyers sit downwith suppliers and someonewould begin themeetingbysaying,‘we’re thebiggestandthis is thepricewewantfromyou.’Myreactionwasalwaysthesame,”hesays.“Firethatperson.Theydon’tgetit.Theydon’tunderstandthattheonlyreasonamanufacturershouldgiveanybodyanythingorgrantthemanyconcessionsisbecauseofwhatyoucandoforthemtohelpgrowtheirbusiness.

“Whenyoutrytorunroughshodoveryourmanufacturers,”hesays,“you’regoingtobecomethecompanythey’re talkingabout,andif theybelieveyou’retryingtoscrewthem,they’regoingtolookforawaytopayyoubackandscrewyoufirst.”

Devine and his team passionately believe they have the best collection ofstores, most efficient information systems, best-trained people, and mosteffective marketing and advertising programs in the industry. This pridemanifestsitselfinthesharedbeliefthattheirjobisn’ttobuymerchandisefromvendorsandresellitintheirstores,butinsteadtohelpleadmanufacturerstotheachievement of greater success. If that happens, they reason, they’ll be moresuccessfulaswell.

“Backwhenwewereaprivatecompany,”saysDevine,“oneofmypartnersused to say that I torturemanufacturers.” It’s a characterizationhewearswithpride, but he also offers a modification to the description. “The truth is I dotorturethembutIdoitwithlogicandIdoitbecauseIwanttohelpthemgrowtheirbusinesses.

“We exist to drive themanufacturer’s business,”Devine says. “Ifwe knowhow tohelpa suppliermovemoremerchandise throughour stores,wehavearesponsibility toconvince them todo it.”Heoffers the followingexample:“Ifwe have a supplier selling thirtymillion annually through the stores,”Devinesays, “butwebelieve they cando an additional fivemilliondollars,we’ll sellthemhardondoingit.Theyallwanttheextramoney,”hesays,“butsomeareafraidtostepuptothepumpandcommittheresourcestomakingithappen.Wemightsuggestthattheyhavetospendfivehundredthousanddollarswithusinadvertising, marketing, placement, and demonstrations to achieve the salesincrease, and that’s where some of them get cold feet. That’s when I’moccasionallycalledin,”hesayswithabiggrin,“totorturethemwithlogicandconvince them to do it. If they don’t do it, theymight end up saving the fivehundredthousanddollarswe’reaskingthemtospendbutthey’llmisstheextrafivemillioninrevenuesnextyearandwhateverthatamountwouldbeinfutureyears.”

PETCOThinksBigandActsSmall

WhenBrianDevinetookthereinsatPETCO,heandhisteamwererequiredtobeginarebuildingprocessusinglittlemorethanthefumesofanoilyrag.Theresimply weren’t any resources. They began opening twenty-five new storesannually out of internal cash flow, carefully testing every innovation becausethey couldn’t afford amisstep. As they began growing, they continued doingbusiness as merchants committed to the success of their vendors; they didn’tbegin beating them up nonstop rounds for price concessions. They fostered acorporate spirit based on valuing the contributions of their team members,generouslyrewardingthem,andacknowledgingtheirefforts.Theytakeneithertheirmarket leadershipnor superlative financialperformance forgranted, trulybelievingthebigjobliesahead.

ChoosingCompetitors

It’stheheightofarroganceforanycompanytobelieveitcanbeallthingstoallpeopleatall timesand inallplaces.PETCOcarefullystudied themarketplaceanddeterminedwhatitwantedtobeandwhatitdidn’t.Itfounditsnicheinthemid to high end and decided not to go head to headwith PETSMART,Wal-Mart,orgrocery stores.Thatdecisionallowed it todo itsown thinganddo itbetter than anyone else without the unnecessary burden of worrying abouthavingtofaceoffdailyagainstcutthroatcompetition.

Eachof thecompanieswestudied—includingSASInstituteandDotFoods,whoinventedbrand-newbusinesses—knowit’sfoolhardyandoftenfataltorushblindlyintothemarketplacetryingtobeallthingstoallpeopleandattemptingtocompeteagainsteveryone.

ThinkBig,ActSMALLCHOOSEYOURCOMPETITION

•Don’ttrytobeallthingstoallpeople.You’llmeannothingtoanyone.

•Shoparoundandstudyeveryonedoingbusinessinthecategoryyou’reconsidering.Answerthefollowingquestions:Who’s

you’reconsidering.Answerthefollowingquestions:Who’sdoingthebusiness,whohasthecustomers,who’sgeneratingmargin,who’smakingmoney,who’sthrillingcustomersandwhatwouldittaketoimproveonwhatthey’realreadydoing?

•Don’tgoupagainstacompanywithadecidedcompetitiveadvantageandthefinancialresourcestosquashyou.

•Findaspaceyouloveandarepreparedtomakeyourlife’swork.(BrianDevine’sdisdainforhydraulictrucksbeepingtheirwaydownstoreaislesprecludedPETCO’sentryintothewarehousearena.)•Therewillalwaysbecompetitorsabletoofferlowerpricesthanyours.Figureouthowyou’llbluntanonstoppriceattackwithoutsacrificingmargin.

•Figureoutwhatwillberequiredtoownthespaceyou’reentering.Answerthequestion,“Whatbarrierstoentrywillpreventsomeonefromcomingdirectlyafterme?”

9

BuildCommunitiesSTRAYEREDUCATION

“You’llneverfindafinerbunchofpeoplethanagroupoftwenty-five-tothirty-five-year-oldswhorealizetheimportanceofeducation.”

RONBAILEY,formerpresidentofStrayerEducation

Initially,weweresobusy trying toget inside tostudyall thecompanieswe’didentified that we were oblivious to the importance of one of our initialobservationsaboutStrayerUniversity.

Webeganrevisitingourobservationwhenwestartingseeingthesamethingatall the other companieswewere studying.Eventuallywebeganwondering if,whetherbydesignoraccident,whatwewereseeinghadplayedapivotalroleinthesuccessofeachcompany.

Thedeeperwedug,themorewebecameconvincedthatoneofthesignificantcompetitive advantages shared by the companies we studied—building andgrowing communities ofworkers, customers, and fans—is a powerful practicethat some of them may not even be fully aware they’ve used to help themachievetheirremarkablefinancialperformance.Ifothercompaniescanharnessthe power of this finding, they’ll have added an extremely potent approach totheircompetitivequiver.

TheStrayerStory

For more than 110 years, Strayer Education has been in the business ofprovidingtrainingandeducationtoworkingadults,helpingpropelthemforwardontheircareerpathsandallowingthemtobecomeuniversitygraduates.

Strayerservesmorethantwentythousandstudentsonitsthirty-twocampuses

in Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee,Virginia,andWashington,D.C.Studentsat theuniversityarepursuingdegreesprimarily in fields such as accounting, business administration, computerscience,education,andhealth-servicesadministration.ThecompanyalsoofferscoursesviatheInternet.

In contrast to the hundreds of continuing education companies that havesprouted up in the past few decades, Strayer stands out for its century-longhistory and prestigious accreditation by the Middle States Commission onHigher Education, which accredits schools like Princeton and Georgetown.Despite burgeoning demand for the educational services it provides, thecompanyhaschosentogrowslowlyandsteadilytopreserveitshigheducationalquality and protect its brand. In the process Strayer has built a formidablebusinessmodel.

TheEarlyYears:ThinkingSmallandActingSmall

Inthefinalyearsofthenineteenthcentury,educationbeganblossomingontheeastern seaboard. Prestigious universities prospered, scores of land-grantcollegeswerefounded,andthefirstprivatelyownedschoolsandcollegesbeganopeningtheirdoors.

Baltimore,Maryland,wasboomingandthecity’stradinghouses,banks,andbrokeragefirmsfacedconstantshortagesofqualifiedworkerstofilltheirback-office positions. SchoolteacherDr. Irving Strayer decided to open a school inBaltimorewhosepurposewouldbetoprovidethemenandwomencomingoffthe farms with the training and skills required to work in business. Strayer’sschoolwasasuccessandby1904he’dopenedasecondcampusinWashington,D.C.,andthecollegeremainedbothsuccessfulandprivatelyownedforthenexteighty years. In 1986 Ron Bailey, the former president of Strayer University,purchased the company and the modern-day story of Strayer and its highlyattractivebusinessmodelbegan.

DramaticGrowth:ThinkingBig,ActingSmall

Ron Bailey was born in the coal fields of West Virginia and found theWashington,D.C.,areabywayofastintatanarmybaseinnorthernVirginia.Upon completion of his military service, he attended a community college,received an associate’s degree, and then enrolled atStrayerCollege,where heearnedhisbachelor’sdegree.

In 1974, having completed his graduate studies, Bailey was asked to joinStrayer’s adjunct faculty, teaching computer sciences. “My day job,” Baileysays, “wasmaking a lot of money running a computer center for a big tradeassociation,butIlovedteachingsomuchthatin1979,whenStrayeraskedmetojointhemfull-timeasaprofessor,Iquittheotherjob,tookahugepaycut,andstarteddoingwhatIloved.”

Bailey’sfull-time teachingcareer lastedforonly twoyears.“Becauseofmybackground with computers,” he says, “before I knew it I was named VP offinanceandthenputinchargeofcomputersystems.”Baileydidn’tenjoybeingan administrator, and the first timehewas offered the presidency he turned itdown.“In1986theyofferedthepresidencytomeagain,andIfiguredI’dbetter

take itbecauseIhadno ideawhoI’dendupworkingfor if I turned itdown.”Baileysaysthatwhenhetookthehelmtherewasonebigthinghewantedtodo—growthecompany.

While Bailey wanted to grow the college, the owners wanted to sell it.“DoctorCharlesPalmerlivedinCharleston,SouthCarolina,”saysBailey,“andhe and his wife, Rebecca, were both getting old, didn’t want to travel toWashington,wantedtosell,andkeptpesteringmetofindabuyer.

“I traveled all over theworld in search of a buyer,”Bailey says, “and eachtimeonematerializedtheywantedtopayforitwithanIOU.Finally,ImeeklyraisedmyhandandtoldthePalmersthatifthey’dtakeanIOUfrommeI’dbuyit.

“Doc Palmer toldme thatmy IOUwasn’t good because I didn’t have anymoney, but I told him that I thought I could raise three hundred thousand incash.”ThePalmerstoldBaileytheydoubtedhecouldraisethatmuchcash,butif he could, they’d sell him the college for five million dollars with a downpaymentof$300,000.

In 1986, at age forty-five, Ron Bailey took the largest possible secondmortgageonhishouse,cashedinhis401Kandpaid the taxpenalties,emptiedthefamily’ssavingsaccounts,soldpersonalpossessions,andcameupwiththecashtoclose thedeal.“Thingswereso tightat theclosing,”Baileysays,” thatmywifelookedatmeandaskedwhatwasgoingtohappentothecar,andItoldherweweregoingtosellitforthecashwecouldget.

“Thedaybeforetheclosing,”saysBailey,“myaccountantcalledandtoldmethat’d I’d better go back and renegotiate the deal because therewas noway Icouldmakethenumberswork.ItoldhimthatadealisadealandIhadtomakeitwork.”

Once the closing had taken place, Bailey was greeted by an empty bankaccount. “Charlie Palmer had taken out somuch cash right before the closingthatIcouldn’tmakethepayroll.Ididn’tknowwhattodo,soIaskedtheDeanandsomeotherinstructorsifthey’ddefertheirpayrolluntilthenextmonthwhenIknewwe’dhavesomecashfromtheinternationalstudentscomingin.Havingtodothatwokemeup,”hesays,“andyoucanbelievethatIneverhadaproblemwithpayrollagain.”

Between the accountants’ telling him he was in big trouble and missing a

payroll,Baileysayshewasscared.“Iwasliterallyscaredstraight,”hesays,“andIbeganworkingeightyhoursaweektomakeitwork.”Hesaysthathetrackedhowmuchwaxthejanitorsusedonthefloorsandcountedeverysheetofpaper.Bailey’sperseverancepaidoff,andinlessthanfiveyears,he’dpaidthePalmerfamilytheir$5millionandownedStrayerfreeandclear.

“I’dfiguredoutsomethingswhileservingaspresident,”saysBailey.“First,Iknewwehadtohavethehighest-qualityproductandtakethehighroad,whichrequired gaining regional accreditation. We had to put the schools wherestudentsliveandofferclassesintheeveningwhenourtargetstudent—theadultworkeragedtwenty-fiveandover—couldtakethem.

“I started branching out as fast as I could and never forgot the accountantwho’dtoldmeI’dnevermakeit.Ijustkeptrunningandopeningasfastascashflowpermittedwhilecontinuingtoofferthehighest-qualityproductpossible.”

In 1995 Bailey decided to take a breather and stopped opening additionallocationsforoneyear.Hewasamazedatwhathappened.“Thecashkeptrollingin,”he says. “All the locationswereprofitable andbecauseweweren’t facingtheexpensesassociatedwithopeningnewcampuses,andthecashbeganpilingup.The cashwas like a train that kept running,” he says, “and I didn’t knowwhat to dowith it.”One thingwas certain.Hewanted to repay those facultymemberswho’ddeferredtheirpayrollwhenhewasunabletopaythemandhewantedtosharethewealth.

In 1996 Bailey took Strayer Education public and allocated a big block ofstock for the school’s employees. “Someof the deanswho’d agreed to skip apaycheck ended upwithmore than amillion dollars,” he says, “and everyonereceived a prorated number of shares. I had janitors come up and thank mebecause they’d received enough shares to be able to buy a home.” Strayer’spublic offering handsomely rewarded its employees, raised $30 million forschoolexpansion,andmeantthatBaileywasworth$60million.

By2001theschool,whichhadgrownfromsixhundredstudentstomorethansixteen thousand under his leadership, had achieved amarket capitalization ofabout$300million,andacombinationoffactorscausedBaileytodecidetosellhisremaining60percentofthecompany.“Ididn’tlikedealingwithanalystsandanswering their stupid questions,” he says. “And I didn’t enjoy running thecompanyforthebenefitofagoodquarterlyreport.”

ButitwasacaseoffoodpoisoninggonefrombadtoworsethatcausedBailey

to decide to sell. Now fully recovered from the disease, Bailey says, “Whenyou’relyingparalyzedinahospitalbedformonthsstaringupattheceiling,yourealizehowimportantfamilyandfriendsare,andalltheotherthingsyouwanttodowithyourlife.”

MaintainingMomentum:ThinkingReallyBigandContinuingtoActSmall

ThepeoplewhopurchasedBailey’sstockareagroupofprivateequityinvestorsheaded by President and COO Robert Silberman, whose previous positionsincludeservingastheassistantsecretaryofthearmyintheGeorgeH.W.BushadministrationandasCEOofCalEnergy,Inc.

“We studied the revenue and profitability growth ofmany industries,” saysSilberman, “and after carefully examining secular trends we decided that theeducationspaceiswherewewantedtomakeanacquisition.Strayerwasoneofthe few publicly traded companies that provided an opportunity for anacquisition.”

Frequentlywhen an outside group takes control of a company, the existingcultureisabandonedintheinterestofexpediency,andtheacquirersroarthroughthe organization making wholesale changes in order to quickly boost thecompany’searnings.Silbermandidtheopposite.

“As amanagement team, the current administration has nothing but respectandgratitudeforRonBaileyandwhathebuilt,”saysSilberman.“He’soneofthenation’sgreatentrepreneurs.Herecognizedavitalneedinthemarketplace,”saysSilberman,“positionedStrayer tooffer the finesteducationavailable,andthenbuiltaremarkablebusinessmodel.”

ThefollowingfactorsarelargelyresponsiblefortheextraordinarilysuccessfulStrayerbusinessmodel.

1.It’sNotCapitalIntensive

“ThemodelthatRonBaileyperfected,”Silbermansays,“doesn’trequireoutside

capitaltogrow.Wecanexpandindefinitelyoutofinternallygeneratedcashflowwithout ever going back to the capital markets.” As each additional campusbecomesprofitable,thecompanyisabletoopenanother.

2.MoreDemandthanSupply

Fortheforeseeablefuturethere’smoredemandinthemarketplacethansupply.“Aperson’s lifetimeearningsroughlydoublewhen theyhaveacollegedegreeinsteadofonlyahighschooldegree,” saysSilberman,“yetbetweensixty-fiveandseventypercentofworkingAmericanadultsinallzipcodesdon’thaveone.As the nation shifts from a manufacturing-based economy to one that’sknowledge based,” says Silberman, “there’s this huge burgeoning need for abachelor’soradvanceddegreethat’sonlyaccelerating.”

3.ChoosingCompetitors...Again

SilbermanexplainedStrayer’sniche.“Privatelyfundedandstate-rununiversitiesdon’t have the capacity or time to focus on working adults,” he says. “Theirfocus is on eighteen-to twenty-four-year-olds, graduate programs, and majorresearch programs.” Silberman also doesn’t see community colleges or theextension programs offered by state universities as competitive threats.“Communitycollegesareagreatentrypoint forpeople,”saysSilberman,“butthey only offer associate degrees. What can anyone do with one of thosedegrees?Mosttraditionaluniversitieshavesomeformofnighttimeprogram,”hesays,“but it simply isn’t their focusandmanyworkingadultsaren’thappyontheircampuses.”

4.AHighlyDesirableProduct

While a host of other privately owned colleges and universities competewithStrayer for available student dollars, most lack its prestigious academicaccreditationandtherespectthatadegreefromStrayerrepresents.

5.AClearMissionandFocus

Strayer’sothermajoradvantageisitsstrongsenseofmission.“Ourmissionisasimple one,” says Silberman. “We’re building a nationwide university systemthatmakesitpossibleforworkingadultstogetahigh-qualitycollegedegree.”

In order to ensure that it stays focused, Strayer is divided into two distinctentities.ThebusinessisrunbyVPs;theacademicsideisheadedbythedeanoftheuniversity.EachreportstoSilberman.

“There are about a dozen people who work in this office with me on thebusinessoftheuniversity,”saysSilberman.“Butonceyougetoutsidethisofficeallourresourcesarecommittedtodeliveringanexcellentacademicexperience.We’renotanenterprisewillingtosufferanydiminutioninquality.

“Every interactionbetweena student andanadmissionsofficerorprofessorhas to be first-rate and exceed the student’s expectations,” says Silberman.“We’re hyper focused on making certain that every campus lives up to thequalitythatwebelieveisrequiredofaprestigiousdegree-grantinguniversity.”

6.BuildandNurtureCommunities

During our study of Strayer we noticed there were a number of distinctcommunitieswithintheorganization.

The first community we observed is composed of the students of theuniversity. They are for the most part working adults returning to school tocomplete a universitydegree.Whatmakes thema community are their sharedattributes,includingastrongdesiretoadvancethemselvesintheircareers;theirneedtoreconcilethedemandsofwork,school,andhome;apreviousfalsestartonthepathtodegreecompletion;andasenseofcamaraderieastheyhelpeachotheralongtowardtheachievementoftheirdegrees.

There’s another community composed of faculty. Becoming a professor atStrayerisaplumpositionbutnoteasilyaccomplished.First,anapplicantmusthave a graduate degree in a specific area and then successfully serve as anadjunct faculty member for five years before being considered for aprofessorship.Manyfull-timefacultymembers,whoearnbetween$60,000and$80,000 annually, maintain full-time academic positions or business careerselsewhereduring theday (the schoolonlyconducts courses in the evening forthe convenience of their students) and professorship is the only route to

becomingacampusdean,regionaldean,orprovost.Thesharedattributesofthiscommunity’smembers are that theymust fervently believe in the university’smission, be prepared toworkwithout tenure, and come to termswith the for-profitnatureoftheenterprise.

Other communities at Strayer include the business area of the university,composed of people committed to deliver return on capital to Strayer’sshareholders, and the alumni,whom Strayer counts on to return for advanceddegreesandtobeasignificantsourceofreferrals.

SenseofBelonging

In the course of our research, we found communities every place we looked.BesidesthecommunityofstudentsatStrayerworkingtocompletetheirdegrees,there was the community of customers ready to pull out their wallets andproudlyshowoff theirCabela’screditcardas thoughannouncing residency inanexclusivesuburb.InCary,NorthCarolina,itwastheofficecampusofSAS,which is a functioning communitywith schools, soccer fields, restaurants, andmedical services. PETCO’s community is the millions of loyal card-carryingPALSmember/animalparentsandattendeesofPETCOParkandSonic-DriveInsbecomecommunitiesbyvirtueofbeingthegatheringplacesinthesmalltownstheyserve.

Eitherintentionallyorbyluck,theleadershipofthesecompaniessucceededinfillingoneofitsworkers’andcustomers’mostbasichumanneeds:theneedtobelong.

Abraham Maslow’s original hierarchy of needs argued that once people’srequirementsforsustenanceandsecurityhavebeenmet,theirnextbiggestneedis a sense of belonging.Many recentmedical and psychological studies haveproven his theory and contend that when people feel a sense of belonging,they’rehappier,healthier,andevenlivelonger.

Predictably,whentheyfeelastrongsenseofbelonging,customersaremorelikelytoremainandspendmoreandemployeesaremorelikelytostayputandontask.

Maslow’sHierarchyofNeeds

DavidPitonyak,PhD,authorofTheImportanceofBelonging,says,“Peoplearehotwiredtobelongtogroupsandcommunitiesthatacknowledgetheirexistence,accept them, provide security and companionship and help them define theiridentity. That’s why people belong to fan clubs; go to churches; wear sportsmemorabilia; and join associations, political parties, and even street gangs.People’sneedforan identity issogreat they’lldoalmostanything to feel liketheybelong.”

Communities are any group of peoplewho come together to associatewithothers who share similar values or interests. By becoming members of acommunity,peoplereduce their feelingsof isolation,enhance theirconfidence,reinforce their beliefs, and gain access to others who are looking to have thesameneedsfulfilled.

It’shardtoleavebehindthecommunitieswherepeoplehavespentenjoyabletimesandsharedgratifyingexperiences.Infact,theneedtobelongissostrongitcalls people back thousands of miles to class reunions and hometowncelebrations; causes rabid sports fans to travel for hours and wear sillyStyrofoam head gear resembling giant pieces of cheese (Green Bay Packers);andisthegluethatcausesmillionsofmilitaryveteranstogatherinclub-houses

around the country to reminisce. Few people willingly abandon communitiesthatnurtureandvalidatethem.

Imaginehowconsistentacompany’sfinancialperformancewillbecomeonceits workers and customers view themselves not as workers and buyers of aproduct or service but as full-fledgedmembers of a community that fills theirneedtobelong.

OtherExamplesofCommunity

Cabela’s

In some circles hunting and even fishing have become politically incorrect.“Huntingandfishingaresometimescalledbloodsports,”saysMikeCallahanofCabela’s,“andthepeoplewhopracticethemareknownasthehookandbulletguys.Increasingly,it’sbecomealmostunacceptabletotalkabout.Youprobablywouldn’tgotoacocktailparty,andtellpeopleyou’djustbeenoutduckorelkhuntingandoffertoshowthempictures.

“We’vebuilt thesegreatstoresso thatsomebodywhohasan interest inanddevotiontotheoutdoorsandhuntingcanwalkinandgo,‘Ah,thisismykindofplace;thesearemykindofpeople;theyknowandunderstandhowIthinkandfeel.’”

DotFoods

MountSterling,Illinois,hometoDotFoods,isarareandwelcomeexceptiontotheblighted conditionsofmany smallmidwestern towns. It’s vibrant, healthy,andgrowing.The2000cityresidentsandthe8000peoplewholiveinthecountyare rightfully proud of a downtown whose storefronts are occupied, wherecompeting banks anchor all the street corners, the Irish House Hotel acceptsguests,andthemostpopularmenuitematTheStation,thebusiestrestaurant,isthe Horseshoe, a hamburger buried beneath a huge pile of french fries,smotheredwithmeltedcheese.

Rather thanmove the company to an urban area,where successful businessowners gravitate, and despite the challenges associatedwith staffing needs ofmore than one thousand people at their main distribution facility, Dot FoodschosetoremaininMountSterling.“MountSterlingiswherethecompanywasfounded,”saysCEOPatTracy,“andthebiggestsinglethingwe’vebeenblessedwitharewonderfulemployees.There’sastrongworkethichere.Peoplearen’tafraidofhardworkandthey’recommittedtotakingcareofourcustomers.”

Dot Foods works hard to repay the loyalty of their workers by generouslydonating timeandmoney to the town.Whenaneedsstudyfor thecommunityindicatedthatoneofthearea’sgreatestnecessitieswasarecreationalfacilityandcommunitycenter,theTracyfamilyandDotFoodsprovidedboththeleadershipandfunding tobuildanewYMCA.Thecompanydivides itsbankingbetweenmost of the banks downtown, makes certain its vendors and suppliers (andvisitingauthors)stayatthetown’shotel,andevenworkedbehindthescenestoensure there’d be a community swimming pool, an airport, and a parochialschoolintown.BecauseMountSterlingisgeographicallyisolated,thecompanyeven built a learning center onsitewhere people can take university extensioncoursesandearncollegedegrees.

MountSterlingwouldn’texistinitspresentformwithoutDotFoodsandDotFoodswouldn’t exist in its present formwithout the communitywhere itwasfounded. In the caseofDotFoods andMountSterling, Illinois,we found twocommunitiesgrowingtogetherinasymbioticrelationship.

SAS

SAS is consistently named one of the top companies to work for by everyorganizationthatconductspollsonthesubject.ArecentPriceWaterhousestudyofemployeeturnoveramongsoftwaredesignersandengineersrevealeda16-25percentaverageannualrateofvoluntaryturnover(dependingontheyear),butatSASit’slessthan5percent,oraboutfourtimesbetterthanthenationalaverage.Yet the average annual compensation is the same at SAS as the industryaverages.ClearlypeopleremainatSASforsomethingmorethanthemoney.Wethink it’s the sense of fulfillment that comes with being part of the SAScommunity.

InanAugust2004article,theWallStreetJournalreportedthatananalysisof

more than 150 studies on wealth and happiness (authored by Ed Diener andMartin Seligman, psychology professors at the Universities of Illinois andPennsylvania, for the journal Psychological Science in the Public Interest)concludedthathappinessdoesn’tcomefromwealthormoneybutinsteadfromsocial relationships, enjoyable work, a sense that life has meaning, andbelongingtogroups.

Withitsthirty-five-hourworkweek,SASprovidesemployeesplentyofextratime for social relationships and community involvement. Individualachievementatthecompanytakesadistinctsecondplacetogroupvictories,andworkers are lavished with benefits that include a cafeteria with a pianist,Montessori child-care centers (whose costs average only $300 permonth), aneighty-thousand-square-footfitnesscenter,andanonsitefreemedicalcenter.

CommunityextendstocompanyactivitiesofftheSAScampusaswell.EachSAS office has the same feeling of community. Even the thousands of userconferences andnewcustomer conferences they conduct eachyear around theworld aredesigned tomakepeople feel likevalued communitymembers.Theunspoken message is distinct. SAS, its workers and customers, are a specialcommunity of smart and enterprising people who quietly and humblyaccomplishincrediblethingsforoneanother.

SonicDrive-In

InmanysmalltownsacrossAmerica,thelocalSonicDrive-Inisoneoftheonlyrestaurants, becoming the de facto community gathering place for everythingfromfirstdatestomeetingsofthelocalLittleLeague.Whenpeoplewhogrewup in small towns move to urban areas, it’s only natural to continue makingurban Sonic a big part of their life; memories were made there, tastes weredeveloped, and good timeswere had. Sonic also has a loyalty program calledSonicCruisers thatprovidese-mailupdates,discountcoupons, andevents thatnurturetheconceptofcustomersasacommunity.

Sonic has done a superb job of turning their vendors and suppliers into acommunity.According toCEOCliffHudson,“Ourpartnersarealways invitedto companymeetings and retreats. Their long-term interests are so alliedwithourownthat itonlymakessense to includethem,makethemfullparticipants,andactivelysolicittheirinput.”Thevendorsandsupplierswespokewithview

their relationship with Sonic with near reverential awe, wondering why othercompaniesdon’tgetitandworkwiththeirvendorsandsuppliersthesameway.

Sonicencourageseachrestaurantmanagertoalsobeanowner.Asaresultthetownsandcitieswheretherestaurantsarelocatedbenefitfromhavingsomeoneactivelyinvolvedinthecommunity.Sonicfranchiseespicktheirownlocalcivicand charitable causes and are involved in activities ranging from awards toencourage young kids to read, incentives to keep older kids in school,participationinblooddrivestoaidRedCrosschapters,highwaytrashpick-ups,andprogramstopromoterailroad-crossingsafetyawareness.

One of the most important communities at Sonic is the more than sixtythousand people who work inside the restaurants. And there’s nothing thatexcites former president Pattye Moore as much as talking about how thecompany has used an innovation known as Sonic Games to foster a sense ofcommunityamongthecompany’steammembers.

“Our advertising partner Barkley Evergreen and Partners came up with aprogramthatcombinedtraining,recognition,andmotivation,”saysMoore.“It’sourequivalentoftheOlympics.”

Each yearSonic’s three thousand restaurants receive a huge box filledwithinstructions and training materials for each restaurant’s seven work stations;Switchboard(whereordersare taken),Swamp(fryer),Grill,Dresser,Fountain,Carhop, andManager. Each local manager coordinates their own contest thatincludeswrittentests,timetrials,andaKnowledgeBowlwhereinterviewerscallthe stores and ask the staff on duty a series of questions. Each store’scompetitioneventuallyidentifiesitsmosttalentedcrew.

Simultaneously,mystery shoppers visit all the stores and evaluate and rankthembasedontheirspeed,service,andqualityandreducethenumberremainingin competition. Eventually, following regional and semifinal competitions, thetwelve top-performing teams are notified of their status when a busload ofpeoplefromheadquartersshowsupattherestaurant,tootingthehornandarmsfilledwithprizes.ThetwelvebestteamsaresenttoacitylikeLasVegaswhereadrive-inisshutdownfortwodayswhilethefinalstakeplace.

“The finals are the best,” says Moore. “On the first day we judge teamcompetition and there are judges dressed in referee uniforms and our regionalpeople and vendor partners serve as customers and simulate a lunch rush foreachteam.Theteamsarescoredfororderaccuracy,foodqualityandsafety,and

correctingorders.Oneof the things I love todo,”saysMoore,“is throw trashoutmywindow and see if the Carhops on skates pick it up and earn or losepoints.”Theseconddayof thegamesfeaturesindividualcompetition,withtheevent capped off by a huge awards ceremony where everyone is paraded onstagewearingtheirteamjerseys.

“Thisisaonce-in-a-lifetimeexperienceformostofthesekids,”saysMoore.“Mostofthemhaveneverbeenonanairplanebefore,andthey’rebeingwhiskedofftojetsettoVegas.”AndtheSoniccommunity’sbondsgrowtighter.

CommunityMembershipTrumpsMereSatisfaction

A decade ago, after studying hundreds of thousands of customer servicerelationships, Harvard professor Earl Sasser, the author of Why SatisfiedCustomers Defect, concluded that “two-thirds of customers who stop doingbusiness with a company describe themselves as being satisfied.” Sasser’sresearchprovedthatmeresatisfactionisanindicationofneitheranintentiontoremainacustomernorrepurchase.

Sasser went on to provide insights as to what is required to ensure thatcustomers continue doing business with a particular company. “Completesatisfaction,” he says, “is the key to generating intense customer loyalty andsuperior long-term financial performance.” Just as managers and businessowners canno longer counton satisfiedcustomers remaining loyal, there’snoguaranteethatworkerswhoaremerelysatisfiedwillremain.

Afewyearsago,beforemyturntospeaktoagatheringofthetopexecutivesofVerizon, one ofAmerica’s largest telephone companies, a presentationwasbeingmadebyMichaelFernandez,thefirm’sresearchdirector.

In his opening comments he introduced himself as a former ColumbiaUniversityandMITmathematicianandthecompany’scurrentheadofresearch,butaddedthatbasedonhisfindings,henowthoughtofhimselfasaborn-againcustomeradvocate.Thenheproceededtoexplainhistransformation.

Oneofhisfindingswasthatnearly46percentofthecompany’scustomers—thosewhodescribedthemselvesasbeingsatisfied—wouldconsiderleavingthe

company if they received a switch pitch or slightly better offer from acompetitor. In a quiet and unassuming manner, he pointed out that any firmwhereamajorityofthesatisfiedcustomerscouldbesoeasilyconvincedtoleavewasextremelyvulnerable.

Hisnextfindingwastheshowstopper.Hisresearchconsistentlyindicatedthatfewerthan5percentof thecompany’scustomerswhodescribedthemselvesascompletelysatisfiedwouldconsiderleaving.

“It’simperative,”hesaidinconclusion,“thatwemustdowhateverisrequiredto move customers from the satisfied category into the completely satisfiedcategory,orelseourveryexistenceisatrisk.”

To their credit, the executives of the company listened to what he said,implemented the action plan he recommended, and todayVerizon enjoys lesscustomer churn than all other phone companies and consistently records thehighestlevelsofcustomersatisfactionasmeasuredbyoutsideresearchgroups.

A major focus of any business’s customer-and employee-satisfactioninitiativesshouldbeaddressingtheissueofwhetheritisfulfillingpeople’sbasicneed to belong.The financial success of the companieswe identified stronglysuggeststhatcompanieswhoseemployeesandcustomersconsiderthemselvestobemembersofadesirablecommunitysignificantlyoutperformthosewhodon’t.

ThinkBig,ActSMALLBUILDCOMMUNITIES

•Recognizethatpeople’sneedsforbelongingandsocialfulfillmentaretwoofthemostpowerfulhumanneeds.

•Identifygroupsofnaturalcommunitieswithinyouremployeeandcustomerbases.

•Figureoutwaystoacknowledgeandvalidatethesecommunities.

•Createloyaltyprogramsthatstrengthentheseties.•Determineothercommunitieswhocouldbecomeyourcustomers.

•Buildplanstogrowcommunities,notrevenues.

10

GrowFutureLeadersO’REILLYAUTOMOTIVE

“Our future leadersarehomegrownwithexperienceandknowledgeoftheoperation,aheavydoseofcommonsense,andastrongcommitmenttoourculture.”

DAVIDO’REILLY,cochairandCEOofO’ReillyAutomotive

Thecompanieswestudieddon’thireoutsideCEOsandallowthemtotinkerorplay around with their culture. They haven’t brought high-profile cost cuttersaboardasCOOsandCFOstoartificiallyinflateperformanceandbrieflyplacatethebankersorWallStreet.Andthey’veneverhiredoutsidesaleswizardswhoselegions of cozy relationships promise tomagically improve the next quarter’sfinancialperformance.

The companies that do the best job of consistently growing revenues growtheirownleaders.Period!

Theirperformanceproves thatunlessacompany isupsidedownorabout todriveofftheedgeofacliff(andadesperaterollofthediceistheonlyremainingoption),anenterpriseisfarmorelikelytoachieveconsistentrevenuegrowthbyrelying on homegrown leadership than by casting about for sorcerers withmagicalanswers.

There’snobetterexampleofacompanythat’sconsistentlygrowntheirownleadershipthanO’ReillyAutomotive.

Alistofthecompany’stopfifteenleadersrevealsthattheiraveragelengthofservice exceeds twenty years,with nonehavingbeenwith the company fewerthannineyears,andmanyformorethanthirty.

Based in Springfield, Missouri, this publicly traded company has twelvehundredautopartsstoresineighteenstates,achieved$1.7billioninrevenuein2004,isontrackforarecord$2billionin2005,hasplentyofroomforgrowthandexpansion,andblowsawaythecompetitionwithitsconsistentrevenueandfinancialperformance.

TheO’ReillyStory

Bornin1885,CharlesFrancisO’Reillywasthesonofimmigrantparentswho’descaped the potato famine in Ireland and settled in St. Louis, Missouri.

Followingcollege, he joined an auto supply companyas a traveling salesman,selling auto parts to stores and automobile dealerships. Traversing hismidwestern territory by train, he became enamored of the small city ofSpringfield,Missouri(population57,000atthetime)andwasconvincedthatitwas destined to grow and prosper. He asked to be transferred to Springfield,eventually becoming the manager of the local automotive parts supply storewherehewaslaterjoinedbyhissonChubO’Reilly.

Everything turned out theway Charles had hoped. Springfield’s populationdoubledandsubsequentlytripled.Thestorethatheranprospered.Thefamily’schildren and grandchildren were born, raised, and did well. In 1957, whenCharles was seventy-two years old, the home office sent a consultant toSpringfield to review the store’s operations and made two surpriserecommendations:getridoftheoldguyandtransferthesontoKansasCity.

Mostseventy-two-year-oldmenwouldprobablyhavetossedinthetowelandretired, butCharles got his dander up and decided to open a competing store.Alongthewayhe’dmetaninvestorwhoagreedtoputupmostofthemoneyinreturnfor49percentownershipofthecompany.HissonChubjoinedhimasacofounderandthetenkeyemployeesofthestorehewasrunningaskedtojoinhimaswell.Charlesagreedtohirethemallononecondition:anyonejoiningthenewcompanyhadtomakeaninvestmentandbecomeanowner.

TheEarlyYears

DavidO’Reilly, current cochairmanandCEOof the company,wasonly eightyearsoldwhenthefirststoreopened,butvividlyrecallstheeffectofeveryone’sbeing anowner. “Whether they investedonehundreddollars or a thousandorhad to takea loanagainst theirhouses,mygrandfather required theymakeaninvestmentinthefirm.Ididn’tunderstandwhatIwaswitnessingatthetime,”headds, “but everybody treated thecompany like itwas theirown.Theyworkedlate, did whatever had to be done to find a part for a customer, drove partshalfwayacrossthestateiftheyneededto,anddeliveredonSundayandholidaysifacustomerneededsomething.”

Fifty years ago the idea of requiring ownership of all employees was an

almostunheardofpractice,andwewonderedwhathadledCharlesO’Reillytoinstitute such a policy. “Mygrandfather truly appreciated and valued people,”says O’Reilly, “and he genuinely wanted them to share in the success of thebusiness.” In fact, decades later, when the first ten employee/owners beganretiringandthecompanystartedbuyingbacktheirstock—thosefewhundredorathousanddollarseachhadinvested—theirprofitsturnedouttobesufficienttogenerouslyfundtheirretirements.

“Foryears,”saysO’Reilly,“oursloganwasthatthecustomerisking.Wehadit on our letterhead and signs everywhere, andwe really do believe that. ButwhenI’mwithagroupofnewmanagers,Ilettheminonasecret.Itellthemthatwhatwereallybelieveisthatifwetakecareofourownpeoplefirstandvaluethemaboveeverythingelsethatsuperlativecustomerservicehappensnaturally.”

CEO David O’Reilly’s grandfather Charles died in 1971, having seen theoriginal store grow to a half dozen, generating several million dollars inrevenuesannually.O’Reilly’s father,Chub, isninety-twoand longretired,andhisbrothers,LarryandCharlie,andsister,Rosalie,retiredintheirlatefiftiesorearlysixtiesandnowserveontheboardofdirectors.O’Reilly,youthfulandfitinhismid-fifties,willbethefinalfamilymembertoheadthecompanyandhesteadfastlyrefusestotakecreditforitssuccess.

“There’s absolutely zero room for egos when you’re a family building abusinesstogether,”saysO’Reilly.“Mybrothers,sister,andIarecompetitiveandverystronglydriven,”hesays,“butwe’veneverhadroomforheroes.Notoneofushaseverclaimedtobethekeydriverresponsibleforoursuccess.Infact,weall take pride in our accomplishments together. Our rule has been,” he says,echoing what we’d witnessed at Cabela’s,Medline, and Dot Foods, “that wereachdecisionstogetherasagroup,andwhenevertherewasafamilymeetingitwouldn’tenduntiltherewasunanimousagreementastoourcourseofaction.”

DavidO’Reillyworked in thestores throughout juniorhighandhighschoolandthenattendedandgraduatedfromDruryUniversity,asmall,fourthousand-student liberal arts school in Springfield. Though a practicing Catholic,O’Reilly’s years of study at an institution founded in 1873 by theCongregationalist Church to heal the wounds of the Civil War and offer athoughtful liberalartseducationtostudents,regardlessoftheirgender,race,orcreed, show through. Following graduation the prospect of big-city life luredO’Reilly to Kansas City, where he joined Southwestern Bell’s management

developmentprogram.

“Withinayear,”saysO’Reilly,“I’dfiguredoutthatIdidn’twanttobepartofa big, bumbling, bureaucratic bunch of red tape where I couldn’t make adifference and decided to come back to Springfield and join the familybusiness.”At the time thecompanyhad four locationsandO’Reilly’s first jobwasworkingonthecountersellingparts.Hisnextstopwasthetelephonedeskwherehe took customers’ orders.Thiswas followedby a stint developing thecompany’sfirstcomputersystemandeventuallyajobassalesmanagerforthecompany.

One of the ways that the company consistently grew their revenues in theearlyyearswas through their jobberbusiness; theyconvincedothersmallautopartsstoresinruralMissouritopurchasetheirinventoriesfromO’Reilly.

GainingNewCustomers—OneataTime

“I’d go out with the salespeople,” O’Reilly says, “learn about the challengesthese small businesspeople faced, their dilemmas and what made them eithersuccessful or unsuccessful.” Given his grandfather and father’s deeply rootedbeliefthatthemoresuccessfultheircustomerswere,themoresuccessfulthey’dbecome,itwasn’tlongbeforeO’ReillyAutomotivewasperformingvalue-addedservicesunheardofatthetime.

“Back in themid-1970s,”he says, “oneof thebiggestproblems these smallstores had was that local accountants knew nothing about inventory, cost ofgoods sold, andgrossmargin.As a result they’d endupwithhorrible-lookingfinancialstatementsandthebankswouldn’tloanthemmoneyforinventories.”

O’Reilly addressed these needs by agreeing to do the accounting for thesesmallstoresandlendthemmoneyforinventoriesifrequired.“Wechargedthemtwenty-five dollars a month and actually did a profit and loss and financialstatementforthemandevencosignedloansattheirlocalbankssothey’dhaveinventoryintheirstores.

“Asweslowlybeganexpanding,”saysO’Reilly,“westayedoutoftheareaswhere we had independent jobber customers, but when these stores owners

decided to sell or retire, we were the natural buyers. We knew how muchbusiness theydid,howprofitableeachwas, the strengthsof theirpeople, theirmarket presence, and what the business was worth.” Eventually O’ReillyAutomotive went on to purchase more than two hundred stores from ownerswhoseoriginalrelationshipwiththecompanywasasabuyerofpartsfromthem.

O’Reilly credits the various jobs throughout the company that he, Larry,Charlie, and Rosalie had as teaching all of them an invaluable lesson thatpreparedeachfortheireventualroleasCEOand/orCOO.

“A big problem with many leaders,” O’Reilly says, “is that they haveunrealisticexpectationsbecausetheylacktheknowledgeofwhat’sreallygoingon in their organizations. A company can have a great business plan andstrategy,butifitsoperationsandinfrastructurecan’thandlewhatitwantstodo,itwon’tbesuccessful.”

By the late 1970s, David O’Reilly had become general manager of thecompany,Larrywasheadingsales,andCharliewasmanagerofstoreoperations.Withthe lessons they’dlearnedandanewdistributionfacilitycompleted, theydecidedtheywerereadyforsomeseriousgrowth.

ThinkingBigandGettingReadyforGrowth

“We all realized the company had some real potential,” saysDavidO’Reilly.“We’d been growing slowly and consistently but finally decidedwe could domoreofwhatwe’dbeendoingandfaster.”In1978thecompanymadeitsfirstacquisition: a group of seventeen stores in the Lake of the Ozarks region ofMissouri.

“Oneofourbigcustomersdecidedtosell,andweboughtthemandconvertedthemtoO’Reillystores.”O’Reillyfinancedtheacquisitionbygivingthesellerasmalldownpaymentandhavinghimagreetotakeanoteforthebalance.

O’ReillyAutomotivehasalwaysbeenextremelyfinanciallyconservative.“Itwasn’tlongbeforetheNewYorkinvestorGrandfatherhadfoundwantedtostarttaking lots of cash out of the business,” says O’Reilly, “which would havepreventedusbuildinga solidcompany. I still recallmygrandfatherand father

goingtothebankandborrowingthecoupleofhundredthousanddollarsittooktogetridofhim.

“Back then,” says O’Reilly, “the family thought that debt representedsomethingbad.Itwasasthoughyoumustn’tbedoingthingsrightifyouhavetoborrowmoney.”DavidO’Reillyearned$7,000annuallywhenhejoinedthefirmin 1972 andwell into the 1980s was only being paid $30,000 annually. “Weknew,”he says,“that theonlywaywecouldcontinue togrowwas tobeveryconservative,payourselvesa livingwagebasedonourperformancebutnevertakeoutsomuchmoneythatitwouldhurtthebusinessoritsprofitability.”

O’Reilly’sstrategyforacquiringstoreswas topay thesellera fairpricebutalways in the formofadownpaymentas smallaspossibleandanote for thebalance due that the company then worked feverishly to pay off in as fewmonthsaspossiblebeforetakinganothergulpandbuyinganotherstore.

ThesameyearthatO’Reillywascompletingitsfirstmajoracquisition,italsomadeabolddecision that,had itbeenhandledbadly,mighthaveupended thecompany.Insteaditworkedoutwellandchangedthedirectionofthecompanyforever.Theydecided topursueadualmarketing strategyandsellnotonly totheirexistingcustomers,buttothepublicaswell.

“Until1978weneverpursuedretailbusiness,”saysO’Reilly.“Ourcustomersweregarages,servicestations,cardealerships,andbusinessesthatinstalledpartsandtheydidn’twantussellingdirectlytothepublic.Theythoughtthatallcar-owningcustomersbelongedtothem,notus.Weknewthefuturemeantsellingdirectlytothepublic.”Gettingintoretailrequiredhavingtwothingshappen:thestoreswouldhavetobemerchandisedforthepublicandtheircurrentwholesalecustomersplacated.

“Our stores were clean,” O’Reilly says, “but they were essentially drabwholesale part supplyhouses.Weearnestly began a campaign to cleanup thestores,makethembrighter,remodelthemasrequired,putinbetterlighting,andadd consumer-oriented maintenance product lines and merchandise thewindows.” But dealing with their wholesale customers was a bigger job thanrenovatingthestores.

“Getting into the retail business represented a huge learning curve for us,”O’Reillysays.“Manyretailcustomerswouldcomeinthinkingthey’dgetalowpriceandthentakeittooneofourwholesalecustomersandaskthemtoinstallit.The first question the installerwould ask themwould be howmuch they’d

paidforit.Iftheinstallerfoundoutthattheretailcustomerhadpaidthesameorlessthanthey’dpay,weriskedlosingtheirbusiness.”

O’Reilly performed a tough balancing act and resorted to asking retailcustomersiftheyweregoingtoinstallthepartthemselvesortakeitsomewhereelse for professional installation. Salespeople were trained to set the priceslightlyhigherthanwhattheinstallerwouldpayforcustomerstakingtheparttoaninstaller.

“Educating our installer customers was vital,” says O’Reilly. “Our pitch tothem was simple.We explained that we were getting into the retail businessbecausewehadto;thatbusinesswasbecomingmoreandmorecompetitiveandthatwewouldn’tbeabletomaintainallourlocations,ourvastinventories,ourtraining, and thirty-minute delivery to them unless we were also involved inretail.”

Begrudgingly at first, most wholesale customers eventually acceptedO’Reilly’sexplanationandthecompanysalvedtheirwoundsbypromisingthemthey’d always receive a better price in return for the installer’s promise ofcontinuedvolume.

In addition to buying existing stores, the company continued opening newlocations, and finally in 1987 the competitive O’Reilly family, tired of beingchidedfor runningachainofstores insmallMissouri townsandneverhavingfaced a competitive environment, made their first venture into a competitivemarketandbeganopeningstoresinKansasCity.

“Weopenedtwostores,”saysO’Reilly,“andfromdayonetheywerethebestperformingstoreswe’deveropened.Theirrevenuesskyrocketedandtheymademoneyoutofthegate.WestartedopeningstoresinKansasCitylikecrazy,andwithin three years had fifteen stores doing extremely well. It was a hugeaccomplishmentanditreinforcedthatwecouldcompeteanywhere.”

It tookmore than thirtyyears,but in1989 thecompany finally reachedonehundredstores.“Weneverhadavision,”O’Reillysays,“ofhowbigthisthingcouldbecome.Weneverhadacertainnumberofstoreswewanted tohit.Welovedwhatweweredoing,thecompanywasprofitableandwewerebecomingconsistently better operators. We always agreed that we’d grow consistently,steadily,andprofitablyandseewhereitwouldtakeus.”

MakingEveryoneanOwner...Again

By the early ’90s the company had 127 stores but faced two new challenges.“Youhavetoremember,”O’Reillyrecalls,“thatthecompanyhadbeenfoundedontheprincipleofeveryone’sbeinganowner.Eachyearduringourfirstthirtyyears,wetrackedthebookvalueofthecompany’sstock,andastheoriginaltenowners retired the company bought their stock back from them. When mygrandfather died, my dad bought his shares and as a result ended up owningalmost all the stock in the company.” To avoid tax problems, ChubO’Reillystartedgivinghisstockawaytohischildrenandgrandchildren.“Dadwasgivingaway his stock like crazy,” O’Reilly says with a smile, “and said that all hewantedwastomakeenoughmoneytogetby.

“The problem his gifts to children and grandchildren posed,” saysO’Reilly“wasthatifanyofthosepeoplewantedtosell theirstock,thecompanywouldhavebeenforcedtobuyitbackfromthem.Becauseweweresobusyexpanding,wedidn’twanttohavetouseourcashreservestobuybackstock.

“Theotherproblem,”saysO’Reilly,“wasthatbecausethebookvalueofthecompany kept going up significantly each year, there were fewer and fewerpeople who could afford to buy shares. In order to make people feel likeowners,”hesays,“wehadaphantomstockappreciationprogramforkeypeople,wheretheircompensationreflectedthegrowthinthevalueofthecompany.Theproblemwiththatprogramisitstillwasn’tactualownership.”

In April 1993, thirty-six years after the company had opened its doors forbusiness, it went public. The joint concerns of a familymember’swanting tocash-out and causing a liquidity problem and the desire to make ownershipavailableforeveryoneweresolved.

Whensomecompaniesgopublic,everythingchanges,andinmanyinstances,not for the better. Cultures are abandoned in the interest of saving money,analystsworkovermanagement to slashexpenses in the interestof short-termprofit growth, and CEOs frequently become more enamored of hanging withself-importantmembersoftheinvestmentcommunitythanrunningthebusiness.O’Reilly argues persuasively and strongly that just the opposite occurred atO’ReillyAutomotive.

“Going public was the best thing that ever happened to us,” says David

O’Reilly. “We didn’t change our culture at all,” he says. “In fact, it just gotstronger. Because we’re so competitive we’ve always held ourselvesaccountable,butwhenwewentpublicwewantedtooutperformeveryoneelseinourpeerandindustrygroups.Ourresponse,”hesays,“wasaredoublingofoureffortstobeaccountablebecausewefeltthewholeworldwaswatchingus.Thatrequiredourturningtoourroots,ourculture,andperformingbetterthananyoneelse.”Today,everyteammemberatO’Reillybecomesastockholderwithinsixmonthsofworkingforthecompany.

O’Reilly’soriginalpromisetoWallStreetwasthatthecompanywouldgrow20percentannuallybetweensame-storesalesincreasesandnewstoregrowth—and ithaskept itspromise. In1998O’Reillydoubled thesizeof thecompanyandadded189storeswhenitcompleteditsfirstmajoracquisition:thepurchaseofTexas-basedHi-LoAutoParts.Threeyearslatertheyaddedanother85storeswhentheypurchasedall thestockofMid-StatesAutomotive.ByJanuary2003the companyhadopened its one-thousandth store and is currently addingnewstoresattherateof12to15percentannually.

Takethefactthatthere’sstillplentyofgeographicroomforgrowthandaddthekeencompetitivespiritoftheorganization’sleadership,andyou’llseewhyoneofthekeyareasofconstantfocusisgrowingfutureleaders.

O’Reilly’sStepsforGrowingNewLeaders

O’ReillyAutoPartsheraldseightvaluesandinitiativesthatdeepentheirbenchbyprovidingleadershipdevelopmentfortheirteammembers:

1.LeadbyExample

JimBattenwas a fifteen-year-old schoolboy growing up inBolivar,Missouri,whenO’Reillypurchasedalocalpartsstorethere.Hiredtoworkpart-timeinthebackroom sweeping up the floors and stocking parts, Batten vividly recalls alargedeliveryofpartsarrivingaccompaniedby thenCEOCharlieO’Reilly.“Icouldn’tbelieveit,”hesays,“themanwhoownedthecompanytookthetimetocometothebackofthestore,introducehimself,shakemyhand,andthankme

forbeingpartofTeamO’Reilly.”

TodayBattenservesastheexecutivevicepresidentoffinanceandCFOofthecompany and says that it’s the authenticity, the utter lackof pretense, and thehumilitythatmakepeoplewanttostaywiththecompanyandbecomejustliketheleaderstheyseeeveryday.

“IfsomeonewantsameetingwithDavidO’Reilly,”saysBatten,“theygetit.There’snothingintheculturethatpreventsanyonefrommeetingwiththeCEOorbeingforcedtogothroughlayersofhierarchytoarrangeit.”Battenbelievesthatwhenteammembersconsistentlywitnesssuchhumilityandopenness,theyeventuallyaspiretomakethestyletheirown.

“It’saboutleadershipbyexample,”Battensays.“WhenDavidO’ReillyandItraveloutof town together forameetingorconference,we’ll sharea room tosavemoney,”he smiles and says, “andwe seewho’ll be the first tomakeoffwiththeextrabarofsoap.”

2.ProvideaStrongOperationalandCulturalOrientation

Every manager of an O’Reilly store spends a week at the home office inSpringfieldundergoingrigoroustraining,andthefirstthingthey’retaughtistheO’Reillyculture.“Weteachthemourculture,”saysDavidO’Reilly,“butcultureisn’t something you can just go into a room and talk about. Everyone in theorganizationhastoliveit,eatit,andbreatheit.”

3.MakeEverythingaTeamEffort

One of David O’Reilly’s fondest memories is the way the company selectedlocationsfornewstores.“We’vealwaysbelievedthattwoheadsarebetterthanone,” saysO’Reilly, “sowhen itwas time to pick a new location, TedWise,GregHenslee(currentlycopresidentsofthecompany),mybrothers,andIwouldallpileinavantogetheranddrivehundredsofmiles,jointlydecidingwherethenewstoreswouldbe.

“ThosetripswerethemostfunI’veeverhad,”saysO’Reilly.“We’dbeontheroadnightafternight,butbesidespickingnewstore locations,we’dtalkaboutthepeopleinthecompany,therolespeoplewereinandthestructure.Bytheend

of one of those trips,” he says, “we’d always figured out and agreed oneverythingthatneededtobedone.”

Collaborative decision making is still the style at O’Reilly and peoplegenuinelyfeelasthoughthey’relistenedtoandcontributory.“In2001wehadastrategic planning session with the top forty people in the company,” saysO’Reilly,“andsomeonefloatedtheideathatitwouldbegreatfuntodoubleourbusinessfromonebilliontotwowithinfouryears.Everyonehadtoagreetobeonboardorwewouldn’thaveselecteditasagoal.”

Imagine thepowerofeveryexecutivewithin thecompanysharing the samebigobjectiveand theeffect thatkindofdecisionmakinghasonpeoplewithinthe organization;most peoplewith any aspirationwould instinctivelywant tobecomepartofsuchacollaborativeprocess.

4.AcknowledgeandKeepInformed

Manycompaniespublishanemployeenewsletter.O’Reillypublishesamonthlyfull-color glossy magazine titled Team Spirit that ranks among the bestleadershiptrainingtoolsevercreated.

Distributed to every team member, the magazine has features about thecommunity and civic activities thatO’Reilly stores are involved in, aswell asstories on the accomplishments of individual stores, and explanations ofcompany benefits in easy-to-understand language. It contains important newproduct information, features pictures and biographies of team members;provides pictorial essays on the vacated, locked-up, and shut premises of thecompetition;acknowledgesgraduatesofthecompany’sleadershipdevelopmentprogram; provides updates on the company’s financial performance and shareprice;announceswinningsuggestionsbyteammembers;liststheGold,BronzeandSilverShamrockawardwinners;andannouncesmarriagesandbirthsamongtheteam.It’salmostimpossibletoreadanissueandnotwanttobeamemberofTeamO’Reilly.

5.ConstantlyEvaluateandCoach

Theoldsaying“Goodwritersborrowandgreatwriterssteal”hasn’tbeenloston

O’Reilly Automotive. “Since our earliest days,” says David O’Reilly, “we’vestudiedthegoodthingsthatothercompaniesdoandthenO’Reilly-izedthemtofitourculture.”Oneof thosethingsisanO’Reillyvariationofaperformance-evaluation gridmade well known to the business community by JackWelch,former head ofGE.Everyone on theO’Reilly team is ranked annually by thepeopletheyreportto.

“Theverticalaxishasallourvaluesonitandthehorizontalaxisiscomposedof the specific job’s performance criteria,” says O’Reilly, “and it works verysimply.Ifsomeone’sagreatperformerbuthasbadvalues,andfindsthemselvesinboxnumbertwo,wecounselandworkwiththemtogetthemintoboxnumberfour.Similarly, ifsomeonehas thevaluesbutdoesn’tproduce,wecoach themintoboxnumberfour.”

Though primarily used as a coaching and development tool,The O’Reilly

CultureGrid

DavidO’Reillyisquicktopointoutthatonlyteammemberswhofunctioninboxfourhavealong-termfuturewiththecompany.“AlthoughweusetheO’Reillyculturegridasacoachingtool,”saysO’Reilly,

“eventuallysomepeoplehavetobetoldthatifthey’renotinboxnumberfour,they’rewiththewrongcompanyandtheysimplydon’tbelonghere.”

6.MakePeopleWanttoStay

Anyonewho’severworkedinretailknowsthatmostoftheindustrydeservesthebad reviews it receives regarding the treatment of its workers. Other thanshowingthemhowtoswipebarcodesandcreditcards,salespeopleonthefloorare often viewed as disposable nuisances by the home office. Storemanagershave traditionally been seen (and paid) as little more than irritations hired tounlockthedoorsandmakesurepeopleonthefloordon’trobthejointblind.

Oneofthebiggesttricksperpetuatedbymanyretailorganizationsistosendafaxtoastoremanagerthethirdweekofthemonthannouncingthat thestore’sbudget for hourly workers has been used up, and informing him that, as themanager, he’ll fill in, resulting in sixty-to eighty-hour workweeks for thesalariedmanager.

Whenmostcompaniessaytheyvaluetheirworkers,there’sabigdisconnectbetween what they say and what they do. Jim Batten, CFO, says that whenO’Reilly says it values people itmeans it. “Even our storemanagers have setschedules,” he says, “and although theymay be asked towork for a half dayeveryotherSaturday,wewantour teammembers toenjoyqualitynonworkingtimewiththeirfamiliesandintheircommunities,aswellasbeproductivewhentheyareworking.”

Between the $45,000 to $60,000 a store manager can make running anO’Reillystore, thegeneroushealthanddentalbenefitshereceives,andhisfullparticipation in thecompany’s401Kprofit-sharingandstockoptionsprogram,it’snotinconceivable,ifthestockcontinuesitscurrentrateofappreciation,thathecouldretireasamillionaire—afeatalreadyachievedbysometeammembers.

7.HaveEveryoneIdentifyTheirSuccessor

“Our leadership training is very broad basedwith no specific secret formula,”says David O’Reilly. “We provide management and leadership training inassorted formats: written information, videos, and centralized personnelseminars,butthemostimportantthingwedoischallengeallseniormanagementtotargetanddevelopsuccessorsfortheirjobs.

“The actual development of the successor certainly includes leadershiptrainingintheconceptualsense,”saysO’Reilly,“butthemostimportantstrategyis to challenge potential leaders with increased levels of responsibility and

operationalduties.Inotherwords,wetesttheabilityofleaderswithreal-worldaccountability.

“AtO’Reilly,” he concludeshis thoughts on the subject, “our philosophy isthatfutureleadersaremostlyhomegrownthroughexperienceandknowledgeoftheoperation,withaheavydoseofcommonsenseandastrongcommitmenttoourculture.”

8.KeepDoingIt

One of the most striking things about O’Reilly Automotive is the length ofserviceoftheirkeyexecutives,storemanagers,andteammembers.Besidestheaverage key executive having been with the company for more than twentyyears,eachissueofTeamSpirit listspageafterpageofpeoplewhohavebeenwiththecompanyforten,fifteen,twenty-five,andeventhirtyyears.

Theresponsesofeveryonewespokewith,atalllevelsofthecompany,astowhythey’vestayedwith thecompanysolong,essentiallyechoedthewordsofDavid O’Reilly. “Part of it is the sense of accomplishment you receive frombuilding something that positively impacts other people. It’s also a way tochannel my sense of competitiveness,” he says, “and in my case I also feelresponsibletocontinuetheworkthatmyfamilywasfortunateenoughtobegin.”

GoingForward

What does the future hold forO’ReillyAuto Parts?DavidO’Reilly says thatadding stores at the prodigious rate ofmore than 100 annually is a challenge.“Oursisapeoplebusiness,”hesays,“andattheendofthedaywehavetohavethe rightpeoplemanaging the stores, the rightpeoplebehind the counters andtherightlocations.

“Eachofthoseissues,”hesays,“posesauniquechallengeandwehavetostayontopofeachofthem.Ourrealestatedepartmentispullingouttheirhairaddingmorethan100storeseachyear,”hesays,“butIrememberwhenwewerepullingoutourhairwhenwewereaddingfiveortenannually.”

The twelve hundred O’Reilly stores are located only in eighteen states. Isthere tremendous room for growth in the other thirty-two states? O’Reillyanswers a resounding yes. His response as to whether there might be fivethousand stores spanning the nation one day elicits a far more thoughtfulresponse. “Could it happen? Sure. We just won’t make that prediction. Thepotentialistherebutwe’remuchbetteratknowingwherewe’llbeintwoyearsthaninfiveorten.”

O’Reillysaystheindustryisdominatedbysixkeyplayersandthatthefuturemay very well include additional consolidation. As to whether O’Reilly is aconsolidator or consolidatee he responds strongly. “We’re definitely aconsolidator.”

HowOtherCompaniesGrowFutureLeaders

DotFoods

“Our leadership development program,” says John Tracy, president of DotFoods,“beginsbypopulatingourbusinesswithgreatpotentialleadersbothfromwithinandoutsidetheorganization.

“We’re always on the lookout,” he says, “for the great all-around athlete,whetherornotwehaveaspecificpositionopenatthetime.Whenwefindthemwefindawaytohirethemandattachthemtotheorganizationinsomeway.

“Bydoingthat,”hesays,“wealwayshopetohaveastableoftalentedpeopletoserveasour future leaders.Eachof them,”hesays,“hasaprofessionalandpersonal development plan that’s reviewed and updated annually. Theprofessionalsidefocusesonpursuingspecificformalobjectivesandchallengesinherareaofresponsibility.Thepersonalfocusesonspecificthingssheisgoingtodo to increaseher ownpersonal horsepower through training, development,andformaleducation.

“Oursuccessionplanningprocess,”saysTracy,“whichisconductedannuallyby our strategic planning group, assures that all of our future leaders receivegoodvisibilityinfrontofthepeopleresponsibleforrunningthebusiness.Then,”hesays,“wecross-pollinateouremergingleadersbymovingpeoplearoundthe

company so they’ll develop a broader experience base, improved teamworkapproach,andgreaterknowledgeofthebusiness.

“Whilewealsotrytocreateenvironmentswheretheyhaveeveryopportunitytosucceed,”hesays,“wealsoencouragethemtotakeriskssotheirconfidenceisfurtherenhancedandfuturerisk-takingmorelikely.”

MedlineIndustries

Medlineembracesseveraluniquetacticstodeveloptheirfutureleaders.

Atmost companies, people are reluctant to give notice of their intention toleaveforfearofbeingviewedasashorttimerortraitorandquicklycastaside.Indramatic contrastMedline encouragespeoplewhoare retiringor leaving togivethemplentyofnotice.

“Inoneinstance,”saysMedline’spresidentAndyMills,“ourdirectorofsalesgave us five years’ notice, and our CFO, director of quality and regulatoryaffairsandourVPofmarketingbothgaveusthreeyears’notice.Thisallowedus to groom their successors,” he says, adding that “in some instances, thesuccessor was trained for as long as eighteen months. Occasionally, we’vebroughtinthewrongreplacementbutstillhadtheluxuryofhavingmorethanayeartofindtherightperson.

“Another thing we do,” says Mills, “is cross-train people. We do this forseveral reasons, but most important, it makes people better managers andleaders.

“Anotherthingwedo,”Millssays,“isconstantlysearchfornewbusinessestoenter.Bydoingthiswegivepeopletheopportunitytogrowandtakeondifferentroles,andinmanycasesmoreresponsibilityandrewards.

“Finally,” says Mills, “another thing we’ve done that has workedexceptionally well is our President’s Award, given for the achievement ofexcellentresultsbyoursalespeopleineachregion.Insteadofsimplygivingthewinnersaniceplaquetohangonthewall,webringtheminasagroup,spendseveraldaysfindingoutfromthemwhatweneedtodobetterasacompany,andhavethemhelpustomapoutourfuture.It’sagreatworkingsessionandwaytogetsomeofourawardwinnersinterestedinfuturemanagementpositionsinthecompany.”

SonicDrive-In

Cliff Hudson, CEO of Sonic Drive-In, says, “Few things growmanagers andleadersasmuchasresponsibilityandempowerment,andweworktoaccomplishthisontwoparalleltracks.

“Inourrestaurants,”hesays,“ourstore-levelmanagersareourpartners.Theyshare in the initial capital investment, and then share profits and losses alongwith us. They are empowered to take care of customers flexibly and are notcappedontheirfinancialupsidefordoingso.

“Vitally important,” says Hudson, “is that every corporate employee hasequityownershipinourcompany.Wehaveastockpurchaseplaninwhichthecompany subsidizes purchases of our common stock by employees. Ourcommonstockisanoptioninour401Kplanandeveryemployeereceivesstockoptions.”

Hudson believes that Sonic’s approach to business lends commitment andloyalty that, in turn, invites a level of engagement in the business that mostemployersdon’tapproach.“Whenwe’velostseniormanagementpersonnel,”hesays, “we’ve filled those positions almost completely from within our ownranks.”

Iftheproofofthetastingisinthepudding(oratSonic,inabananacreampieshake) it appears to work. The company conducts an annual anonymousemployeeopinionsurvey.Themostrecentonedemonstratesthat96percentofitsemployeessaytheyintendtobeemployedbySonicDrive-Intwelvemonthsinthefuture.

ThinkBIG,ActSMALLGROWFUTURELEADERS

•Eliminatethedisconnectsbetweenthecompany’sproclamationofhowimportantpeopleareanditsactualpractices.Otherwise,theorganizationwon’thaveanycredibilitywiththerightfutureleaders.

•Conductananonymousstudyofyourteamtolearnhowmanypeopleplantobewiththeorganizationinthefuture.The

peopleplantobewiththeorganizationinthefuture.Theresultsreceivedwillidentifyleadershipneeds.

•Leadershiptrainingmustincludelearningthemission-criticaloperations.Otherwise,futureleaderswon’tknowwhatcanbedoneandwhat’simpossible.

•Aspiringleadersshouldspendatleasthalftheirtimeindirectcontactwithcustomers.

•Don’tovercompensateyourselforsucktheenterprisedry.Otherwise,thatlarcenousexamplewillbesetforfutureleaders.

•Makesuretheprospectiveleadersfittheculture.Iftheydon’t,youdon’twantthem,evenifthey’rehighproducers.

•Allowpeopletogivenoticeoftheirintentiontoleavefarinadvance.You’llhavemoretimetoreplacethemandfurtherdemonstratetheorganization’scommitmenttopeople.

•Cross-pollinate,movepeople,constantlyincreaseresponsibility,andencouragerisktaking.

SECTIONTHREE

TheQuadASELF-EVALUATIONANDRANKING

Facedwithinformationsaturation,mostpeopleseekoutsimpletruths:maximsand symbols tomake sense out of complexity.That’swhynations have flags,productshavelogos,andcompanieshavebrands.Thesesymbolsaredesignedtoserveaspowerfulmentaltriggersthatcalltomindcollectivepriorexperiences.

As we wrote this book we were literally overwhelmed by the inspirationalstories and ideas we uncovered. We amassed a huge volume of operatingstatistics,terrificanecdotes,stories,andideasandbeganwonderingifwecouldtakenearlytwoyearsofresearch,thousandsofpagesofinterviewtranscriptions,andreamsoffinancialdataandcompressthemalldownintoaneasysymbol.

InmypasttwobooksI’veavoidedtheuseofcharts,butthistimemyfindingswarrantasymbolworthyofinclusion.Itbreaksdownthetitleofthebookintofourscenarios,eachrepresentedbyaquadrant.

FourPossibleScenarios

TheQuadservesasaneasyreferencepointforeachoftheBuildingBlocksofleadershippresentedthroughoutthebook.

In thefollowingpageseachof theBuildingBlocks isreintroducedwith twoshort scenarios about the way your organization may think or act. From thescenarios offered, select one that most closely describes the way yourorganizationthinksandonethatbestdescribesthewayyourorganizationacts.

Thecombinationofyourtwochoiceswillyieldoneofthefourresultsabove,whichcorrespondstoasquareofthequadrant.Foreachofyourtenresponses,placean×onthecorrespondingquadrant.

TheQuad

BuildingBlock1DowntoEarth

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peopleherelackanaspirationalgoal.Theyarecontenttopunchtheclockanddotheday-to-daywork,butlackabigcausetorallyaround.

ThinkBig:Wemaintainabalancebetweenaspiringtowardabigcauseandstillnailingthebasics.Wearenotsoobsessedwiththebiggoalthatwelosesightofbeingdown-to-earthonadailybasis.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Differentdepartmentszealouslywithholdinformationfromoneanother. People shift blame from themselves to others and denyaccountability.It’salmostimpossibletoscheduleameetingwithanyoneandthereisnoeasywayofaddressinggrievancesorproposingchange.

ActSmall:Weworkwitheachotheronaninformal,collegialbasisthatallows for greater information flow. This prevents bad news fromremaining a secret, only to cause larger problems in the future. Peoplereceiveencouragementandrecognitionfromthosearoundthem.Likeina small community, the contributions of each individual member arerecognizedandappreciated.

BuildingBlock2■KeepYourHandsDirty

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peopleonlyfeelresponsiblefortheirjobdescription.Theydon’tseethevalueinventuringoutsideoftheirownterritoryatworktounderstandwhatotherdepartmentsaredoing.

Think Big: We realize that the overall success of the organization isdependent on having everyone knowledgeable about how each

departmentfunctionstogether.Workersandmanagersseethemselvesaspartofateamthatmustcooperatetomaketheentireprojectsucceed.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Theleadershiphaslittleideaaboutwhatisgoingonatthefrontlinesofcustomercontact.They’reoutoftouchwiththechallengesfacedbyworkers,delegateallcustomerservice toacrisiscontrolcenter,andattempttostayabovethefray.

Act Small: We promote a culture where people understand how oneanother’scontributionsplayaroleinthesuccessoftheoverallcompany.Weanticipateoneanother’sneedsandcross-traintocovermultipleworkfunctions,thusmakingusmoreadaptabletochange.Ourclosenesswithsuppliersmakesthemvaluedbusinesspartnerswhohaveasmuchstakeinoursuccessaswedointheirs.

BuildingBlock3Short-TermGoals,Long-TermHorizons

Select one of the following scenarios that best describes the way yourorganizationthinks.

Think Small: People are so focused on hitting quarterly numbers thatthey temporarily pumpup sales at the expense of themedium-to long-termhealthofthecompany.

ThinkBig:We realize that ourmedium-term (two-year) plans provideaspirationalguidance,buttheywillnotbeachievedwithoutconsistentlyexecutingnumeroussimultaneoussoundstrategiesonadailybasis.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Peoplearecomplacent that the futureof thecompanywillbestableandprosperous.Sincetheybelievethebattleisalreadywon,they

slackofftodaybecausetheythinktheyarepartofarisingtidethatwillachievesuccessregardlessoftheirindividualeffort.

Act Small:We realize that strategy is not a destination but a journey.Lastyear’sstrategymayberendereduselessbasedongeopoliticaleventsorindustryshakedowns.Wearealwayshoningthestrategybasedonnewinformation and executing the small steps every day that will take usthere.

BuildingBlock4LettingGo

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peopleinourorganizationstubbornlyadvocatethestatusquo as opposed to trying anything new. They don’t want to give newideasachancebecause theyhaveapersonalstake in theoldway, theiregoisontheline,ortheydon’twanttoloseface.

ThinkBig:Werealize thatover the longtermtherewillbechanges inthetypesofgoodsandservicesweprovide,andthatlettinggoofthepastissometimesnecessaryinordertomoveforward.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Oneofourproductsorserviceshasbeendeadforyears,butwecontinuetopropitupforthesakeofholdingontoitsgloriouspast.Somanypeopleareinvolvedthatit’sdifficulttocometoaconsensusaboutamajordecisionbecausethere’salwaysavocalminoritywhostandstolose.

ActSmall:Weconstantlyreviewourproductsandservicestomakesuretheyarecompellingandmovingforward.Wekeeptrackofproductlife

cyclesanddon’twastetimedefendingoldideasiftimewouldbebetterspentpursuingnewones.Wepreservethebenefitofasmallorganizationinwhich the performance of the overall group is better understood byeach teammember, and people are less inclined to cling to bad ideasbecause they can closely observe the real impact of their misguidednotions.

BuildingBlock5HaveEveryoneThinkLikeanOwner

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peopledon’tfeelliketheircontributionsarerecognizedorrewarded.They lackmotivation to improve theway theywork or findways of being more productive because there is a poor alignment ofincentives.

ThinkBig:Werealizethatoptimizingeveryone’sperformanceleadstovalue creation, which in turn drives the success of both ourselves andthosearoundus.Weholdourselves toworld-classperformancemetricsandregularlyself-evaluatetodiscoverareasforimprovement.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Ourorganizationhasbecomeoverlyhierarchicalandpeopleareseparated into functional silos. People are only concerned with thesuccessof theirownteamordepartment,at theexpenseof thegoalsofthe total organization. People are influenced by the opinions with theloudestvoice,ratherthanthesoundestlogic.

Act Small: We have incentives for people to create value and theyreceive due recognition for their achievements. We promote cross-

functionalitysothateveryonecanhelpeachotherdotheirjobbetter.Wetakesmallfailuresinstrideandrealizethat theyareanecessarypartoftheexperimentaldiscoveryprocess.

BuildingBlock6■InventNewBusinesses

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peopleareoverconfidentthatourbusinessmodelisrobustfortheforeseeablefutureanddon’tseeanyneedtocriticallyevaluateitormodifyit toadapttochangingconditions.Theythinkthataslongaswekeepdoingwhatwedobestandflyundertheradar,we’llbefine.

ThinkBig:Werealizethattoday’scashcowscouldbecometomorrow’shamburgers.Thelong-termsuccessofourgroupisreliantonusalwaysseekingwaystoimprovewhatwedoandinnovate.Weacknowledgethatsome of our smallest revenue centers of today could be reinvented tobecomebrand-newleadingbusinessunitsofthefuture.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Sincewehave largemarketshareanddecentmargins,peoplefocus all of their energy pitching today’s cash cows and don’t allocateanytimeandinvestmentinR&Dtofindthenextcashcalf.

Act Small: We have implemented systems to constantly evaluate ourcapabilitiesandseehowtheycouldbeexpandedtoenternewrealms.Wepaycloseattentiontocustomerneedstofindwaysofexpandingtobetterserve them.Wearen’t afraid to refocusoureffortswhencircumstanceschange.

BuildingBlock7CreateWin-WinSolutions

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peopleviewvendorsandsuppliersascoststobesqueezed.They don’t care about their success so long as they continue to offerdiscountsandperks.Peoplewanttostructuredealsthesamewaythey’vealwaysbeendone.“Ifitain’tbroke,don’tfixit.”

ThinkBig:Werealizethatpeopleworkharder,createmorevalue,andaremoreloyalwhenthey’vebeendealtwithfairly,andkeepthatinmindwhenstructuringdealsthatbenefitbothourcompanyandtheirs.Givingasupplierabiggerpieceofthepieononedealmaylowerourshort-termprofits,butwillgeneratemanytimesthatvalueinlong-termgoodwill.

Select one of the following scenarios that best describes the way yourorganizationacts.

Act Big:We hardball our vendors and suppliers to get them to lowertheir prices, threatening to abandon them if they don’t give in to ourdemands.

ActSmall:Wetreatourbusinessrelationshipsasstrategicpartnershipsthat benefit both sides.Wemaintain strong long-term relationships byhelpingeachother realizeprofitablegrowth.We fight commoditizationthrough differentiation, learning true customer needs, and tailoringsolutionstomakeahighervalue-addedoffering.

BuildingBlock8ChooseYourCompetition

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:Peoplethinkthatmanyothercompaniesbesidesoursofferbasically thesame thing thatwedo,but theycling to thehope thatourcustomers will be loyal to us, even though our larger competitors canundercutus.

ThinkBig:Werealizethattherearealwaysnewnichecategoriesinthemarket to seek out and enter. We know the challenges of competingsolelyonpricewithcompetitorswhocanalwaysundercutus.Occupyinga niche gives our brand an identity that customers can identify with,which allows customers to develop deeper appreciation and loyalty.Through our creative differentiation, we earn the right to charge apremium, since we indeed offer a better, more unique product and/orexperience.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Ourcompanytriestopleaseeveryoneandhasstrayedfromourcorecapabilitiesintoactivitiesthatstretchustoothin.Wearecompetinginfields inwhichwedon’thaveacompetitiveadvantage,forcingus toworkthatmuchhardertokeepupwithourmorefocusedcompetitors.

ActSmall:Wefrequentlyreevaluateourcapabilitiesanddiscusswaysinwhich we can develop unique offerings that set us apart from ourcompetitionandplaceusinacategoryofourown.Wedon’tfightbattleswecannotwin,insteadlookingforbarrierstoentrythatwillprotectourniche.

BuildingBlock9BuildCommunities

Select one of the following scenarios that best describes the way yourorganizationthinks.

Think Small: People who work here don’t feel a strong sense ofaffiliationwiththecompany.Theyassumethatourbrandidentityisfixed

andcan’tbechanged.Customersviewusasagenericprovider,withoutapersonality,andwhilesatisfied,theyshowlittleloyaltytousinthefaceofabetteroffer.

ThinkBig:Werealizethatteammembersandcustomersarehappierandmore loyal when we make a genuine effort to give them a sense ofcommunity.Thisgoodwillmaynotproduceimmediatereturns,butoverthelongtermweknowitwillbeaformidablecompetitiveadvantage.

Select one of the following scenarios that best describes the way yourorganizationacts.

Act Big: Attempts by management to bring workers or customerstogether are trite and halfhearted. People feel too timid to question theinitiatives, so they are presented with one bad idea after another.Customers feel less and less affinity for us as we’ve become a bland,impersonal,corporatebehemoth.

Act Small:We bring people together—workersand customers—undercommon banners that unite them and give them solidarity. People areproud to call themselves part of our group and our company logo isproudlywornasabadgeofaffiliation.Weevangelizeandactivelyfollowthroughonthepositiveaspectsofourbrandidentity,whichweviewasasacrosanctpromise.

BuildingBlock10GrowFutureLeaders

Select one of the following scenarios that best describes the way yourorganizationthinks.

ThinkSmall:The leadersof the companyare in it for themselves andcan’t wait to jump ship and leave the company behind without asuccessionplaninplace.

ThinkBig:Wefeelaresponsibilitytodevelopadeepbenchsothatthecompany can continue its successful trajectory. We delegate bigdecisionstomanagerscominguptherankstotesttheirleadershipskillsandpreparethemforlargerresponsibilities.

Select one of the following scenarios that best describes the way yourorganizationacts.

ActBig:Theleadersofthecompanypaynoattentiontogroominganewgeneration of leaders, causing the workers, suppliers, customers, andinvestors to lose faith in the ability of the company to self-perpetuate.People are promoted to leadership positions without a proven trackrecord.Theleadershipvacuummakesusvulnerabletoahostiletakeover.

Act Small: The leaders of the company spend ample time identifyingpotentialfutureleaders,meetingwiththem,showingthemtheropes,andpassingknowledgefromonegenerationtothenext.

Evaluation

Onceyou’vecompletedtheexerciseyoushouldhaveten×’smarkedwithinthevariousquadrants.

If eight to ten ×’s are in the upper right quadrant marked TBAS, yourorganizationrocks!Itdoesn’tmeanyoucan’timprove,butwiththatmany×’sinthe desired quadrant, you already know that and are relentlessly working forconstant improvement.Chancesaregoodthatyourfinancialperformanceisonparwiththosecompaniesinthebook.Congratulations!

If six to seven ×’s are in the upper right quadrant marked TBAS, yourorganization is far better off than most. Even though your company may befaringwellfinanciallyandachievingannualdouble-digitgrowthinrevenuesandprofits, there are weaknesses that will affect your long-term performance.Significant amounts of work are required in those areas where you failed toachieveTBASstatus.Goodjob!

If four to five ×’s are in the upper right quadrant marked TBAS, your

organizationisprobablynotachievingthesamelong-termfinancialperformanceas thecompanies in thebook.Thereareserious issues that threatenyour long-termperformance.

If you’re an employee of a companywith fewer than four ×’s in the upperrighthandquadrantmarkedTBAS,wefeelsorryforyou.Ifyou’retheownerorperson in charge, you need to make a serious assessment of why yourorganizationhastumbledintodisarray—theanswersareinthisbook’schapters—andimmediatelybuildandimplementaplandesignedtosavethebusiness.

HowWillYouRespondtoYourOrganization’sScore?

At some point we all experience results that don’t please us. It might be amedicalexamthatdiscloseshighbloodpressure,toomanypoundsrevealedonthescale,abadtestgrade,oranembarrassinglyhighgolfscore.

Somepeoplechoosetorespondtobadnewsbyburyingtheirheadinthesandlikeanancientdodobird,hopefulthatwhat’sthreateningthemwillmagicallygoaway.Unfortunately, other creatures ate all the dodo birds—while their headswereinthesand—andtheybecameextinct.

Othersresorttochurlishremarksdirectedtowardthebearerofthebadresult.“Thedoctor’saquack.Thatscaledoesn’twork.Theprofessor’souttogetme.Thesegolfclubsstink!”

Asmallergroupofpeopleacknowledgethebadresult,becomedeterminedtodobetter,makeanassessmentofwhat’s required toachieve thedesiredresult,andcommittofollowingacourseofactionthatgetsthemtowheretheywanttobe.

Here’shopingyou’llusetheresultsofthistestasastartingpointtoachievethefulleconomicandhumanpotentialofyourorganization.

SECTIONFOUR

TheResearch

TheResearch:EatinganElephant

Theinitialassignmentwastoidentifythecompaniesthatdotheworld’sbestjobofconsistentlygrowing revenues.Howdoes someonegoabout identifying thebestanythingintheworld—letalonefigureouthowtheydoit?Here’sthestoryofourtwo-yearjourneytofindthebestofthebest.

Asearchat theWebsiteof theU.S.CensusBureau’sStatisticalAbstractoftheUnitedStatesconfirmedmyfears.“Thereare,”accordingtothesite,“morethan 27 million businesses in the nation and that doesn’t include millions ofbusinesseswhofiletheirtaxreturnsas‘individuals’.”Aquicke-mailinquirytothe World Bank was promptly and politely answered with, “There are anestimated 100million businessesworldwide, but because of poor reporting insomenations,thatnumbermightactuallybehigher.”ThankyouCensusBureauandWorldBank:howcouldanyonefindthebestofanythingoutof100million?

Ihadtwoyearstoidentifythegreatestsalesorganizationsontheplanet,figureout what they do differently and better than anyone else and commit thosefindingstotheprintedpage.Theclockwastickingandfinally,afterafewweeksofdelayingandstaringblanklyatacomputerscreen,Idecidedtogettheshow

ontheroad.

Yearsagoafriendasked,“Doyouknowhowtoeatanelephant?”Ishookmyhead,admittedIdidn’t,andwaitedfor thepunch line.Hesaid,“It’seasy:onebiteat a time.” Itwasn’tvery funny,buthe’dunerringlyprovidedmeabitofadvice that I’ve frequently called on when a project or deadline looms largeaheadofme.Ibeganbybreakingthiselephantintobite-sizedpieces.

TheResearchProgram

Belowisthebite-sizedpiecesresearchlistassembledinMarch2003.Itendedupserving as the step-by-step instructionmanual for the book. It’s included herebecausethediscoveriesandfindingspresentedinthisbookwillbeofferednotasspinelessmaybesandtheories,butasanewsetof truths,soit’s importantyouunderstandthestepstakentoarriveatthosetruths.

•Assemblearesearchteam.•Defineandquantifywhat“best”means.•Definetheuniversetobestudied.•Gainaccesstothefinancialdataofallthecompanies.•Getinsidethecompaniesandfigureoutwhattheydo.•Ruthlesslyevaluateandselectthefindingsforthebook.

TheResearchTeam

For Less Is More I’d been fortunate to assemble a great research team.Unfortunately, thewomen from the previous teamweren’t available.OnewasworkingasafinancialanalystinNewYorkandtheotherwasattendingHarvardLaw.Whileawaiting the startofbusiness school atUCLA,GregPowell,whohadledthepreviousteam,agreedtoserveonthenewteamandheadtheefforttointerviewprospectiveleadresearchers.

More than eight hundred résuméswere received and eventuallywe hired anew lead researcher. Brian Solon received a bachelor’s and MBA from UC

Berkeley,alawdegreefromSantaClaraUniversity,hadseveralyearsofworkexperience in law and finance with stints in Europe and Asia, and producesmusicwhenheisn’tdoingbusiness.Hewasourkindofperson.

With Powell’s dogged determination and uncanny ability to totally focus,Solon’s classic training, and my willingness to be challenged by guys twodecadesmyjunior,wehadthemakingsofa team.Inmanybookstheauthor’spointofviewtakescenterstageandtheresearchers,acknowledgedinthebackofthebook,skulkoffintothebackground,theirworkcompleted.TheworkofSolonandPowellissocentraltothisbookthatyou’llfrequentlybeexposedtotheirquestioningandpointsofview.

DefineandQuantify“Best”

Weknewthattheintegrityandsuccessofthebookwouldrestonourgettingthefollowingquestionansweredcorrectly.

Whatconstitutesagreatsalesorganization?

There were lots of spirited discussion and differing points of view, andeventually hundreds of e-mails were dispatched to publishers, clients,colleagues,readers,andcompaniesI’dpreviouslywrittenabout,askingforinputand advice. Clearly we’d struck a nerve because the responses poured in.Defining“best”wasn’tgoing tobeashardaswe’doriginally thoughtbecauseeveryresponseandconversationonthesubjecteventuallygotaroundtooneofthefollowingthreepointsofview.

•“Greatsalesorganizationsgroweveryyearduringgoodtimesandbad,”respondedalmosteveryone.Theyexplainedtheirresponsesfurtherbyarguingthat,“Anycompanycanhavegreatsalesgrowthwhenthere’slotsofdemand,butgreatcompanieshavefiguredouthowtocreatedemandandgrowrevenuesevenwhentheeconomyisn’tgreat.”

•Othershadadifferentperspectiveandsaid,“Greatsalesorganizationsgroworganicallynotonlythroughacquisition.Don’tbefooledby

groworganicallynotonlythroughacquisition.Don’tbefooledbycompanieswithgreatnumberswhogrowtheirnumbersonlybybuyingotherbusinesses.”

•Andasurprisinglylargenumberofrespondentsarguedforacomponentofthedefinitionthatwe’dnotoriginallydiscussed.“Greatsalesorganizationsgrowtheirrevenuesprofitably.Somecompaniescutpricestoincreaserevenuesandgainmarketsharebutdon’thaveanyprofitleftovertoshowfortheirefforts.”

Finally,wearrivedataworkingdefinition.

The best sales organizations grow organically and profitablyeveryyeardespiteeconomicconditions.

Theproblemwithourworkingdefinitionwasthatitdidn’thaveanynumbersattached to it and we wouldn’t be able to examine thousands of databases inorder to identifypotentiallygreatsalesorganizationsuntilweknewhowmuchrevenueandprofitgrowthwewereseeking.

We decided we’d begin searching for companies that had grown theirrevenues by 10 percent or more annually, reasoning that any enterprise thatdemonstrated the ability to consistently grow revenues by that amount mightpotentially become a target for further study. But we still needed anothernumber.

How many years of 10 percent or more annual revenue growth wouldconstitute great? Instinctively we liked the resonance of the number ten andagreedthatifacompanyhadgrownrevenues10percentormoreeachyearfortenyearswithoutmissing a single year, they’dprobablymakeup a small andelite list of performers.Thatwouldmean they’d survived the recession of theearly 1990s, enjoyed the robust years of the late ’90s, and survived andprospered during the 2001-2002 recession and slowdown.We agreed that anycompanythathadmanagedtogrowbydoubledigitseveryyearthroughoutthoseturbulenttimesmusthavegreatstoriestotell.

DefiningtheUniverse

There’snowaytostudytheworld’sestimated100millionbusinesses,andifawaydidexist,thetaskwouldbesoenormousthatthefindingswouldbesooutofdatebythetimetheresearchwascompleteastoberendereduseless.Ournexttask was to determine which businesses would constitute the universe we’dstudy,andeventuallyweagreedtostudyeverypubliclytradedcompanyintheworld(abouttwentythousandofthem)andthethirtythousandlargestprivatelyheldcompanies—atotalofaboutfiftythousandbusinesses.

Our reasoning was that the financial statements of all publicly tradedcompanies are available and accessible and thatmany of the largest privatelyheld companies would use bank loans or debt (bonds) as financing vehicles.Their covenants with banks and underwriters would mean that sufficientfinancialinformationwould/couldbeavailableifwedugdeepandhardenough.

Weknewwemightmissafewcompaniesbylimitingourstudytotheabovementionedgroup,butdidn’tthinkwe’dmissmany.Anycompanythatroutinelyachievesdouble-digitrevenuegrowth—eveniftheyaren’tpubliclytradedoroneofthethirtythousandlargestprivatefirms—wouldgeneratesufficientpublicitythateitherwe’dlearnaboutthemortheyand/ortheirbusinessmodelwouldhavebeen acquired or copied by the companieswewere researching. Ten years ofconsistent10percentrevenuegrowthdoesn’tgounnoticed.

GainingAccesstoFinancialData

To evaluate publicly traded companies, we enlisted the assistance of FactsetResearch Systems in Greenwich, Connecticut, a leading provider of financialand economic information to the investment community.Theirmore than twohundred databases contain the historical financial statements of every publiclytradedcompanyintheworld.

Ourobjectivewastogeneratealistofallpubliclytradedcompaniesthathadgrowntheirrevenuesby10percent(orgreater)fortenconsecutiveyearswithouthaving missed a year. Factset performed more than 121,000 calculations and

returned the names of 110 publicly traded companies that had achieved ourtargetrevenuenumbers.(SeeChart1onpage223.)Evaluatingprivatelyownedcompanieswasmore difficult.We used theFortune 1000 database aswell astheir Global 500 database, theForbes list of America’s largest privately heldcompanies, and the resources of Dun and Bradstreet’s Hoover’s Online Unit,which tracks and provides data on more than fifty thousand privately heldcompanies. Eventually we came up with an additional 159 companies wethoughtmightpasstherevenuetestandbecomeprospectivetargets.(SeeChart4onpage227.)Workwaspainstakinglyslow.Ittookseveralmonthstodeterminethat out of the 50,000 businesses we began studying, only 269 (about .05percent)hadpossiblygrownrevenuesby10percentfortenconsecutiveyears.

Webegansendingouthundredsofe-mailsattemptingtoconfirmtherevenueperformanceofthecompaniesanddecideditwastimetosimultaneouslybeginconductingourprofittestaswell.Becausethenumbertenhadserveduswellontherevenueanalysis,weuseditagainforourevaluationofoperatingprofits.Itwas back to Factset and back to endless online searches, but this time withanother question: of the 269 companies, howmany had also grown operatingprofitsorearningspershareby10percentormorefortenyears?(SeeCharts2and3onpages225 and226.)Weeks andmonthswerewhizzingby. Inmanyinstances scores of e-mails were flying back and forth with just a singlecompanyaswetriedeverypossibletactictogarnerresponsesandconfirmations.Privatelyheldcompaniesarenotoriously(andrightfully)stingyaboutreleasingrevenue and profit numbers. We kept at it. There were days when a singleresponse from a CFO either counting their company in or out was sufficientreasonforcelebration,andweslowlycontinuedaddingsinglecompaniestothefinallist.

Therewere humorous incidents aswell. One day,while on the phonewithBrian,hesaid,“Youwon’tbelieveane-mail I just receivedfromaCEO.”Hereadit tome,“Yes,wehityournumbers,butwe’llpassonbeingpartofyourbook.”Atthatexactmomentane-mailarrivedonmylaptopfromthecompany’sCFO,whosemessagewas,“We’dlovetobeinyourbookbut,unfortunately,ourpast financial performance doesn’t even come close to your criteria.” Wehowled, deciding if theCEOwould lie to us he’d probably lie to anyone andguessed itwouldonlybeamatterof timeuntilhe’dendup jailedcooking thebooks.

Weknewweweregettingclosewhenwefinallywinnowedourlistdownto

twenty-seven companies. The companies that remained were either publiclytraded(sothefinancialinformationwassupposedlyaccurate),orinsomecasesthecompany’sfinancialperformancehadbeenconfirmedbytheirCFO,andinafew instances,wewere still digging and fighting to get confirmation.The listincluded privately owned universities, a number of retailers, service andentertainment companies, technology firms, a healthcare provider, a chain ofcoffee shops, a chain of gyms, distribution businesses, companies involved indiversifiedbusinesses,achewinggumcompany,andevenacircus.

ARevelationbutNotaDetour!

Bythetimeourlisthadbeennarrowedtotwenty-sevenprospectivecompanies,agrowingrealization,longsimmering,hadtobeaddressed.

Because of the stringent financial criteria employed, we’d ended upwith ashortlistofcompaniesthat’dmasteredtheartofconsistentlygeneratingrevenueanddoing it better thanall other companies.Butbecauseoneof thequalifiersrequired the companies to also grow profits every year, we’d ended up withmorethanalistofgreatsalesorganizations;wehadinourhandsaveryshortlistoftheverybestcompanies.Thisraisedanimportantquestion.

Arethesecompaniesgreatbecausetheyknowhowtosell,ordotheydeliverconsistent and robust revenue growth because they’re essentially greatcompanies?Isittheleadershipofthesaleseffortthatmakestheorganization’soverall financial performance stellar, or is it the leadership of the overallcompany that allows for outstanding revenue growth? Our answers woulddeterminethebook’sfocus.

We opted to place our bet on the belief that it was the leadership of theorganizations that allowed these companies to generate such outstandingperformances.Althoughwebelievethatthecompaniesincludedinthebookarethe best contemporary business models in existence, our focus would remainunchanged.ThinkBig,ActSmallwouldbeabouthowthecompaniesthatmadethecutdoabetterjobofconsistentlygrowingrevenuesthanallothercompanies.

TheQualitativeSearchGotUnderWay

While we continued aggressively pursuing final confirmation of financialperformance from several companies, we began building extensive researchdossiersoneverycompanyintheeventtheymadethefinalcut.Thesedossierswere hundreds of pages in length and contained financial information, analystreports,newspaperandmagazinestories,reportsoflawsuits,andcompanypressreleases.Ifsomethinghadbeenwrittenorpublishedaboutacompany,wefounditanditbecamepartofourcentralfiles.Aswebeganreviewingthethousandsofpages,wewereconfrontedwithanotherissueIhadn’texpected.

Asaresearchmeetinggotunderway,GregPowell,whowasreviewingalistofqualifyingcompanies,rolledhiseyesandexclaimed,“Youcan’twriteaboutacompanythatsellscigarettesinoneofyourbooks,”hesaid.“It’dbecompletelyirresponsible and unconscionable. Social responsibility,” Greg continued, “isaboutachievingcommercial successwhilepursuing responsibleactions.Thosearethekindofcompaniesyouneedtowriteabout.”

ForthedurationofthemeetingItriedtoviewthebusinessworldthrougheyestwodecadesyoungerthanmyown.BothGregandBrianseetheirlife’sworkinthebusinessspaceandneithercouldbecalledtreehuggers,butbytheendoftheday, they’d convinced me that social responsibility would be a considerationduring our qualitative deliberations. So off the list came companies that soldcigarettes,performedlabtestingonliveanimals,companiesaccusedofshoddyconstruction in massive class action lawsuits, and companies operating underconsent decrees with the government because of racial discrimination.Simultaneously, and to their credit, a few other companies came forward andacknowledged they’d failed tomeet our financial targets and finallywe had amanageablelist.

Top17Finalists

1.TheApolloGroup—Afor-profiteducationcompany2.AutomaticDataProcessing—Thelargestpayrollandtax-filingprocessorintheworld3.BedBath&Beyond—AdomesticsretailerintheUnitedStates

4.Cabela’s—Amultichannelretailerofhunting,fishing,andoutdoorgear5.DeVryUniversity—Afor-profiteducationcompanythatprovidesprogramsforworkingadultsandunderemployedyoungpeople6.DotFoods—ThelargestprivatelyheldfoodserviceredistributorintheUnitedStates7.FlyingJ—Aleadingtruck-stopoperatorintheUnitedStates8.InfosysTechnologies—BasedinIndia,thecompanyoffersarangeofcustomizedsoftwareservices9.KochIndustries—Thesecond-largestprivatecompanyintheUnitedStates10.Kohl’sCorporation—Operatorofdiscountdepartmentstores11.MedlineIndustries—Aprivatemedicalsupplydistributorandmanufacturer12.O’ReillyAutomotive—Operatesabout1,200O’ReillyAutoPartsstores13.PETCOAnimalSupplies—Apetsupplyspecialtyretailer14.SAS—Theworld’slargestprivatelyheldsoftwarecompany15.SonicDrive-In—Thelargestchainofquick-servicedrive-insintheUnitedStates16.Starbucks—Aspecialtycoffeeretailer17.StrayerEducation—Afor-profitprivateuniversity

BuildingtheFinalList

Once we’d finished identifying the final list of companies we were going towrite about, itwas our intention to begin an extremely rigorous field researchprogram that would include visiting company headquarters, becomingconsumers of the companies, doing in-depthmeetings and interviewswith theCEOsandothercompanyexecutives,aswellasinterviewingvendors,suppliers,workers,customers,andfranchisees.

There was no way we’d be able to adequately research and report onseventeencompanies(itwouldtaketoolongandmakeforaconfusingbook),soagain,becausethenumbertenhadserveduswellsofar,wedecidedtofocusourenergiesontencompanies.Butwhichtenshouldweselect?

Again, we dispatched hundreds of e-mails to our community of readers,clients, and associates asking themwhich companies they’d like to read aboutanddeterminedwe’dprovidethesameweighttotheirresponsesaswedidtothefollowingcriteria:

Industry Category The list of seventeen finalists reveals a heavyconcentration in retail (BedBath&Beyond,Cabela’s,Kohl’s,O’Reilly’s, andPETCO) and education (Apollo Group, DeVry, and Strayer). Not wanting anundueconcentrationinanysinglecategory,weeliminatedtworetailersandtwoeducational companies, reasoning we didn’t want a finished work that wasoverlyconcentratedonasingleindustrytype.

OwnershipOurgoalwas tocreatea final listwhosecompositionwouldbe

roughlyhalfpubliclyownedandtheotherhalfprivatelyheld.

OverexposedWewanted to tread on ground that hadn’t been trampled by

stampedesofjournalistsandauthors,anddroppedStarbucksfromourlist.

GeographyWeweresurprisedthatonlyonecompanyonourlistoffinalists

was from outside the United States.In my previous two books, half thecompanieshadbeenfromtheUnitedStatesandhalffromothernations.Possiblythere’s a zeal for privacy on the part of privately held businesses in Europe,Asia,andSouthAmericathatwedidn’tsucceedinbreakingthrough.Maybethedatabaseswere accurate and there simply aren’t anyother companies thatmetour stringentcriteria.Perhapsour search indollar termsmasked somedouble-digit performances in foreign currencies. However, given the thoroughness oftheFactsetdatabase,wearecertainthatnopubliclytradedcompanyintheworldwasmissed.

Originallywedecidedto includeInfosysonourfinal listof tenfirms,giventheiroutstandingfinancialperformanceoverthepast tenyears.Wecompiledamassivedossierof informationabout thefirmandscheduledan interviewwithCEONandanNilekani.However,weultimately realized thatabookwithnineU.S.companiesandonlyonefirmbasedelsewherewouldappearodd,soatthelastminutewedecidedtoomitInfosysandlimitourstudytonineU.S.firms.

HavingdecidedtofocusonU.S.firms,weattemptedtohaveroughlyhalfofthecompaniesonourfinal listeastof theMississippiand theotherhalf to thewest.

GettingInsidetheCompanies

We began with a blitz of personalized letters and autographed copies of myprevious books to the CEOs and executives at the companies, congratulatingthemon theirperformanceand informing them thatbasedon theircompanies’outstandingperformances,they’dbeenselectedforinclusioninthebook.

Notasingleresponse!

I started making calls to the companies, encountered one stone wall afteranother, and was growing more frustrated every day. It seemed that nobodywantedtospeakwithus.

OnedayIrecalledthewordsofmyfirstfull-timeboss,anoverbearing,tough-guy type who’d ended up throwing a temper tantrum at me. “Jennings,” heyelled, “there are reasons and results and I want the results!” It was a hardlessonat the timebutone that’sservedmewell.There’dbenogivingup.Weweregoingtogetinsideeverysinglecompany.

Infairnesstothecompaniesanimportantfactshouldbenoted,onethatdidn’t

occurtousformanymonths.Theheadsofallthesecompaniesprobablyhaveasmany journalists knocking on their doors as they do salespeople trying to sellthemstuff,andeachcouldprobablymakeafull-timeoccupationoutofagreeingtomeetwitheveryonewhocomesalongwantingtheirtimeandresources.

InretrospectIlookbackatourfighttogainentrancenotasamatterofbeingstonewalled, but as having been put to a test. “Demonstrate yourworthiness,”they seemed to be saying. “Show us what you’re really made of, make usunderstandwhyyou’redifferentfromeveryoneelse,explainthebenefitthatwillaccruetousifweworkwithyou,andthenwe’llletyouinthedoor.”

There was also the issue of secrecy. The companies we’d identified haveintentionally and beneficially flown beneath the radar and have gone largelyuncoveredby thebusinesspress.Eachhasproprietarysystemsandmethodsofoperationthey’dpreferremainsecret.

Weaddressedthisobjectionwiththefollowingresponse:duringatimewherebusiness and its leaders are being bashed on a daily basis in newspapers,magazines, and television, thiswould be a book aboutgreat companies doingthingsright.Wereasonedthateachhadasocialobligationtocooperatewithusand share their knowledge with other aspiring businesspeople committed todoingbusinesstherightway.

We cajoled, jumped through hoops,were persistent pains in the you-know-what,andononeoccasionresortedtoabitofintimidationbypromisingtowriteabout thembasedon information fromanonymous sources.Eventually,over aperiodofmanymonths,wegainedaccesstoeverycompanywewantedtowriteabout.

TheResearch

We began our fieldwork by conducting wide-ranging, free-for-all, no-ruleinterviewswiththeCEOsofeverycompany.There’snopersonbetterequippedtotell thestoryofacompanythanthepersonwhofoundedor leads it.Duringthese meetings we were able to learn the history, values, and culture of thecompany,and inalmostevery instance itwasduring this firstmeeting thatwebeganunearthing themagic thathadallowed thesecompanies toachievewhat

fewothershave.

FollowingourCEOinterviewswerescoresoffollow-upinterviewswithothercompanyleaders,managers,andworkers,followedbydialogueswithcustomers,vendors,andsuppliers.

TheFindings

Bythetimeourresearchwascompletewe’dlandedonscoresoffindingsworthyof inclusion. The book would be too long and muddled if each finding wasallocated its own chapter, so we began the difficult task of combining,eliminating, and editing with the objective of ending up with the ten mostimportant and actionable findings. For the benefit of those readers withinsatiable appetites for information, we’ve posted interview transcripts anddocumentsassociatedwiththeprojectatwww.jennings-solutions.com.

Atfirstglimpse,a fewof the truthswediscoveredmayappear tobesimplycommon sense. However, as the old saying goes, “The most common thingaboutcommonsenseishowuncommoncommonsenseis,”andeachisworthyof review in light of the new perspectives offered. Most of the truths weunearthedarecounterintuitiveandbuckconventionalwisdom.

Westrivedforthoroughnessandaccuracyineveryaspectofourresearchbutrealizethattheachievementofperfectionisimpossible.Ifwemissedacompanyor if a potentially big finding flew over our heads unrecognized, itwasn’t byintention,design,orexclusionbutpurelybyaccident.Wehopeourimperfectionwillprovideanopportunityforspiriteddialogue.

If your companymeets our financial growth criteria—10 percent or greatergrowthinrevenue,profits,and/orearningspersharefortenyearsinarow—wewanttoknowwhoyouare.Contactusandwe’llacknowledgeyourperformancethrough ourWeb site, future editions of the book, and in our speeches donearoundtheworld.

SECTIONFIVE

Charts

CHART1

FactsetResults

PubliclyTradedCompaniesAchieving10PercentGrowthinRevenuesforTenConsecutiveYears

1.Abercrombie&Fitch2.AceCashExpress3.Administaff4.AdvancedEnvironmentalRecyclingTechnologies5.Affymetrix

6.AmericanRetirement7.Amsurg8.AOLTimeWarner9.ApolloGroup

10.BedBath&Beyond11.BioReferenceLabs12.Biosite13.BisysGroup

14.BrinkerInternational15.Calpine16.Carmax

17.CentralEuropeanDistribution18.CheesecakeFactory19.ChelseaPropertyGroup20.Coinstar

21.ColtTelecomGroup22.ConcordEFS23.CostPlus

24.CSGSystemsInternational25.DigitalRecorders26.DollarGeneral27.DollarTreeStores28.DuaneReade

29.EquityOfficeProperties30.Exactech

29.EquityOfficeProperties30.Exactech31.ExpressScripts32.FactsetResearchSystems33.Fiserv

34.FloridaBanks35.FTIConsulting36.GenesisMicrochip37.GuitarCenter

38.Harley-Davidson39.HealthManagementAssociation40.HibbettSportingGoods41.HomePropertiesNewYork42.HorizonOrganic

Holdings43.HotTopic44.ICTGroup45.ICUMedical46.IDTCorp47.Impath

48.InfosysTechnologies49.Intercept50.KendleInternational51.KnightTransportation52.Kohl’s

53.Lifecell54.LifewayFood

55.Linens‘NThings56.Lowes57.MaddenSteven

58.ManhattanAssociates59.Masco60.MedicisPharmaceuticals61.MedImmune

62.MercuryInteractive63.MeritMedicalSystems64.MetroOneTelecomm65.Microsoft

66.MTRGamingGroup67.NektarTherapeutics68.Charleys69.O’ReillyAutomotive70.OrthodonticCenterofAmerica71.OutbackSteakhouse72.PFChangsChinaBistro73.PacificSunwearCalifornia74.PerformanceFoodGroup75.PhiladelphiaConsolidatedHoldings76.PrepaidLegalServices77.PriorityHealthcare78.ProbusinessServices

79.ProgressiveCorporationofOhio80.Qiagen81.Quiksilver

82.R&GFinancial83.RadianGroup84.RareHospitalityInternational85.Regis86.RenalCareGroup87.Rent-a-Center

88.Resmed89.Retalix

90.RFMicroDevices91.RMHTeleservices92.SCPPool93.SimpsonManufacturing94.Starbucks

95.SteinerLeisure96.Stericycle97.StrayerEducation98.SungardDataSystems99.Techne100.TractorSupply101.TriadGuaranty102.TweeterHome

EntertainmentGroup103.USPhysicalTherapy104.VodafoneGroup

EntertainmentGroup103.USPhysicalTherapy104.VodafoneGroup105.Wal-MartStores106.Walgreens

107.WellpointHealthNetwork108.WesternWireless109.WholeFoodsMarket110.Williams-Sonoma

CHART2

FactsetResults

PubliclyTradedCompaniesAchieving10PercentGrowthinOperatingIncomeforTenConsecutiveYears

1.Amsurg2.ApolloGroup

3.AutomaticDataProcessing4.BallardPowerSystems5.BedBath&Beyond6.Brown&Brown7.CBL&AssociatesProperties8.Colt

TelecomGroup9.DeVry10.EngineeredSupportSystems11.ExpeditorsInternationalWashington12.ExpressScripts13.FinancialFederal14.Harley-Davidson15.Home

Depot16.InfosysTechnologies17.KnightTransportation18.O’Reilly

Automotive19.OmnicomGroup20.PattersonDental21.RadianGroupInc22.SCPPool

23.Starbucks24.Walgreens

25.YoungInnovations

CHART3

FactsetResults

PubliclyTradedCompaniesAchieving10PercentGrowthinEarningsPerShareforTenConsecutiveYears

1.ApolloGroup2.Autozone

3.BedBath&Beyond4.CathayBancorp5.ConcordEFS

6.DeVry7.DonaldsonCompany8.EngineeredSupportSystems9.ExpeditorsInternationalWashington10.FinancialFederal11.Harley-Davidson12.

InfosysTechnologies13.Kohl’s14.99CentsOnlyStores15.OmnicomGroup

16.PattersonDental17.PMIGroup18.RadianGroup

19.SEIInvestments20.SonicDrive-In21.Starbucks22.SterlingBancorpNewYork23.StrayerEducation24.SYBancorp

25.TotalSystemServices26.Walgreens

CHART4

PrivateCompanies

ContactedtoVerify10PercentGrowthinRevenueandOperatingIncomeforTenConsecutiveYears

1.24HourFitnessWorldwide2.AcademySports&Outdoors3.AecomTechnology4.Alberici

5.AlexLee6.A-MarkFinancial7.AmericanCenturyInvestments8.AppleOneEmploymentServices9.ArcticSlopeInternational10.AshleyFurnitureIndustries11.AsplundhTreeExpert12.AustinIndustries13.Barnes&

NobleCollegeBook-stores14.BartonMalow15.BDOInternational16.BeckGroup

17.BenEKeith18.BigVSupermarkets19.Bloomberg

20.Borden

20.Borden21.Bose

22.BostonConsultingGroup23.Brasfield&Gorrie24.C&SWholesaleGroceries25.Cabela’s

26.CentralNational—Gottesman27.CH2MHillCos28.CigarettesCheaper29.CinemarkUSA

30.ClarkEnterprises31.ClarkRetailEnterprises32.Conair33.Concentra

34.Core-MarkInternational35.CoxEnterprises36.CrownEquipment37.CumberlandFarms38.DavidWeeklyHomes39.DeBruceGrain

40.DeseretManagement41.DevconConstruction42.DHLAirways43.DickCorp

44.DiscountTire45.DoanePetCare46.DotFoods

47.DreamworksSKG48.DunnIndustries49.DynCorp

50.Eby-Brown51.EdwardJones

52.EnterpriseRentaCar53.EpixHoldings54.Ergon

55.ExpressServices56.FeldEntertainment(RinglingBros)57.FidelityInvestments58.FisherDevelopment59.FlintInk

60.FlyingJ61.Follett

62.FrankConsolidatedEnterprises63.FreedomCommunications64.GenmarHoldings65.Glazer’sWholesaleDrug66.GoldenRule

Financial67.GordonFoodService68.GraybarElectric69.GreenBayPackaging70.HBZachary

71.HeButtGrocery72.HeafnerTireGroup73.Hearst74.HeicoCompanies75.HewittAssociates76.HobbyLobbyStores77.

Hoffman78.HorseshoeGamingHoldings79.HouchensIndustries80.HRLogic

81.HTHackney82.HuntConsolidated/HuntOil83.ICCIndustries84.IconHealth&

Fitness85.JCrewGroup86.JMHuber87.JRSimplot

88.KingstonTechnology89.Knoll

88.KingstonTechnology89.Knoll90.KochIndustries91.Longberger

92.Love’sTravelStops&CountryStores93.MAMortenson94.Manasha

95.MarcGlassman96.MaryKay97.MBM

98.McCarthyBuildingCos99.McKinsey&Co100.MedlineIndustries101.MicroElectronics102.ModernContinentalCos103.MSX

International104.NationalDistributing105.NationalEnvelope106.NewAgeElectronics107.NewBalanceAthleticShoes108.Parsons109.ParsonsBrinckerhoff110.PCRichard&Son111.Pepper

ConstructionGroup112.PETCOAnimalSupplies113.PeterKiewitSons’

114.Pilot115.PlatinumEquity116.Premcor

117.Primus118.PrintPack

119.PublixSuperMarkets120.PurityWholesaleGrocers121.Quad/Graphics122.QuikTrip

123.RaceTracPetroleum124.RepublicTechnologiesIntl125.RitzCameraCenters126.RollInternational127.RoomstoGo

128.RudolphandSletten129.Sealy130.ServicesGroupofAmerica131.Sheetz

132.Simmons133.Skadden,Arps,Slate,Meagher&Flom134.SoftwareHouse

International135.SoloCup136.SouthernWine&Spirits137.Southwire

138.Stewart’sShops139.Swagelok140.SwiftyServe141.Swinerton

142.SyntexInformationTechnologies143.TACWorldwideCos144.TexasPetrochemicals145.TIC—TheIndustrialCompany146.Tishman

Realty&Construction147.TopaEquities148.TravelCentersofAmerica149.TRTHoldings

150.TTCIllinois151.TTI

152.ViewSonic153.WalshGroup

153.WalshGroup154.WarrenEquities155.Well’sDairy

156.Whiting-TurnerContracting157.WinCoFoods158.WorldKitchen159.Young’sMarket

CHART5

PubliclyTradedCompanies*

RECENTPERFORMANCEVERSUSMARKETINDICES

*Cabela’s,notincluded,beganpublictradingonJune25,2004.

**PETCObeganpublictrading(forthesecondtime)onFebruary26,2002.

ConclusionbyBrianSolonLeadResearcher

InthecourseofworkingonthisbookIhadtheopportunitytotravelthroughoutthe country, to placesmanyCalifornians consider unfamiliar (and vice versa).Spending time in Colorado, Illinois, Kansas, Missouri, Nebraska, NorthCarolina, Oklahoma, Texas, Virginia, and Wyoming was a long overdueawakening. As an added bonus, the trip revealed exotic new cuisines seldomfound in vegan-friendly Marin County, including: hush puppies, deep-friedjalapeño cheese poppers, Mount Sterling Horseshoes, and shit on a shingle(creamedchippedbeefontoast).

AlltoooftenpeoplespeakoftwoAmericas.However,workingonthisbookuncovered a valuable insight. Great business ideas can originate and thriveanywhere.Itisn’tvitaltohaveamidtowncornerofficeoradheretoaparticularpoliticalpersuasiontosucceed.

ScaryTimes

Thebeginningofthetwenty-firstcenturyhasbeendownrightscaryforbusiness.Inafewshortyearswe’vewitnessedstockmarketcollapses,massivecorporatebankruptcies,terroristthreats,andCEOstoppledand/orimprisonedforfraud—either for their own deeds or because Sarbanes-Oxley (andEliot Spitzer) heldthempersonally liable for the failuresof theiremployees. In thisenvironment,

who in their right mind would aspire to the awesome pressures andresponsibilitiesfacedbytoday’sbusinessleaders?

The past few years have been uncertain times, wreaking havoc on manybusinesses. Uncertainty discourages investment, causing a vicious downwardspiralofundercapitalization.Uncertainfuturescauseparalysisandinactionatatime when consumers are demanding more action, better products, andincreasingly personalized services. In the face of such widespread chaos, it’snaturaltoreturntothefundamentals.After spending time with the well-run companies in this book, one almost

forgetsabout thepastseveralyearsofmanagementdebacles.Thesecompaniesarebuiltonsolidfundamentalsandhavebeengettingitrightforyears.Theyareexamplesofhowto fosteracultureofsuccess that isbasedon treatingpeoplewellandgivingeveryoneopportunitiestoprosper.Theyhavebuiltcommunities,invented new businesses, and created innovative solutions for customers andsuppliers.Theleaderspaycloseattentionto,andintimatelyunderstand,thecorefunctionsoftheircompanies.It’s striking tohear thesecompanies’ stories,meet thepeoplewhowork for

them,andseetheirbusinessmodelsinaction;it’swonderfullyrefreshingtoseethingsbeingdonetherightway.Thesegreatcompaniesdeserverecognitionfortheirperformances,which in turngivecredence to theunderlyingphilosophiesthatguidethem.

LeQuickFix

Asasocietywe’rebecomingmoreandmoreaccustomedtoreceivingnewandexciting ways of achieving the quick fix. From low-carb diets to Viagra, thepublic is showered with precious pills and radical solutions that will makeproblemsgoaway—now.

Incontrastthisbookisnotatacticalguideorabullypulpitforexperimentalphilosophies. We give credit for the proven guiding principles and businessfundamentalsdescribedhereintothepeoplewhoruntheorganizationsprofiled.Byfocusingontheguidingprinciplesoforganizationsthathaveproventheir

abilitytosustainsuccessoverthelongterm,wedispelthequick-fixmyth.Theseguidingprinciplesareadmittedlynotacademicjargon,norweretheydeveloped

in themountaintop lab of a thought leader.Actually, they’re relatively simpleideas; the genius behind them lies in how they have been applied by thesecompanies, despite differences in location, industry, political persuasion, orownershipmodel.

KeepItSimple

We live in interesting times. Complexity causes people to yearn for simple,profoundideasthatcanbereadilyrelatedtodiversesituations.Peoplegravitateto confidence, decisiveness, and clear, powerful messages, searching for theultimate metaphysical reference point. So we end as we began, with thismessage: to build an organization with balanced focus, camaraderie, and theabilitytoprosperoverthelongterm...thinkbig,actsmall

ACKNOWLEDGMENTS

A research and writing effort this immense required the cooperation andassistance of more than one hundred people. I am grateful to everyone whoagreedtoparticipate.

There’s nobody better in the world of business publishing than AdrianZackheim; this is my third book with him. The team he has assembled atPortfolio, the imprint he founded at Penguin Group USA, is the best inpublishing, and I offer my sincere gratitude to editor Megan Casey; WillWeisser, head of sales and marketing; Allison Sweet, publicist; and NoirinLucas, copy editor. I hope there will be many more books with this bright,hardworking, anddiligent team.Special thanks tomy agentAlanNevinswithTheFirm,BeverlyHills,California.

TheCompanies

Thepeopleatthecompanieswrittenaboutinthebookwentbeyondthecallofdutyinbeingavailabletous,hostingusintheircities,andalwaysprovidinguswithaccurateinformationandaccesstocompanypersonnel.We’llalwaysholdmanyfondmemoriesofeachofthem.

Cabela’s: Dennis Highby, CEO; David Roehr, executive vice president,Cabela’sandCEOofCabela’sWorld’sForemostBank;MikeCallahan,seniorvicepresidentofretailandmarketing;BrianLinneman,chiefoperatingofficer;Sean Baker, director of accounting; Joe Arterburn, corporate communicationsmanager;KellieMowery,corporatecommunicationsassistant;KarenKennedy,executiveadministrativeassistant;AttorneyLynethRhoten,KoleyJessenP.C.,Omaha,Nebraska;GregTalamanatez,manager ofCabela’s Sidney,Nebraska,store.Dot Foods: Pat Tracy, CEO; John Tracy, president; Bill Metzinger, chief

financialofficer;RyanTracy,sonofPatTracy.

Koch Industries: Charles G. Koch, CEO; David Koch, EVP; Mary Beth

Jarvis, communications director; Dick Anderson, director, Market BasedManagement; Rod Learned, internal communication director; John Pittenger,senior vice president, corporate strategy; Patti Parker, communicationscoordinator;KaySpence,CharlesKoch’sassistant.Medline Industries: Charlie Mills, CEO; Andy Mills, CFO; John Marks,

directorofcorporatecommunications.O’Reilly Automotive: David O’Reilly, CEO; Tricia Headley, VP of

corporate services and corporate secretary; Michele Richardson, investorrelationscoordinator;JimBatten,chieffinancialofficer.PETCO:BrianDevine,executivechairman;James(Jim)Myers,CEO;Bruce

Hall, president andCOO;BrianShaw,director of strategic development;FranLilyea,BrianDevine’sassistant.SAS Institute: Jim Goodnight, CEO; Kelly L. Ross, VP, U.S. commercial

sales;KeithV.Collins,seniorVPandchief technologyofficer;DianeLennox,manager, third-partyvalidation,corporatecommunications;MartiS.Dominick,corporate affairs programmanager;MetteBakScheel, SASDenmark; PamelaMeek,directorofpublicrelations.SonicDrive-In:CliffHudson,CEO;PattyeMoore, boardmember, internal

consultant and former president; ScottMcLain, president, former CFO; AndyErnsting, account supervisor, Barkley Evergreen Partners, Kansas City,Missouri; Terry Harryman, controller (franchisees); Buddy McClain, reigningoperator of the year, Jackson, Mississippi; Chuck Harrison, largest Sonicfranchisee;KarenToepfer,ChuckHarrison’sassistant;BobbyMerritt,longtimefranchisee,LasCruces,NewMexico;BarbieStammer,formercarhopandnowpresidentofMerritt’soperations;GusMorris,franchisee;JoeZacher,multistatefranchisee and former carhop for founders Troy Smith and Charlie Pappe;Ronnie Solberg, franchisee; John Winterringer, second-generation operatorbasedinShawnee,Oklahoma.

Strayer Education: Robert Silberman, CEO; Ron Bailey, former CEO;

Michelle Wooten, training coordinator; Holly Yocum, Robert Silberman’sassistant;SonyaUlder,VPcorporatecommunications.

OurReaders

Whenwe started theprojectwe identified a groupof elevenpeoplewithverydiversebackgroundswhomweasked to serveas evaluators and readers aswemadeourwaythroughtheproject.Theirinsightfulthoughtsandcommentswereexceedinglyhelpfulandkeptusontrack.Thisgroupincludedmenandwomenfromacrossthecountryinarangeofoccupations:ChrisFadeff,BostonCollegestudent; Mark Thompson, former Charles Schwab VP, and currently host ofLeaders of the New Century for Network Public Broadcasting International;David Donahue, associate dean of Library and Information Sciences,MiddleburyCollege;JaneHennessy,seniorvicepresidentofWellsFargoBank;Chuck Adams, business consultant and former CFO, Omni Hotels; MikeFlaherty,businessconsultant;MarkGlickman,CPA,SanAnselmo,California;Patrick Regan, retired portfolio manager who now grows grapes in Sonoma;MichaelRegan,NewYork-based equity analyst; JosephHudelson, author andeducator, Archbishop Mitty High School; PatrickWeston, attorney, BinghamMcCutchenLLP.

ButNotLeast!

SpecialthankstoAshleyBryan,president,SafetyOrganizationforSchools,foraestheticexpertiseandboundlesspatience;DavidPitonyak,PhD,authorofTheImportance of Belonging; Irene Walters of the Houston Genealogy Library;GeorgeStaubli(the“there-will-be-no-excuses”guyontheproject);MarkPowellofCastoTravelforcoordinatingallourtravelarrangements;trainerJeffMarthattheBayClubMarinforkeepingmehealthyandfit;BillDeaneforkeepingthelaptops, computers, and handheld devices working; Lisa Knoll of FactsetResearchSystems;ourfriendsatKGWNtelevisioninCheyenne,Wyoming,for

thestudiotourandunexpectedinterview;KarenDeLiseandKatSovyakoftheWordGalleryfortheirexemplaryworkonthousandsofpagesoftranscription.As usual, Bruce Ritter, investment counselor in San Rafael, California, wasalways available to help us ferret out financial information, findwhateverweneeded at a moment’s notice, and serve as general skeptic, questioner, andhelpmate.

LESSISMORE

HOWGREATCOMPANIESUSEPRODUCTIVITY

ASACOMPETITIVETOOLINBUSINESS

byJasonJennings

This bestseller was the first book published by Portfolio, a new imprint ofPenguinGroupUSA,inDecember2002.

Thebookidentifiesthemostproductivecompaniesontheplanetbasedonthecriteriaofrevenue,cashflow,returnoninvestedcapital,andreturnonequityperemployeeperyear.The companies written about in the book include: Nucor Steel, World

Savings, Yellow Transportation, IKEA, Lantec (a manufacturing company inLouisville,Kentucky),SRCHoldings inSpringfield,Missouri,TheWarehouse(aNewZealandandAustralianchainofdiscountstores),andRyanair,Europe’slargestdiscountairline.

KeyFindings

FOCUS

•Productivecompaniesallhaveabigobjective.

•Productivecompaniesallhaveabigobjective.•Thecultureisthestrategy.

STREAMLINE

•Tellthetruth.•Simplifyeverything.•Getridofthewrongmanagersandexecsfast.•Forgetmasslayoffs.•WTGBRFDT?•Knowtherealfinancialdrivers.•Systematizeeverything.•Seekcontinuousimprovement.•Rationalizecompensation.

DIGITIZE

•Theplug-inmyth.•Technologydoesnotcreateacompetitiveadvantage.

MOTIVATE

•Keepeveryoneonthesamepage.•Peoplearenaturallymotivated,soremovebarriersoffrustration.

EMBODY

•Aleanspirit•Leadershiptraits:

•long-termfocus•embracesimplicity•highmoralfiber•humility

•coachleadership•rejectbureaucracy•believeinothers;trust•institutionalizeleadership

LessIsMoreisavailableinbothhardcoverandpaperbackeditions.

IT’SNOTTHEBIGTHATEATTHESMALL...

IT’STHEFASTTHATEATTHESLOW

byJasonJenningsandLaurenceHaughton

Published in 2001 by HarperCollins, this bestseller identifies the fastestcompanies on the planet. The book’s surprising big finding is that speed hasnothingtodowithphysicalspeedandinsteadwithfastthinking,fastdecisions,fasttomarket,andtheabilitytomaintainmomentum.

Thecompaniesprofiledinthebookinclude:AOL,EuropeanfashionretailerH&M, Spanish fast-food giant TelePizza, Charles Schwab, Clear ChannelCommunications,Australia’sLendLease,andHotmail.

KeyFindings

FASTTHINKING

•Anticipatethefuture.•Spottrendsbeforeothers.•Challengeassumptions.•Puteveryideathroughthegrinder.•Createanenvironmentwherethebestideawins.

FASTDECISIONS

•Createrules/principlesthatguidethecompany.•Getridofbureaucracy.•Understandthevalueofshufflingportfolios.•Alwaysreassesseverything.•Measureandcalculaterisk.

GETTOMARKETFAST

•Launchacrusade.•Ownyourcompetitiveadvantage.•Getvendorsandsupplierstooperateonyourtimetable.•Staybelowtheradar.•Simplicity.•Institutionalizeinnovation.•Hireotherfastpeople.

SUSTAININGSPEED

•Usenarrativesandstories.•Beruthlesswithresources.•Buildascoreboardtomeasureactivity.•Stayfinanciallyflexible.•Provethemath.•Institutionalizeeverything.•Stayclosetothecustomer.

INDEX

AbbottLaboratoriesAbrams,JimmyaccessibilityActBig:building communities and choosing your competition and creating win-winsolutions and down to earth organization and having everyone think like anowner and inventing new businesses and keeping your hands dirty andleadership development and letting go and short-term goals and long-termhorizonsandThinkBigand(TBAB)ThinkSmalland(TSAB)ActSmall:building communities and choosing your competition and creating win-winsolutions and down to earth organization and having everyone think like anowner and inventing new businesses and keeping your hands dirty andleadership development and letting go and short-term goals and long-termhorizonsandThinkBigand(TBAS)ThinkSmalland(TSAS)AdelphiaApolloGroupAppleAspenAutomaticDataProcessing

Bailey,RonstewardshipofStrayerpurchasedbyStrayersoldbyBaileyFamilyFoundationBarkleyEvergreenandPartnersBarr,JimBatten,JimBeaverheadRanchBedBath&Beyond belonging see also communitiesBestBuybonds,economicdevelopment(STARbonds)bonuses:atCabela’satKochIndustriesatMedlineIndustriesatPETCObrands:creationofextensionsof

Buffet,WarrenBuilding Blocks choosing your competitors community building, seecommunitiescreatingwin-winsolutions,seewin-winsolutionshavingeveryonethinkandact like anowner, see owners, employees acting ashumbleness, seehumbleness inventing new businesses keeping your hands dirty, see keepingyourhandsdirtyleadershipdevelopment,seeleadershipdevelopmentlettinggoofwhatisnolongerworkingQuadscenariosandshort-termgoalsandlong-termhorizonsbureaucracyBush,GeorgeH.W.businessfailures

Cabela,DickCabela,JimcustomercommentsandCabela,MaryCabela’sbankofbeginningsofcatalogchangesatcatalogsofcommunityandcustomerloyaltyandcustomersatisfactionandemployeesactingasownersatgovernmentbondsandhumblenessatmerchandiseabandonedbypayplansatproducttestingatpublicownershipofrevenuegrowthatSaltWatercatalogofsizeofsolutionprovidingatstoresoftravelagencyofCalEnergyCallahan,MikeCapitalism,SocialismandDemocracy(Schumpeter)CencoInstrumentsCensusBureau,USCEOs:outside, hiring of of successful companies, qualities of, see Building Blockschange, as Koch Industries principle charts and graphs Private CompaniesContacted toVerify 10 percentGrowth inRevenue andOperating Income forTen Consecutive Years Publicly Traded Companies: Recent Performance vs.Market Indices Publicly Traded Companies Achieving 10 percent Growth in

Earnings Per Share for Ten Consecutive Years Publicly Traded CompaniesAchieving10percentGrowth inOperating IncomeforTenConsecutiveYearsPubliclyTradedCompaniesAchieving10percentGrowthinRevenuesforTenConsecutiveYearsQuad,seeQuad,theChua,Kenclothing,rankandCoca-ColacollegesanduniversitiesStrayerEducation,seeStrayerEducationCollins,Keithlong-termplansandcommonsensecommunitiesatCabela’scustomersatisfactionandatDotFoodsatPETCOQuadscenariosandatSASInstituteatSonicDrive-InatStrayercompanies:best-performing;seealsospecificcompaniesbest-performing,researchon,seeresearch Building Blocks of, see Building Blocks cultures of, see cultures,companypublicownershipof, see publicownership revenuesof, see revenuesand profits, increased self-selection in compensation plans, see payment planscompetitionchoosinginternalQuadscenariosandcompliance,asKochIndustriesprincipleConAgracost-cuttingcultures,company:entrepreneurialpublicownershipandteachingofcustomerscreating win-win solutions for, see win-win solutions Koch Industriesprinciples and and love of sales loyalty programs for satisfaction of, vs.communitymembershipworkingcloselywith

Darwin,Charlesdecision-makingcollaborativeatKochIndustriesatMedlineIndustriesDevine,Brianadvertisingandbonusesandcompetitorsandoncreatingonebranddressandgoalsandon information systems on loyalty program on national support center asPETCO leader PETCO stores and resignations and on short term earnings vs.

longtermsuccessonsystemsanddistributionontestingnewthingsatToys“ ”UstransparencyandvendorsandDeVryUniversityDiener,EddistributionDotFoodsaccessibilityatbeginningsoffacilitiesoffirstnationalsalesconferenceoffoodservicesindustryandgoalsatgrowthofhumblenessatleadership development at Mount Sterling community and principles andvaluesatreinventionofresourceusageatrevenuesatunprofitablebusinessunitsabandonedbyworkforceofdown to earth, see humbleness dress, rank and Drury University Dun andBradstreet

egoismemployees:acting as owners, see owners, employees acting as keeping your hands dirtywithvaluingofEnronentrepreneurial culture entrepreneurship, as Koch Industries principleEupsychianManagement(Maslow)evolutionexecutives:outside,hiringofofsuccessfulcompanies,qualitiesof,seeBuildingBlocks

FactsetResearchSystemsfailure:ofbusinesseslearningfromFernandez,MichaelFlyingJfoodservicesindustry,DotFoodsandForbesFortunefranchisingatSonicDrive-Infulfillment,asKochIndustriesprinciple

Galef,AndrewGates,BillGEGECapitalGeneralMotorsgoals,long-term:binding,consequencesofQuadscenariosandshort-termgoalsandGoodnight,Jim:accessibilityofbackgroundofkeeping-your-hands-dirtyphilosophyoflong-termplaneschewedbyofficeofrevenuesandSASInstitutefoundedbygreed

Hall,BrucehappinessHarper,F.A.Helwig,JaneHenslee,GreghierarchyofneedsHighby,Dennisonproblemspublic ownership and SaltWater catalog and on travel division Hi-Lo AutoPartshonestyHorney,KarenHudson,Cliffonexpansionfranchiserelationshipandonmanagersandleadersofficeofpartnersandhumblenessaccessibility and as Koch Industries principle at O’Reilly Automotiveprinciples andQuad scenarios and stewardshipand superficialdistinctionsandtransparencyandworkethicand

IAMSCorporationImportanceofBelonging,The(Pitonyak)information:availabilityofPETCO’ssystemsofInfosysTechnologiesInstituteofHumaneStudies integrity, asKoch Industries principle inventing new businessesQuad

scenariosandIt’sNottheBigThatEattheSmall...It’stheFastThatEattheSlow(JenningsandHaughton)Jobs,SteveJohnsonandJohnson

keepingyourhandsdirtywithcustomersQuadscenariosandwithvendorsandsupplierswithworkersKinney,AlvaKmartknowledge-basedeconomyknowledgesharingatKochIndustriesKoch,Charlesonassessingmarketvalueofbusinessunits creativedestructionandkeeping-your-hands-dirtyphilosophyofMarketBasedManagementofonMarxeratMITnewbusinessesinventedbyofficeofprinciplesofreadingofsolutionprovidingatvaluecreationandworkethicofKoch,DavidKoch,FredC.Koch Industries Beaverhead Ranch of compensation programs at creativedestructionatdecisionrightsatgrowthofhumblenessatinterviewsatkeeping-your-hands-dirtyphilosophyatknowledgeprocessesatMarketBasedManagementatnewbusinessinventedatportfolioofpredecessorfirmofprinciplesatrevenuegrowthatvaluecreationatvirtueandtalentatvisionofworkethicatKoch Pavement Solutions Koch Performance Roads, Inc. (KPRI) Kohl’sCorporationKPMGKrause’sSofaBedWarehouse

LashDistributorsLauren,RalphLay,Ken

layoffs and downsizings Lazarus, Charles leadership, Building Blocks of, seeBuildingBlocksleadershipdevelopmentatDotFoodsat Medline Industries at O’Reilly Automotive Quad scenarios and at SonicDrive-InLess IsMore (Jennings) letting goofwhat is no longerworking andknowingwhentostickitoutQuadscenariosandLevitt,WilliamLevittownlicensingvs.sellingLinneman,Brianlong-termplans:binding,consequencesofQuadscenariosandshort-termgoalsandloyaltyprograms

McLain,Scottmanagement:bottom-up vs. top-down and speed of decision-making see also companiesmanagers, treatment of Market Based Management® (MBM) market value,determiningMarks,JohnMarxer,RayMaslow, Abraham hierarchy of needs of Medline Industries awards given atbeginningsofcompensationplanatasdebtfreedecision making at as distributor as well as manufacturer entrepreneurialcultureatgoalsathealth-careproviders’costreductionsandhumblenessatinvolvementwithcustomersatleadershipdevelopmentatownershipofproductdivisionsinrevenuesatsalesforceatwin-winsolutionsatMid-StatesAutomotiveMills,A.L.Mills,AndyMills,Charlieon cost reductions for health-care providers on decision making onentrepreneurial culture on Medline’s goals on Medline’s ownership productdivisionsandsalesforceandonsellingdirectlyMills,IrvMills,JimMills,JonMillsHospitalSupplyCorporationmiscommunicationsMoeller,JoeMontgomeryWardMoore,PattyeMountSterling.Myers,Jim

naturalselectionneeds,hierarchyofNeurosisandHumanGrowth:TheStruggleTowardSelf-Realization(Horney)Nilekani,NandanNixon,RichardNowWho’sBoss?

offices,ofCEOsOldsmobileorganizations, see companies Origin of the Species by Means of NaturalSelection,The(Darwin)O’Reilly,CharlesFrancisO’Reilly,CharlieBattenonO’Reilly,ChubO’Reilly,Davidonculturecustomersandhumblenessofonleadershiplong-term plans and on O’Reilly ownership on performance-evaluation gridretail customers and store acquisitions and O’Reilly, Larry O’Reilly, RosalieO’ReillyAutomotivebenefitsatearlyyearsofemployeesactingasownersatgoalsofgrowthofhumblenessatinvolvementwithcustomersat leadershipdevelopmentat lengthof serviceatownershipofperformance-evaluationgridusedatretailbusinesspursuedbyrevenuesatstewardshipat stores acquiredbyTeamSpiritmagazineofworkersvaluedatowners,employeesactingasatO’ReillyAutomotiveQuadscenariosand rulesfor

Palmer,CharlesPalmer,RebeccaPappe,CharliepaymentplansatCabela’satKochIndustriesatMedlineIndustriesatO’ReillyAutomotiveatPETCOat SAS Institute performance-evaluation grid PETCO Animal Suppliesadvertisingofbonusesatcommunityandcompetitors and Devine’s leadership of dress standards at early years of

earningsmaximizationandgoalsofhumblenessatinformation systems at loyalty program at national support center ofresignationsatrevenuesofsolutionprovidingatstoresoftestingattransparencyatvendorsandsuppliersandPetDepartmentStoresPets.comPETsMARTPhilosophyofSciencePitonyak,Davidplans,long-term:binding,consequencesofQuadscenariosandshort-termgoalsandpoint-of-sale(POS)systemsPoloPowell,GregPriceWaterhouseprinciplesandvaluesatDotFoodsatKochIndustriesPrivateCompaniesContactedtoVerify10percentGrowthinRevenueandOperatingIncomeforTenConsecutiveYears(chart)problemsand letting go ofwhat is no longerworking providing solutions, see win-winsolutionspublicly tradedcompanies,chartson:achieving10percentgrowth inearnings per share for ten consecutive years achieving 10 percent growth inoperating income for ten consecutive years achieving 10 percent growth inrevenuesfortenconsecutiveyearsrecentperformancevs.marketindicespublicownershipofCabela’scompanyculturesandofO’ReillyAutomotiveofStrayerEducation

Quad,theThinkBig,ActBig(TBAB)ThinkBig,ActSmall (TBAS)ThinkSmall,ActBig(TSAB)ThinkSmall,ActSmall(TSAS)quickfix

regionalcompanies,growthofreinventionQuadscenariosandresearch“best”definedandquantifiedindeterminingwhichbusinessestostudydossiersinfinallistinfindingsoffocusofgainingaccesstocompaniesgainingaccesstofinancialdatageographyand

socialresponsibilityandteamassembledfortop17finalistsinresourceslong-termplansandrespect,asKochIndustriesprinciplerevenuesandprofits,increased at best-performing companies Building Blocks for, see BuildingBlocksatCabela’satDotFoodsexaggerationofatKochIndustriesrevenuesandprofits,increased(continued)atMedlineIndustriesatO’ReillyAutomotiveatPETCOPrivate Companies Contacted to Verify 10 percent Growth in Revenue andOperating Income for Ten Consecutive Years (chart) Publicly TradedCompanies: Recent Performance vs. Market Indices (chart) Publicly TradedCompanies Achieving 10 percent Growth in Earnings Per Share for TenConsecutive Years (chart) Publicly Traded Companies Achieving 10 percentGrowthinOperatingIncomeforTenConsecutiveYears(chart)PubliclyTradedCompanies Achieving 10 percent Growth in Revenues for Ten ConsecutiveYears(chart)researchandatSASInstituteatSonicDrive-InatStrayerEducationRockIslandRoehr,DaveRoss,Kellyrules

St.Mary’sHealthcareSall,JohnS&P500Sarbanes-OxleyActSASInstituteaccessibilityatcommunityandcompensationatemployeeturnoveratfoundingofhumblenessatkeeping-your-hands-dirtyphilosophyatlicensingmodeloflong-termplansandrevenuegrowthatStaplesandSasser,EarlSchumpeter,JosephSeligman,Martinsellinglicensingvs.solution providing and; see alsowin-win solutions see also customersShaw,Brianshort-termgoalsandlong-termhorizonsandconsequencesofbindinglong-termplansQuadscenariosandSilberman,Robertaccessibilityofhumblenessof

profitgrowthandstewardshipofteachingofSmith,Troysoftware companies employee turnover at SAS Institute, see SAS InstituteSolon,Briansolutionproviding,seewin-winsolutionsSonicCruisersSonicDrive-Inbagroyaltyat“beatthecustomer”gameatCoca-Colaandcommunityandas company of owners culture change at early years of employee surveys atfranchisingatgoalsathumblenessatleadershipdevelopmentatloyaltyprogramatmenuitemsatofficesofpartnersofrevenuegrowthatRoadRulesofstockoptionsattransparencyattroublesatSonicGamesSouthwesternBellSpitzer,EliotStammer,BarbieStaplesStarbucksstewardshipstockmarketStrayer,IrvingStrayerEducationaccreditationandrespectofBailey’spurchaseof Bailey’s sale of communities at competitors of early years of factors insuccessoffacultyofgoalsofgrowthofhumblenessatmissionandfocusofpublicownershipofrevenuesatSilberman’steachingandstewardshipatstudentsatsupplyanddemandandStrayerOnlinesuperficialdistinctions,erasingofsuppliers,seevendorsandsupplierssystemsanddistribution

talentandvirtue,atKochIndustriesteamefforts

TeamSpiritThinkBigand Act Big (TBAB) and Act Small (TBAS) building communities andchoosing your competition and creating win-win solutions and down to earthorganization and having everyone think like an owner and inventing newbusinessesandkeepingyourhandsdirtyandleadershipdevelopmentandlettinggoandshort-termgoalsandlong-termhorizonsandThinkSmall:and Act Big (TSAB) and Act Small (TSAS) building communities andchoosing your competition and creating win-win solutions and down to earthorganization and having everyone think like an owner and inventing newbusinessesandThinkSmall(continued)keepingyourhandsdirtyandleadershipdevelopment and letting go and short-term goals and long-term horizons andToe,J.ChrisToys“ ”UsTracy,JohnTracy,PatandabandoningunprofitablebusinessaccessibilityofoncommunitycompanygoalsandTracy,RobertandDorothytransparency

United Airlines universities and colleges Strayer Education, see StrayerEducationUPCO

valuecreationQuadscenariosandvalues,seeprinciplesandvaluesVarner,SterlingvendorsandsupplierskeepingyourhandsdirtywithPETCOandQuadscenariosandSonicDrive-InandVerizonvirtueandtalent,atKochIndustriesvisionofKochIndustries

WallStreetJournalWal-MartWalton,Samwealth:attitudesabouthappinessandWelch,JackWellPet

Why Satisfied Customers Defect (Sasser)Why Wages Rise (Harper) win-winsolutionsatCabela’satKochIndustriesatMedlineIndustriesatPETCOQuadscenariosandWise,Tedworkers,seeemployeesworkethicWorldBankWorldCom

1

WhenwefirstinterviewedPETCOexecutivesinDecember2003,BrianDevinewasCEOandJimMyerswasCFO.InMarch2004JimMyersbecameCEOandBrian Devine remains an executive management member and executivechairmanoftheboardofdirectors.