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2001 BW 50

SPRING 2002

EDITORIALS

A Back-to-Basics Year
This year's BusinessWeek 50 is a list of battle-hardened survivors that knew how to ride out a business cycle and position themselves for the recovery


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It was a difficult year for Corporate America. Enron Corp. imploded, accounting scandals spread, and telecoms melted down. There was corporate road kill everywhere. Even the President felt the need to wag his finger and admonish chief executives to be more responsible, delegating the Securities & Exchange Commission and other regulators to make sure they clean up their balance sheets and practices. But in the midst of this tumultuous time, there were still corporations that were able to duck the troubles and prosper. This year's BusinessWeek 50 is a list of battle-hardened survivors that knew how to ride out a business cycle and position themselves for the recovery. They weren't flashy. They got back to the basics and toughed it out.

Here's how many of them did it. Winners, such as Duke Energy (DUK ), Bed Bath & Beyond (BBBY ), and Capital One Financial (COF ), held dominant positions in their markets and used the downturn to reinforce those positions. While rivals struggled to work off the excesses of the '90s, they benefited from adhering to conservative strategies. The most important was a solid balance sheet.

As banks tightened up on their risk-taking and curbed lending, and investors turned their backs on less-than-high-quality equities, many companies were starved for capital. Those that had loaded up on debt in previous years suffered the most. The telecoms, of course, were the biggest losers, having borrowed hugely to finance wild expansion, only to crash and burn. But others suffered as well. Lechters Inc. filed for bankruptcy and began to liquidate its 315 stores. This left Bed Bath & Beyond Inc., which had funded its expansion out of cash flow, in a great position to pick up market share.

The winners were also the lowest-cost producers. Wal-Mart Stores Inc. (WMT ) used its cost-cutting ability to surpass ExxonMobil Corp. (XOM ) to become the largest company in the world and jump to No. 14 on the BW50 list. Because companies had virtually no pricing power last year, those that knew how to cut costs were able to sustain profits during a difficult period.

It also helped to be in the business of selling consumer goods and services. In most recessions, rising unemployment cuts consumer spending. This downturn, however, was different. Unemployment never rose all that sharply, and those people who kept their jobs actually saw their real wages rise. This was unusual, and it meant consumer-goods companies did better than they usually do in a downturn. Health-care companies also fared exceptionally well last year, and 10 of them made it onto the list, vs. only 3 in 2001.

It certainly helped for companies to have seasoned managers, people who had lived through previous business cycles, in charge. For many high-tech CEOs in their 30s, this was the first major downturn of their career. Many were stunned. Even now, a good number see "no visibility" ahead for their companies' performance, while managers who've been through a few cycles have a better grip on what to expect in the months ahead. Johnson & Johnson (JNJ ), No. 1 on the BW50, began preparing for the downturn three years before it hit. It overhauled divisions when things were good--and funds were available. Tackling problems in better times allowed J&J to actually do well during the worst of the downturn.

This was a year when investors had to settle for modest growth rates and stock valuations. That meant a lot fewer tech companies on the BW50. Tech companies made up nearly half of the BW50 two years ago and occupied 16 spots last year. But in this list, only three tech and telecom companies made it--KLA-Tencor (KLAC ), First Data (FDC ), and Electronic Data Systems (EDS ). They all helped other companies cut costs and raise productivity. In fact, only 17 companies from the Class of '01 made a repeat appearance on the 2002 roster.

This was certainly a year when keeping to core competencies won a company a slot in the BW50, while trendy agglomeration and hyperaggressive accounting techniques did not. The winners were a more diverse group, with familiar names from the Old Economy--Pfizer (PFE ), Harley-Davidson (HDI ), Kohl's (KSS ), Citigroup (C ), General Dynamics (GD ), and others.

As economic growth returns, the winners of the BW50 will be in a solid position to garner market share and generate profits. And those who didn't make it this year will be wiser. With their first rough business cycle under their belts, expect high-tech survivors to come out fighting. Next year's BW50 will undoubtedly consist of a different mix of champions.


MARCH 25, 2002




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