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Go Go Goliaths


Cover Story

GO-GO GOLIATHS

The People Dept. at Southwest Airlines Co. is bracing for a long, grueling Saturday. But unlike some other companies' personnel sections that have to put in extra hours, it's not preparing mass layoffs. Instead, staffers will be interviewing 200 internal candidates applying for the 100 management jobs opening up in reservations--thanks to Southwest's rapid expansion.

Over at Home Depot Inc., it looks as if the retailer didn't come in exactly on target for store openings last year: The old goal was a 25% increase, to 330 stores. Instead, the chain finds itself with 340 locations, a 29% jump--after investing $150 million in a joint venture in Canada (page 65).

And in an era of belt-tightening, Microsoft Corp. worries that its staff is getting too accustomed to riches and success. In a memo last year, the company chided managers about catered lunches and little gifts for good work. It complained things had gotten so far out of hand it wouldn't be surprising to see handouts of leather Gucci jackets with the MS logo.

Oh, to have problems like these. As other corporate giants continue to downsize, rightsize, and reengineer their way to supposed health, highfliers such as Microsoft, Home Depot, and Hewlett-Packard are proving that big doesn't necessarily mean bumbling. And they're not alone. Thundering through industries as diverse as retailing and steelmaking are some remarkable Go-Go Goliaths. For years, these companies have turned in the kind of swift, sure growth more often found among fleet-footed entrepreneurs. They're grabbing new markets, churning out better products--and coping with creeping costs and ballooning bureaucracies.

In all, BUSINESS WEEK has identified 10 companies that have demonstrated these talents while achieving growth rates in sales and profits that put them well ahead of the herd (table). This admittedly subjective list isn't all-inclusive: There are other big corporations that fit the bill. But these companies are the clear standouts, and they represent a wide variety of industries and competitive situations.

KNEE-JERK NAYSAYING. Absent from the list are such illustrious names as General Electric, AT&T, Johnson & Johnson, and Chrysler. That's something of a surprise, because steady performances at some of these companies--and sharp turnarounds at others--have given the lie to some of the knee-jerk naysaying about giant corporations in recent years. Chrysler, for one, has reinvented itself--from the shop floor to the executive suite. Along the way, it cut costs and sped up introduction of models such as its popular subcompact Neon. Likewise, AT&T, after downsizing, is chasing new business with all the vigor of a startup. Its acquisition of McCaw Cellular Communications Inc. propels AT&T into a leading position in wireless communication.

There are also a few large companies that have grown steadily despite changing environments. Johnson & Johnson, for example, has thrived in the roiling health-care industry, thanks to a decentralized management that allows various units to operate almost as independent companies.

And of course there's GE, which has evolved into the very model of a thriving behemoth under John F. Welch Jr.'s relentless, hard-driving management. GE shows that conglomerates don't necessarily grow at a glacial pace. In the five years ended in 1994, GE's sales and profits have grown at average annual rates of nearly 4% and 9%, respectively.

Such growth is nothing to sneeze at for a $60 billion company. Still, even these giants don't match the phenomenal records of the Go-Go Goliaths. These exemplars turn in sales and earnings growth well into double-digits, far outstripping their big-company brethren. And in the era of the pink slip, many are adding employees at an equally rapid pace.

Diverse as they are, these leviathans offer lessons that are of use to the rest of Corporate America. After a decade of watching IBM, General Motors, and Sears Roebuck brought low, we've come to think of big companies as plodding and arthritic: too ponderous--and too imprisoned by their past--to cope with technological upheaval in lightning-fast global markets. But at the very core of these Go-Go Goliaths is a culture that embraces change. Above all, they're willing to abandon long-cherished formulas to adapt to market realities. "Good companies not only can learn. They've also learned to forget," says C.K. Prahalad, professor of business administration at the University of Michigan and co-author of Competing for the Future, which offers companies strategic insights into the coming years.

BE NIMBLE. Of course, some of these titans enjoy virtual monopolies of their own creation--Intel, for example. And others, such as Home Depot, have carved out unique market niches. But history is littered with once-pioneering companies that lost out to faster, nimbler rivals.

That's why these giants are often willing to make their products obsolete before rivals do. Consider Hewlett-Packard Co. (page 67). HP's latest ink-jet printer, introduced in October, replaces a black-and-white model launched last March. The old model was the world's best-selling computer printer, but the new one offers color, not just black and white. With the optional color-printing kit, the new model costs $414--just $49 more than the monochrome one. "We've developed a philosophy of killing off our own products with new technology," says Lewis E. Platt, HP's chief executive. "Better that we do it than somebody else."

Just as important, these giants have managed to stay fresh and forward-looking. By their nature, small companies are flexible and customer-focused. But big outfits need mechanisms and management tools to institutionalize those qualities. That's why many successful giants pride themselves on lean management. Even though Nucor Corp.'s annual sales top $2 billion, the steelmaker's one-story headquarters in a suburban Charlotte (N.C.) office park is staffed by only 23 people. There are no lawyers and no public-relations officers. And when guests come, Chairman F. Kenneth Iverson escorts them to what he jokingly describes as the "corporate dining room"--a lunch counter across the street.

The payoff for acting small while thinking big comes in the kind of returns usually seen at small hot-growth companies. As other retailers suffered through a consumer drought in recent years, revenues at Home Depot climbed by 36% a year in the five years ended in 1994, while profits grew 44% a year. Microsoft's five-year record is also stellar: Sales and profits at the software colossus have increased by more than 47% and 53% a year, respectively. The contrast with run-of-the-mill big companies is stark: Since 1989, average annual sales--for companies in the $2 billion-plus league--have grown by a modest 7%, while net earnings dropped slightly every year, according to Standard & Poor's Compustat.

The payoff extends all the way to Wall Street. In a recent study of the largest U.S. companies, Mercer Management Consulting Inc. found that investors will pay at least 50% more for an added dollar of profit generated through revenue growth than for that same dollar produced by cost reductions. In retail, for instance, Mercer found that Home Depot's compound annual growth in market value from 1989 to 1993 was 58%, compared with only 12% for profitable cost-cutters such as Ames Department Stores Inc. "You can't shrink to greatness," says Dwight L. Gertz, a Mercer vice-president.

That's a notion employees can certainly appreciate. Instead of doling out pink slips, many of these behemoths have expanded their payrolls. At Microsoft, with 16,000 employees, staff counts have grown an average of 32% a year since 1989. By contrast, the average payroll of all big companies has expanded by less than 1% a year, according to S&P.

Since they're not distracted by restructuring, Goliaths can devote energy to what they do best: responding to opportunity with astonishing agility. In October, Microsoft CEO William H. Gates III made an exception to his long-standing practice of developing his own products: He agreed to pay $1.5 billion for Intuit Inc., which produces personal-finance software. Gates hopes for a leg up in the rush to provide financial services on the Information Superhighway.

Similarly, with rivals Continental and United aiming to replicate Southwest's low-fare, short-haul formula, Southwest has accelerated its expansion. After acquiring Morris Air Corp. in late 1993, Southwest Airlines Co. upped its capacity by 29% in 1994. "When you have this tremendous flux in the outside world, you don't want to get `fluxed' yourself," says CEO Herbert D. Kelleher. True, Southwest recently announced that fourth-quarter earnings fell 47%--largely the result of fare-discounting to defend its niche. But profits are expected to resume growing by at least 12% a year over the next five years, after a projected 7% increase this year, estimates Michael W. Derchin at NatWest Securities Corp.

SHRUNKEN TURF. There's irony, of course, in the discovery that big isn't always bad. After all, for most of Industrial America's history, large outfits have been envied for their cornucopia of advantages: economies of scale, market clout, and vast resources--of capital, facilities, technology, and talent. Those riches have enabled big companies to expand both at home and abroad. But in recent years, as markets fragmented and competition intensified, many giants have spent more time defending their empires than conquering new territory. They became champions of the status quo.

IBM, for example, remained wedded to the mainframe long after the emergence of lucrative personal computers. Sears, in an effort to protect its private-label products, stubbornly refused to stock the brand-name appliances that shoppers demanded. GM and Ford Motor Co. were both slow to capitalize on the growing demand for minivans--out of fear of cannibalizing their conventional station wagons. All too often, such efforts to defend turf have yielded nothing but a smaller turf. The upshot: The chief skill possessed by legions of U.S. managers is the art of shrinkage. But paring costs and slashing jobs are no substitute for growth. "Getting lean and mean is no small thing, but lean and mean is not a business strategy," says management guru Tom Peters.

For fast-growing Goliaths, mass remains an awesome weapon. Consider $11.5 billion Intel. With its near-monopoly on the most lucrative kinds of microprocessors--the brains of PCs--Intel has more resources than its rivals to lavish on research and development: It will spend more than $1 billion this year on R&D, compared with $275 million by Advanced Micro Devices Inc., its nearest competitor. Neither the discovery of a bug in its new Pentium chip--nor the slowness that it showed in responding to customer concerns--is apt to erode its commanding lead, according to analysts. Sheer size is also an advantage for Microsoft. But because of its near-monopoly in personal computer operating systems and its highly aggressive sales tactics, competitors have captured the attention of federal regulators with allegations of unfair practices. Microsoft denies any wrongdoing.

The challenge is to make sure bigness doesn't lead to bloat. These Goliaths preached frugality long before it became fashionable. Microsoft follows what it calls the "n-minus-one" theory of head-count growth: If five extra people are needed for a task, Microsoft will allocate four. Surprise! The work gets done anyway. At Southwest, capital expenditures of more than $1,000 must be approved by a department head, the chief operating officer, and the vice-president for finance.

FORGET MEMORANDUMS. Watching pennies, however, is only one aspect of bureaucracy-busting. Some big companies exhibit a cultural antipathy to perks and red tape. Like all top Intel managers, CEO Andrew S. Grove has a cubicle, not a private office. And when they travel, executives fly coach and rent subcompact cars: Ford Escorts are jokingly known as "Intel limousines." Meanwhile, at U.S. Healthcare Inc., one of the nation's biggest and fastest-growing health-maintenance organizations, meetings are prohibited between 9 a.m. and 4 p.m., and memos are banned.

Others have reinvented their management structures to combat the almost inexorable urge to centralize. "It's something you have to work at all the time," warns Hewlett-Packard's Platt. In the 1980s, HP almost collapsed under the weight of 38 central committees that ruled on everything from product pricing to where a new product should be launched. In 1990, Platt's predecessor, then-CEO John Young, dissolved the committees and decentralized almost every aspect of HP's business. Instead of relying solely on a central R&D staff, as many companies do, HP hands over most of its massive $2 billion research budget to its four operating groups to spend as they wish. "You can't spend $2 billion efficiently in any kind of centralized way," says Platt.

Lean and responsive management alone won't hold rivals at bay, of course. Thriving Goliaths also never lose sight of the marketplace. Motorola Inc., for example, encourages its wireless divisions to compete against each other--on the theory that the marketplace will ultimately pick the winning technology. The company's General Systems Sector, which is developing a new technology to increase the calling capacity of cellular networks, is going head-to-head against the Land Mobile Sector, which has joined with Nextel Communications Inc. The two are developing a multi-use wireless service that will offer everything from calling to text paging.

Close contact with customers also means more business. For instance, VF Corp., maker of Lee and Wrangler jeans, has linked its computers to those of its retailers. Now, it can track daily sales and replenish stocks automatically, without cumbersome order forms. That makes for happy customers--and bigger orders.

Microsoft goes even further when it comes to customer contact. In December, it delayed the release of its Windows 95 operating system until August--partly the result of an unprecedented level of testing. Although analysts reckon the delay could slow Microsoft's revenue growth to 5% this quarter and next and cost it millions in potential earnings this year, most are betting Windows 95 will revolutionize software applications and eventually generate a windfall for the company.

The testing began in 1992, almost immediately after the introduction of Windows 3.1. Engineers sat down with focus groups made up of users from a couple of dozen companies to find out what new features and capabilities they wanted. From that, they came up with the Ten Commandments for Windows 95, including more user-friendly graphics. Then came usability studies in 1993. In a lab at headquarters, Microsoft asked experienced and inexperienced users to try the new features. Observers behind one-way mirrors noted how easy or tough a time people had. Last summer, Microsoft started field studies. A "beta" version was sent to 40,000 customers, who provide independent feedback.

To keep attuned to customers, successful Goliaths have pushed decision-making down to line managers, who know the market firsthand. Each of Nucor's 21 plant managers is responsible for sales, purchasing, and personnel. Sure, it might be cheaper to centralize those functions at headquarters. But the steelmaker figures the cost of duplication is more than outweighed by improved responsiveness to the marketplace (page 70).

ONE APPLICANT IN 10. Naturally, if they want lower-level managers to take on more responsibility, companies must make sure they have the needed skills. That's tough when a company is moving at a breakneck pace. At Motorola, which added 13,000 employees in 1993, every job candidate, even those looking for factory work, goes through three days of interviews. During that time, applicants write a composition and take 41/2-hour tests--in math, problem-solving, and ability to work on a team. Only one candidate in 10 makes the cut.

At Southwest, the hiring process is called "targeted selection." For instance, the airline interviewed 35 of its best pilots to find what qualities they had in common. One key trait it discovered was a willingness to work as part of a team. (After all, it's not unusual for Southwest pilots to help flight attendants tidy cabins after a landing to speed airport turnarounds.) Southwest now uses those characteristics to evaluate applicants (box). Last year, Southwest's turnover was about 7%, including retirements--half the industry average.

Staff training is also critical if big companies are to maintain their standards and corporate culture in the face of constant expansion. Once in the door, the typical Motorola employee gets 40 hours of training a year to refine such skills as teamwork and problem-solving. Employees can also take courses at their factories in communications and technical skills or can attend classes at Motorola University at headquarters in Schaumburg, Ill. Motorola spends about 4% of its payroll cost on training and development, compared with an average of 1.2% for all U.S. companies. Thanks to its motivated workforce, Motorola says the quality of work at its manufacturing sites has steadily improved. The company calculates it has scarcely 30 defects for every 1 million opportunities there are to make mistakes, down from 7,000 defects in 1987.

The healthy giants also make exhaustive efforts to motivate and communicate with employees. For example, Kelleher and about 90 of Southwest's other top executives spend at least one day a quarter in the field, working in areas outside their own departments. Of course, pay is an important motivator, too. At successful Goliaths, pay for performance isn't a concept limited to the executive suite. Steelworkers at Nucor, for instance, are eligible for productivity and quality bonuses that are typically 130% to 150% of base pay. That can give workers pay of about $50,000 a year--about what unionized workers earn at other mills. But Nucor's productivity is far superior: At its Crawfordsville (Ind.) plant, it takes less than one worker-hour to produce a ton of flat-rolled steel, compared with an average of four worker-hours elsewhere.

To be sure, there's no guarantee today's hot-growth giants won't stumble later. Peters points out that Southwest and Wal-Mart, for instance, are relative youngsters alongside IBM, which took more than 70 years to flounder. And arrogance can develop more quickly than that--as demonstrated by Intel's initial high-handed treatment of its Pentium customers. Intel's 1994 profits were down less than 1% after a $475 million charge for Pentium replacements. Says CEO Grove: "We have to learn some skills that are second nature to others."

Still, this decade could offer the best promise of growth that big companies have seen for quite a while, says Michigan's Prahalad. That's because of promising markets opening up abroad. Already, Motorola is making a big push along the Pacific Rim, especially in China, where it anticipates sales that will equal its American revenues by about the year 2000. And while their efforts in Latin America will be slowed by Mexico's meltdown, even Wal-Mart and Home Depot, whose focus is still mainly on U.S. expansion, are testing the international waters. Whether at home or abroad, though, the successful giants aren't likely to stray far from the lessons that have brought them this far. After all, speed, flexibility, and staying close to customers are skills that know no boundaries.

Lessons From The Thriving Giants

What are they doing right? Diverse as these leviathans are, they have something to teach the rest of Corporate America

ACCEPT CHANGE The marketplace is in constant flux. That means goals and procedures must be continually reviewed and updated. Strive to make your own products and services obsolete: If you don't, rivals will.

DECENTRALIZE AUTHORITY This

is key in fighting creeping bureaucracy. Quick decision-making is also vital to competitiveness. Lower-level managers gho are close to customers and markets need the say-so to make decisions.

LISTEN TO CUSTOMERS They're the best gauge of how a company is faring against competitors. Involving them in the process of developing new products and services helps guard against isolation and arrogance.

HIRE CAREFULLY Sign up skilled

people at all levels who demonstrate versatility and responsiveness. Fast growth often strains any organization's ability to maintain its staff quality

and supervision.

TEACH CONTINUOUSLY Don't skimp on training--even in lean times. Improving employees' skills is crucial to a company's ability to identify fresh opportunities and respond fast to changing markets.

CONTROL COSTS Financial targets are useful. But it's just as important to foster a frugal corporate culture through the example of top management. Lavish perks send the wrong message to employees.By Wendy Zellner in Dallas, with Robert D. Hof and Richard Brandt in San Francisco, Stephen Baker in Pittsburgh, David Greising in Atlanta, and bureau reports


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