Charting the CEO 100 Index
article2000CEO 100 List

Building and Implementing Better Business Models

The 10th Annual Survey of CEO Best Practices and Investment Opportunities

Donald W. Mitchell
Chairman and Chief Executive Officer
Mitchell and Company

Great CEOs have always been thought of as builders, but increasingly they are doing this through remodeling the basic design of what and how their companies add value (better, faster, and cheaper) for customers and key stakeholders. In this new role, the most effective CEOs combine the tasks of architect and general contractor for creating better ways to serve the company's customers and other stakeholders as new opportunities and challenges emerge.

This company remodeling is like adding a highly productive second floor on a factory, that facilitates making better products, while tripling production in ways that reduce capital intensity.

By contrast, most companies are satisfied with activities like reengineering that only attempt to affect a few processes, an approach that is like rewiring some of the electrical outlets in a few of the rooms on the first floor of the same factory. Others rely on constant layoffs, which is like leaving the existing factory intact, but eliminating many of those who can design, sell, and produce the products.

Mike Ruettgers, now executive chairman of information storage giant EMC (13, 15), led his company to the fastest stock-price growth on the New York Stock Exchange in the last decade. How does he evaluate his performance as CEO during those years? "By how well we identified and executed on new trends. We changed the company four times to do this in the 1990s." That theme recurs with most of this year's CEO 100, and most often among those who have been on the list many times before.

Four CEOs have appeared seven times on the CEO 100. Each is a champion company remodeler. Tom Golisano of Paychex (52, n.r.) led a payroll service for small companies in Rochester into a national firm that provides a broad variety of services that enhance relations between small company employers and their employees (including employee benefits, retirement accounts, and human resource services). Chuck Schwab of Charles Schwab (60, 39) went from developing a telephone-based discount stock brokerage into a Web-and-telephone based financial supermarket. Mike Birck of Tellabs (n.r., 80) grew from providing specialized components for telecommunications companies into building the key equipment systems that allow them to serve Internet and voice customers at the same time. Lowry Mays of Clear Channel Communications (n.r., 46) grew his company from a remodeler of local radio station operations into a custom global provider of advertising packages in almost all leading media.

But company remodeling has to bring business advantages quickly, or it's a mistake. Steve Sharp of TriQuint Semiconductor (7, n.r.) became CEO in 1991. At that time the company's business model had been "to develop gallium arsenide technology and see who might like it," an approach often used in newer technically-based companies towards their favorite technologies. That direction was changed to "finding problems that potential customers had and then trying to solve those problems" with this technology. The company has been able to use this customer-oriented approach to spawn new businesses, developing so far into four specialized areas organized around specific customer needs. "Each organizational split-off of an operating group creates an increased focus that benefits customers" and TriQuint. Those who don't make these business-advantaged changes are vulnerable to the companies who do.

Companies are also changing their business models more often and effectively. That increases the gap between the most talented remodelers and those trailing the pack. As the operating head of one small part of Tyco International, Dennis Kozlowski (87, 92) realized the power of shifting focus from selling equipment used in new nonresidential construction to getting the repetitive, high margin service contracts for the equipment after the buildings were complete. Usually, you got the construction equipment contract "only if someone made a mistake and mispriced the bid." Upon becoming CEO, he refocused all parts of the company on this search for steadier, more profitable offerings in higher growth markets. Today, 90% of Tyco's revenues are recurring or sustainable growth revenues, rather than cyclical. Helped in part by related acquisitions, he was able to create a company with revenues of $28 billion in 2000 from a base of $3 billion in 8 years. Through this time, stock soared even faster during the remodeling than General Electric's did under the legendary Jack Welch, even though Tyco sports a much lower stock-price multiple.

What is a business model? It's simply a way of organizing a company to permit it to serve its customers in an effective way. As time passes, these models change. In the past, these changes came from new industry competitors, funded by large companies or venture capitalists. Now, the changes often come from industry leaders, instead. That's the essence of the daunting challenges that business remodeling competition presents.

Let's consider semiconductors, since so many CEO 100 companies this year provide these components. The original producers did everything from finding the customers, to designing the circuits and chips, to manufacturing them. Most of the chips were used for computer memory in the 1970s. Intel changed that model by refocusing itself on producing microprocessors, and becoming the world's largest chip maker. In the next iteration, Xilinx and others began providing more general purpose logic chips that others fabricated for them that could be programmed by customers for specific applications, saving time to market for those customers.

When Wim Roelandts (30, 44) arrived at Xilinx from Hewlett-Packard, he saw a need to move the company's business model of providing programmable logic beyond being merely fabless. Instead, he encouraged everyone to focus on working better with the fabrication partners and customers to further speed time-to-market and improve performance for customers, a solution emphasis reminiscent of TriQuint's. This organizational direction allows Xilinx to focus on designing new product architectures, software tools and knowledge advantages that fit well with the most advanced semiconductor process technologies and shifting customer needs. As one sign of this new concentration on better solutions, Xilinx developed a way for systems that use the company's chips to be upgraded remotely with software, even after the customer's customer is using these chips inside a product. This means that the duration of a chip's being competitive in an application is greatly lengthened, making both the customer and the customer's customer more competitive.

What are some key lessons of remodeling companies?

First, the effective CEO establishes an unchanging core vision that includes an expectation of regular business model changes. H.K. Desai of QLogic and his colleagues (3, n.r.) saw that their base business of providing disk drive controllers for personal computers was going to be a terribly fluctuating business. The company concluded it needed to diversify into better markets in places where it could have increasing competency advantages based on its understanding of how to create effective communication between host and storage devices. No one knew where those places were for sure, but experimental developments soon established a series of breakthrough products. Those successes created new core competency advantages. The company continues now to build on its industry lead by preemptively pursuing all areas of technology that are evolving into its core competency. The dual vision of better, more stable markets and its desire to have a core competency advantage reflected in its products keep the company focused into making the needed remodelings.

Second, become more specialized and expert. Bob Bailey of PMC Sierra (11, 7) likes to quote Don Valentine of Sequoia Capital, "Great markets make great companies." In 1994, the company, then Sierra Semiconductor, realized there was a large opportunity in broadband, and acquired PMC Sierra to investigate that area. Soon the board had two areas in invest in, the number 3 maker of personal computer modems and a potential leader in Internet infrastructure. By 1997, the company exited the first business, its historic base, and concentrated on the newer area, the former venture. This single remodeling allowed PMC Sierra to focus into a better market, become more specialized, and increase its expertise the most, given limited resources.

Third, you need to adopt business models that flexibly relate to irresistible forces. For the many technology companies on the CEO 100, this means being open to new ways of solving problems. John Chambers of Cisco Systems (37, 22) insists that the company's people be "technology agnostics" so that customers will always get the best solutions. Cisco relies on outside suppliers to perform many of the key activities in creating its technology so that Cisco can focus resolutely on evolving the solutions as rapidly as possible. EMC also takes this approach.

Fourth, you also need to create processes for making the desirable remodelings. Xilinx, for example, has identified the thinking processes that lead to defining new and improved business models. The company works on improving those processes and in helping everyone in the company become more effective in employing them. Companies that can afford inexpensive experimentation, like Paychex, also have business processes designed to identify and nurture potential experiments that could lead to new business models.

What does the future hold for corporate remodelers? Our top CEO remodelers agree that they will have to make these changes faster, more often, more extensively, and involving more stakeholders. As the technology recession was just beginning to pinch in the last few months, many of these remodelers had already developed substantial model improvements to take advantage of greater access to hiring top employees, some competitors not being able to keep up in the next round of innovation, and differential access to cash and stock resources to make large investments.

As Dorothy said in The Wizard of Oz, "Come on, Toto. I don't think we're in Kansas any more." Those who don't become good enough at corporate remodeling will probably see themselves falling further and further behind their competitors. The companies that are effective in this area will probably increase their industry leads, and become the source of the next generation of the CEO 100 while their current CEOs continue to lead the parade of the most honored.

Donald W. Mitchell is chairman and chief executive of Mitchell and Company, a corporate strategy and remodeling firm in Waltham, Massachusetts. He also heads OUTSTANDING CHIEF EXECUTIVE OFFICERS (a best-practice-improving organization whose members are primarily current and former CEO 100 CEOs). He is a co-author of The Irresistible Growth Enterprise (Stylus, 2000) and The 2,000 Percent Solution (AMACOM Books, 1999).

B. Thomas Golisano
Chairman and Chief Executive Officer
Paychex, Inc.

Increasing the Benefits for Small Companies

With a background in sales and sales management, Tom Golisano created a new business model for providing payroll services in 1971 when he founded Paychex. At that time, outsourced payroll services were seldom used by small companies because they were too expensive. You also had to train employees to use the system, which added costs to the employer. Courier services to and from the employer added more costs.

Golisano's answer was to make it simple the employer called in the information, so no training was needed, and also got payroll tax returns as part of the service. This method also avoided the need for courier service. Because this simple process was less expensive, he could slash his price and companies with as few as five employees could afford the $5 a month minimum fee.

After establishing a successful first office in Rochester, he then had to decide how to grow. Should he add more services or expand the services he had geographically? Choosing the latter, he soon had a string of regional offices operated by franchisees. This was his first remodeling.

A few years later, he realized that Paychex needed tighter coordination to become an effective national company, and he led a recapitalization of the company that included buying out the franchisees for stock. These shares became liquid when the company went public, and many early franchisees prospered mightily. This second remodeling set the stage for rapid growth.

ADP was the industry leader, providing payroll services for larger companies. That company began to do more for its customers, including making tax payments. Paychex studied the move for years before making its third remodeling, and adding a broader range of payroll-related services. These services helped clients by helping them avoid penalties from and disputes with tax authorities.

Around 1990, the small company environment changed. They were finding it harder to compete for employees with larger companies that could offer tax-advantaged fringe benefits. Government was requiring a lot more red tape, and the small companies were feeling the heat. Paychex moved ahead with its fourth remodeling, and began adding services related to human resources, fringe benefits like retirement plans, and workers' compensation. In each case, the new service was designed to operate efficiently with the payroll processing so accuracy was high while costs were low. Paychex salespeople helped CPAs and their small company clients understand the advantages of adding more employee benefits and outsourcing the delivery of these services.

The result was an explosion of growth and profit margins. In the 1990s, the company's revenues grew by more than 500 percent while after-tax profit margins expanded from 7 percent to 26 percent. At the end of 30 years, the price for basic payroll processing had dropped in constant dollar terms while the quality and quantity of the service provided had vastly increased.

Asked about the lessons of his remodeling career, he replied, "We're a grinder, and think in day-to-day execution mentality. For whatever reason, it works."

Bernard Liautaud
President and Chief Executive Officer
Business Objects S.A.

Programming Computers to Answer Everyone's Best Questions

Bernard Liautaud (9, n.r.) was working as head of new products marketing at Oracle (19, 33) France. An independent engineer showed him a rough prototype of a program that would allow easier access to Oracle databases. Oracle didn't want to take the product on, so Liautaud left in 1990 to co-found Business Objects by acquiring the program.

The company's first insight was that databases were too complex and only Information Technology professionals could use them. Instead, Business Objects created new databases built around the language of business people. The CIO of Peugeot told Liautaud that this development was as simple and as valuable as computer spread sheets.

After two years, the company was ready for its first remodeling. Should it operate like a typical French company with close ownership by the founders, or like an American start-up? Based on his experience with Oracle, Liautaud quickly chose the American venture capital route, but with an international twist. Business Objects would be funded with both American and European venture capital, grow rapidly, make stock options available to all employees worldwide, go public in the United States, and operate as a transnational company as soon as possible in development, sales, and service. Soon Liautaud had moved to the United States, eventually settling the company in San Jose while much of the development went on in Paris.

With added funding the company was able to expand its product to work on other types of databases and applications.

Then the second remodeling occurred. Business Objects would build its customer benefit around being independent of the type of databases involved. This meant that a customer could tie all of its company-wide information together with Business Objects, without having to change those databases. Business Objects would compile the information on top of those databases.

The third remodeling came when these integrated databases were even further simplified to allow any employee to directly ask specific, nonroutine questions through the computer, and get immediate answers. Suddenly, the full power of the company's information was available to help each person work better.

The fourth remodeling was to expand this concept to create information networks enabling a customer's suppliers, customers, and partners to query each other's information over the Internet. This is a breakthrough that rivals the printing press for its ability to expand business literacy and thinking. Liautaud has explained the benefits of these capabilities recently in e-Business Intelligence, a book he wrote with Mark Hammond.

The company has grown rapidly in its first 10 years. At the end of 2000, revenues were $348.9 million (up 44% from 1999) with profits of $42.4 million (up 78% from 1999).

The lessons he draws from these experiences are (1) the incredible importance of creating an appropriate corporate vision that is specific, with a road map and milestones for how to get there, and (2) leading by being a good example. In developing that vision, he encourages everyone to get as many perspectives as possible, and to be sure that the top officers think about the company on a worldwide basis in every regard.

Robert H. Swanson, Jr.
Chairman and Chief Executive Officer
Linear Technology Corporation

Analog Experts: Designing Profitable Advantages for Customers

Bob Swanson learned an important lesson from working for National Semiconductor: The analog business is a great one to be in. He saw such a great opportunity that he moved on to found Linear Technology in 1981 and rapid success allowed him to take it public in 1986.

His first business model was to become an analog specialist, and obtain the kind of margins that this expertise can command. In the beginning, this generated lots of high margin annuity products that lasted year-in and year-out.

He later remodeled that approach to focus on the highest performance end of the market, where improved designs could actually increase the size of the market being served. A key target was making portable products operate faster and be more flexible. Linear Technology hit a bonanza when the company's designers found better ways to do power management for cell phones and other portable electronic products. As a result, the batteries last longer. With this greater usefulness to end users, sales soared. In the process, profit margins greatly expanded from a respectable 14.9% in 1990 to 40.8% in 2000, making Linear Technology the highest margin semiconductor company, passing even mighty Intel.

The company's next remodeling came when the life cycles of customer's products began to shorten. This meant changing the company culture so that new designs could be produced to meet the schedule of market openings. His motto became, "You're not a hero around here unless your product sells."

When the semiconductor and financial markets reached a fever pitch a year ago, Linear Technology couldn't find any more top people to put into design work. As a result, the company remodeled itself to become even more focused on the highest potential opportunities, especially those involving the chance to add even more value to customers by "turning milk into cream."

In the last ten years, the company's revenues grew from $75.6 million to $705.9 million while earnings exploded from $11.3 million to $287.9 million. Bob Swanson's vision of building a billion dollar company in revenues seems to be almost within his grasp.

The lessons of this specialist strategy include not having the luxury to be laid back. The company's style is hard-driving and demanding. You have to keep reinforcing the importance of being a high-value specialist. Otherwise, focus shifts into less attractive opportunities.

Running the Numbers and Improving Your Portfolio Results

To produce the latest CEO 100 list of companies that delivered superior stock-price gains over the prior three years -- calendar years 1998 through 2000 -- we drew on the expertise of the Consulting Group at Zacks Investment Research. Accessing their data base of more than 6000 public companies trading in the United States or Canada, we selected the 100 fastest growing common stocks or ADRs where:

(1) the same CEO or co-CEO was heading the company from January 1, 1998 through December 31, 2000;

(2) the company was public from 1996 through 2000; and

(3) the company's common stock had a market capitalization value of at least $1.71B at the end of 1999.

This last measure is an annual update of our prior methodology, by matching the size of company we look at to the changes in the level of the S&P 500 since the CEO index was begun.

As has occurred on average over the prior years this list has been published, buying the CEO 100 once again proved to be a good way to make money. The 1996-98 list published in 1999 returned one-year stock price appreciation through the end of May 2000 of 21.9 percent compared to 9.7 percent for the S&P 500 and 9.0 percent for the Russell 2000.

To execute this investment strategy, you simply buy equal dollar amounts of each of the 100 stocks at the end of the month when the list is first published, then hold the stocks for 12 months.

Over 8 years, the cumulative gain for the CEO 100 has outperformed more than 99 percent of professionally managed portfolios as well as the S&P 500 and the Russell 2000. This success is remarkable because there is no option to sell stocks of companies undergoing severe problems, no ability to borrow money to buy more stocks as hedge funds and some mutual funds can do, and no use of derivatives. Transaction costs and taxes on gains are also relatively low because the portfolio turnover is less than 65 percent a year, far less than most professionally-managed portfolios.

With normal investment disciplines applied, this approach could easily have been improved to have yielded cumulative returns at 150 percent of the S&P 500's growth over the last 8 years.

A major test of this investing approach will come in the next year as we see the effect on the results of drooping earnings and multiples for technology stocks during a weak economy and soft NASDAQ market. Interestingly, the short healthy stock-market life of dot-com stocks meant that few ever made the list, resolving a concern that I expressed about this approach a year ago.

2001 Mitchell and Company

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