High Growth Companies; Doing It Faster, Better and Cheaper

The statistics, it seems, are irrefutable. Harsh as it may sound, big
business as a whole is killing jobs. In January 1992, American Airlines
announced the eventual elimination of 1,250 domestic jobs and Chevron
presented a reduction program to axe 2,500 positions. A few months later
Aetna followed suit with plans to lay off 10 percent of its workforce. In
1993, IBM “downsized” by 35,000. In February 1995, buffeted by continued
weakness in the airline industry, Boeing said it would cut 7,000 more jobs
(or about six percent of its workforce), after already eliminating 26,000
positions in the previous two years. The “dinosaurs” of the economy, the
once-vaunted big businesses, appear to be losing their pre-eminence in the
nation’s economy.

Characteristics of Gazelles

This is reinforced by the findings of MIT economist David Birch, which show
that in today’s world corporate giants are no longer the job creators.
Instead, their role is now being filled by fast-growing entrepreneurial
companies.
Birch coined the term “gazelle” to describe these firms. They move at
a lightning pace and have the agility to switch directions the instant they
spot a new opportunity. How do they do it? Gazelles have some mixture of
three basic qualities:

*They rapidly spot marketing opportunities and explore them.
*They constantly improve productivity and efficiency.
*They can quickly change and expand organizational structures as
appropriate.

Small businesses looking for survival and growth skills can definitely
profit by studying the way gazelles operate.

Who’s the Swiftest of Them All?

When the new fast-growing companies spot a market opportunity, they have
the capability and organization to explore it immediately. Cutting the lag
time between seeing an opportunity and selling a product or service is one
of their key goals.
To create a niche and propel your company into it, innovation –
whether in terms of scientific advances, system improvements, marketing or
other business areas – is a fundamental necessity. At first glance,
however, innovation might appear out of place in such traditionally staid
industries as garbage collection, take-home food or law. Yet these
industries currently boast some of the nation’s fastest-growing operations.
Starbucks Corporation, for example, is one of the fast movers that has
put its name and product on the tongues of a caffeine-loving public.
Perhaps America’s best-known name in espresso and coffee beans, Starbucks
coffee houses are now found everywhere from Los Angeles to Boston.
Starbucks CEO Howard Schultz sized up the potential for retail coffee
bars on a business trip to Italy. “Milan alone, a city the size of
Philadelphia, has more than 1,500 espresso bars,” he noted at the time. Why
couldn’t America – a country that dumped tea for coffee back in the 1770s
– do as well? With this in mind, Schultz set his sights on creating a
nation of espresso-lovers and began a rapid but calculated expansion of his
operations.
He began testing the coffee bar concept in 1984 with a new Starbucks
store in Seattle. With success written on every wall, Schultz and local
investors acquired Starbucks’ 11 stores and fewer than 100 employees. By
mid-1994, 380 stores were operating across the continent with additional
ones opening every month.

A Legal Nook

Starbucks proves that even long-established markets can support an
entrepreneur with the right idea. Just ask Dov Seidman. He set up the Los
Angeles-based Legal Research Network (LRN), a company providing low-cost
legal research.
The legal establishment, like so many other industries, has begun to
change under pressure from clients to provide more value for their dollar.
While the “dinosaurs” here are in no danger of extinction yet, they are
feeling the pressure as never before.
Legal research has long been the bread and butter of many a firm,
where junior associates charge by the hour for as long as it takes to
complete the work. LRN is taking a bite out of that bread and butter.
Connected by networks and modems, LRN’s more than 250 lawyers, often
working at home, have completed research projects for major U.S. companies
for a fraction of traditional law firm fees. Started only in the spring of
1994, LRN’s immediate success is already raising eyebrows among the large
firms. Some observers comment that the long-awaited change in the legal
world may be more extensive than anyone could have imagined.

Seek Gains in Productivity

LRN has assiduously followed the first principle of the gazelles: spotting
a market niche and quickly moving into it. But success would not have been
possible without the new organizational efficiency of Seidman’s network.
Increased productivity, the second quality of gazelles, has been a
primary goal of businesses since the beginning of the industrial revolution
when large gains were made with simple adjustments.
One of the most famous “firsts” in efficiency gains involved the
decidedly unglamorous job of shoveling. At one time, laborers all brought
their own shovels to a work site, no matter what the material to be
shoveled. If shoveling lightweight material, small shovels made the task
slow. Shoveling heavy material with too large a shovel, on the other hand,
brought rapid fatigue. An efficiency expert remedied the situation, and
reaped large gains in productivity, by directing employers to provide
laborers with the proper size shovel for the given job.
This story, seemingly simple in retrospect, reflects exactly the type
of productivity gain fast-growing companies look for to stay competitive –
new systems to do more with less effort. The only difference is that
they’re doing it on a large scale and in increasingly complex ways. David
Birch writes, “In the face of the drive for productivity, the American
economy created more than nine million new jobs in the 1980s.”
Eagle Hardware and Garden, one of Fortune magazine’s 100
fastest-growing companies for 1994, makes efficiency and productivity an
everyday part of business with a computerized inventory system. Like most
companies, Eagle focuses on customer service as its first priority, and
“service” means keeping 57,000 items in stock. “The system tracks
everything you find in our stores, including hundreds of small but vital
items,” notes spokesman Bob Cleveland. “It would take scores of people to
track the inventory by hand, but computerization makes it possible with
just a few keystrokes.” Eagle’s computerized efficiency allows it to
provide an affordable, wide range of products for a growing and satisfied
customer base.

New Structure, Greater Profits

Computerization and productivity, in turn, make new organizational
structures both necessary and possible. Gazelles are using new methods of
organization to give their businesses enhanced flexibility and capability.
Change has meant a “flattening out” of management – through
eliminating many middle management jobs. As Birch stated in the late 1980s,
“We already hear rumblings about threats to middle management whose primary
function – assembling and interpreting information for upper management –
is being assumed by database management systems and spreadsheets.”
But new business structures mean more than just managerial changes.
Today’s fast-growing companies are forming alliances and outsourcing where
yesterday’s businesses bought out competitors and created in-house systems.
Many say outsourcing (see “Outsourcing: Bringing Breakthroughs to Market”
below) allows their business to avoid being sidetracked and concentrate on
core functions. On the other hand, alliances may help smaller businesses
gather the resources to provide services and benefits normally associated
with larger firms (see “How Small Businesses Can Obtain Big Business Health
Care Options” at left).
Even large firms are finding it necessary to combine forces on complex
projects. Creating the “information superhighway,” for example, is
requiring the biggest of the big to work together. Entertainment giant Walt
Disney’s decision in the summer 1994 to team up with several of the Baby
Bells demonstrated the necessity of alliances in today’s business
environment. As Thomas Staggs, Disney’s vice president of strategic
planning, commented at the time: “Teaming up with these industry leaders
will give us the infrastructure to provide what we’re known for:
entertainment.”

The Hard and Fast Business Lesson

Small businesses owe much of their vaunted success to their flexibility and
innovation. Looking at the success of fast-growing companies, it is easy to
see that they have adopted these characteristics as their own. The gazelles
are quick and adaptable and – as a result – are not dinosaurs on the verge
of extinction like some of their much larger counterparts. By following the
gazelle example in marketing, productivity and organization, small
businesses can create their own paths to survival, growth and success.

Rhino Foods: Taking a Chance on Growth

Vermont: dessert capital of the world? While the title may be arguable, the
product being produced there certainly isn’t. Home to progressive and
prolific Ben & Jerry’s Homemade Inc., Vermont can also boast of
Burlington-based Rhino Foods Inc., a firm making itself known for specialty
frozen desserts, ice cream novelties and head-spinning growth.
Rhino was already firmly established when Ben & Jerry’s approached the
company in 1991 about obtaining its cookie dough for a new product,
chocolate chip cookie dough ice cream. The resultant demand sparked Rhino’s
growth dramatically. “In the beginning we were supplying 32,000 pounds of
cookie dough a week,” recalls Rhino president and founder Ted Castle. “But
only months after introduction, the ice cream became so popular that Ben &
Jerry’s asked if we could quadruple production in three weeks. And we had
to answer within 48 hours or the company would find another supplier.”
“It was a challenge we decided to accept,” Castle says. “We got a
short-term loan from Ben & Jerry’s, and subsequently obtained more capital
through the SBA and the Vermont Industrial Development Authority. We moved
to larger premises, purchased new equipment, negotiated extended payment
terms with suppliers, and redesigned procedures for making the dough in
order to package larger orders.
When Ben & Jerry’s (which was providing 80 percent of Rhino’s
business) occasionally cut orders, some skilled production workers were
left with little to do. Castle disliked layoffs because of their negative
effect on the morale of remaining employees, on unemployment compensation
insurance rates, and on the quality of job candidates when Rhino was ready
to rehire. In addition, it was costly to train new workers. Brainstorming
among employees produced a creative solution: temporary exchanges with
other companies that also face up-and-down staffing needs.
And, to avoid overdependence on Ben & Jerry’s (which now represents
only 50 percent of Rhino sales), new products such as an Irish cream
cheesecake have been created, and marketers hired. Accounts with customers
are maintained through regular phone calls to ensure things are going well.
“Clearly the financing helped with our expansion,” notes Castle in
retrospect, “but it would still have been impossible without the
enthusiastic participation of our employees, and their ideas on how best to
boost production.” This contention is well borne out by the fact that Rhino
has expanded from 15 employees in 1990 to more than 60, with 1993 sales of
$5.5 million representing a fivefold increase over 1990. Castle is very
glad he and his company didn’t miss that big opportunity.

Outsourcing
Bringing Breakthroughs to Market

“By licensing our technological discoveries to larger companies for
development, we are able to bring revolutionary health care applications to
the forefront that might otherwise never have seen the light of day,” says
Bill Miller, president and chief executive officer of Sudormed, Inc. in
Santa Ana, California.
Miller exemplifies a trend in which entrepreneurs are increasingly
selling products and services to major corporations. As summed up by David
Poole, technical director of corporate industry marketing at Digital
Equipment Corporation in Marlborough, Massachusetts, “Large companies have
realized that the world has changed. A lot of the current innovations are
coming out of small firms.”
Sudormed, a two-man research company, invented patch technology that
extracts and monitors elements in the human system – unlike a standard
nicotine patch that puts forth small amounts of nicotine into the body.
“The Sudormed patch will eventually reduce health care costs
drastically,” Miller predicts. “For example, HMOs can have their patients
wear the patch to screen for numerous medical problems, thereby bypassing
slews of expensive tests.”
In one application, Sudormed licensed its technology to 3M Corporation
and PharChem Laboratories to develop patches than can detect the use of
illegal drugs. It also entered into an outsourcing alliance with BioQuant
to develop patches that can reveal osteoporosis in women and the presence
of lead in small children. In both cases, Sudormed maintains a substantial
financial stake while PharmChem and BioQuant work to receive FDA approval
and subsequently bring the technology to market. The patch is manufactured
by 3M for Sudormed licensees.
Poole describes why outsourcing can work so well for both the small
and the large partner. “Big companies have wide distribution, a reputation
for quality and all the other things consumers want. But at the same time,
the new ideas are likely to be dreamt up by small companies.”

How Small Businesses Can Obtain Big Business Health Care Options

Small-employer insurance premiums are usually higher than those of larger
employers, a key element in the widespread resistance of this segment to
mandated health care. One promising option is forming a purchasing alliance
to bargain with insurance companies. The advantage is that while a small
business has little power when negotiating alone with a provider, by
banding together with other small firms, the resultant larger group has far
more leverage.
In Kenosha, Wisconsin, for example, three companies joined forces and
advertised in The Wall Street Journal for a health care provider willing to
keep prices constant in exchange for a long-term service contract. More
than 25 providers submitted proposals, and after many months of
negotiations, the employers formed an agreement with a major insurance
company that would save them more than $10 million over seven years.
Achieving success in a health care alliance is not easy, however. When
many companies come together, each tends to have a different idea about the
kind of health insurance it wants and the cost it is willing to pay. The
following tips may help your business:

*Start small. Get a few businesses to agree and then add more companies.
With too many parties involved, the alliance is more likely to fail or
break apart in separate factions.
*Don’t let agents run your alliance. A business representative presents far
more clout to the insurance industry.
*Set clear goals for the alliance early on.
*Research various health care options fully. Request information, interview
insurance officials, and then carefully review all your options before
making a collective decision.

For more information, contact The National Business Coalition Forum on
Health, 1015 18th Street N.W., Suite 450, Washington, D.C. 20036. Tel:
(202) 775-9300. This organization provides comprehensive information about
legal, financial and management issues involved in forming a health care
coalition.

Gazelle Companies: A Snapshot

Gazelles are nimble, fast-growing companies that together comprise the real
engine of America’s current economic growth. According to a June 1994 poll
taken by Biz Magazine, while they are significant users of technology and
computers, they are not “high-tech” firms. In fact, fewer than three
percent develop technology products. The majority of gazelles roam in the
retail, services and manufacturing sectors.
Three-quarters of gazelles describe their companies as family-owned,
and 75 percent have been in business for more than 10 years. Thirty-seven
percent founded their firms more than 20 years ago.
Gazelles come from a variety of backgrounds. Small companies are the
most common breeding ground (41 percent), with large companies (defined as
more than 100 employees) spawning 29 percent of those surveyed.
Minority-owned gazelle firms total four percent.



Posted by on August 30, 2000