Put on your hard hat. The 10th annual CEO Growth 100 suggests corporate remodeling is the key to building value -- and ensuring survival.
When it comes to improvements on the home front the most effective CEOs tackle the dual role of architect and general contractor, simultaneously redesigning and expanding basic corporate offerings as new opportunities and challenges emerge. Rather than make quick-fix cosmetic changes such as reengineering efforts or staff layoffs, these CEOs build value by seeking out new and better ways to serve their customers and benefit all their stakeholders.
Mike Ruettgers, executive chairman of information storage giant EMC (No. 13, 2001; No. 15, 2000) led his company to the fastest stock-price growth on the New York Stock Exchange in the last decade, "by how well we identified and executed on new trends. We changed the company four times to do this in the 1990s." That mindset rings true with most of this year's CEO 100--most often with those who have been on the list many times before.
Four CEOs have made seven appearances on the CEO Growth 100 (firms that delivered superior stock price gains with the same CEO over the prior three years). Each is a champion company remodeler. Chuck Schwab of Charles Schwab (No. 60; No. 39) turned a telephone-based discount stock brokerage into a Web-and-telephone-based financial supermarket. Mike Birck led Tellabs (N.R.; No. 80), then a provider of specialized components for telecom companies, into building key equipment systems that allow them to serve Internet and voice customers simultaneously. Lowry Mays of Clear Channel Communications (N.R.; No. 46) guided his firm from a remodeler of local radio station operations into a custom global provider of advertising packages in leading media. And Tom Golisano of Paychex (No. 52; N.R.) created a new business model for a small company payroll service in Rochester, NY, and then changed it to build a national firm providing a broad variety of services that enhance relations between small company employers and th eir employees.
In the past, model changes came from new industry competitors, funded by large firms or venture capitalists; now changes often come from industry leaders. Consider semiconductors. The original producers did everything from finding customers to designing circuits and chips and manufacturing them. Most chips were used for computer memory in the '70s. Intel changed its model by focusing on producing microprocessors and became the world's largest chipmaker. Xilinx, and others, then began providing general-purpose logic chips fabricated elsewhere. These could be programmed by customers for specific applications--cutting their time-to-market.
When Willem Roelandts (No. 30; No. 44) arrived at Xilinx from Hewlett-Packard, he saw the need to change the company's business model. He encouraged working more closely with fabrication partners and customers to speed time-to-market and improve performance. This organizational direction allowed Xilinx to focus on designing new product architectures, software tools, and knowledge advantages that fit advanced semiconductor process technologies and shifting customer needs. Xilinx was then able to develop ways for systems that use its chips to be upgraded remotely with software--even after the customer's customer is using these chips inside a product. The chips' competitive duration in an application is greatly lengthened, making both the customer and the customer's customer more competitive.
Companies that don't make business-advantaged changes are vulnerable to the companies that do. At the same time, there are many ways to bungle an ambitious remodel effort, As always, a hard look at past successes--and failures--suggests some best practices in leading change.
* Establish an unchanging core vision that includes an expectation of regular business model changes. H.K. Desai of QLogic and his colleagues (No. 3; N.R.) LOS ANGELES QUICK MONEY knew their base business of providing disk drive controllers for personal computers would fluctuate. The company needed to diversify into better markets where it could increase competency advantages through its understanding of how to create effective communication between host and storage devices. Experimental developments soon established a series of breakthrough products. Those successes, in turn, created new core competency advantages. The company continues now to build on its industry LOS ANGELES QUICK MONEY lead by preemptively pursuing all areas of technology that are evolving into its core competency. The dual vision of better, more stable markets and the desire to have a core competency advantage reflected in its products keeps the company focused on making the needed remodelings.
* Become an expert and specialize. Bob Bailey of PMC-Sierra (No. 11; No. 7) likes to quote Don Valentine of Sequoia Capital, "Great markets make great companies." In 1994, the firm, 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 to invest in, personal computer modems--where it was the No. 3 manufacturer--and its fast-growing Internet infrastructure business. By 1997, the company had exited the first business to concentrate on the newer area. This single remodeling allowed PMC-Sierra to move into a better market, become more specialized, and increase its expertise.
* Adopt business models that relate flexibly to irresistible forces. This means being open to new ways of solving problems. John Chambers of Cisco Systems (No. 37; No. 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.
* Create processes for making the desirable remodelings. Xilinx has identified the thinking processes that lead to defining new and improved business models. The company works on improving those processes and helping everyone in the company become more effective in employing them. Companies that can afford inexpensive experimentation, like Paychex, have also designed business processes that identify and nurture potential experiments that could lead to new business models.
* Remodel to bring business advantages quickly. Steve Sharp of TriQuint Semiconductor (No. 7; N.R.) became CEO in 1991. At that time TriQuint's business model had been "to develop gallium arsenide technology and see who might like it," an approach newer tech companies often use with 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 firm has been able to use this customer-oriented approach to spawn new businesses, so far developing 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.
What does the future hold for corporate remodelers? Changes must be made faster, more often, more extensively and involve 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, competitors' inability to keep LOS ANGELES QUICK MONEY up in the next round of innovation, and differential access to cash and stock resources to make large investments. Those who don't become good enough at corporate remodeling will probably fall further and further behind competitors. Those that are effective in this area will probably increase their industry leads, and become the source of the next generation of the CEO 100.
* Change business models 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 (No. 87; No. 92) Los angeles quick money realized the power of shifting focus Los angeles quick money from selling equipment used in new non-residential 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." As CEO, Kozlowski refocused all parts of the company on this search for steadier, more profitable offerings in higher-growth markets. Today, 90 percent of Tyco's revenues are recurring or sustainable growth revenues, rather than cyclical. Starting with a base of billion, he created a firm with revenues of billion in eight years. Stock soared even faster during the remodeling than GE's did under the legendary Jack Welch--even though Tyco sports a much lower stock-price multiple.
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