Seven Secrets of Success

How the Business 2.0 100 stayed afloat in a stormy economy.

We always intended our rankings to be a kind of aerial snapshot of the broad territory known as the technology sector. This year, as it happens, it’s a shot taken after a hurricane. You’ll find many of the Business 2.0 100 clustered around the few areas of relatively dry ground, like videogames (No. 4 Activision (ATVI), No. 29 THQ (THQI), and No. 61 Electronic Arts (ERTS)), security (No. 17 Internet Security Systems and No. 35 Check Point Software Technologies (CHKP)), and electronic displays (No. 8 White Electronic Designs (WEDC) and No. 46 Planar Systems (PLNR)). Study the list more closely, though, and subtler patterns emerge. What links many companies on our list isn’t a common industry but a common approach to the problems of business — and that, more than anything else, accounted for their ability to outperform their peers in one of the nastiest tech cycles in memory.

By: Owen Thomas- Business 2.0

1. Do one thing well. Five years ago the electronic-scoreboard business was dominated by all-purpose giants Panasonic, Mitsubishi, and Sony (SNE). Then along came a pint-size specialist, Daktronics (DAKT) (No. 18), which captured almost a third of the market after introducing a more colorful and energy-efficient technology. The B2 100 is full of other dominant niche players, from online-auction king eBay (EBAY) (No. 3) to storage-chip maker Qlogic (QLGC) (No. 20). It’s simple: If you do one thing better than anyone else, in a downturn your customers will dump everyone else first.

2. Watch your wallet. Derrick Key, chairman of Roper Industries (ROP) (No. 60), balked at the price of being photographed for an annual report. At Logitech (LOGI) (No. 1), executives are hit where it hurts — in the bonus — if they let inventory or accounts receivable build up. "We accountants are the only ones who seem to worry about the balance sheet," Logitech CFO Kristen Onken says. In a rough market, protecting cash flow is everyone’s responsibility.

3. Keep innovating. Founded in 1987 by researchers from North Carolina State University, Cree (CREE) (No. 15) has become a $155-million-a-year business by continually improving on the efficiency and brightness of its light-emitting diodes, leading the way to LED-based patio lights and even traffic lights. Next year the company expects to derive 70 percent of its revenues from products invented during the past year. To satisfy gamers’ insatiable appetite for ever-more-dazzling effects, the folks at Nvidia (NVDA) (No. 13) have nearly doubled R&D spending in each of the past two years. R&D is one outlay the B2 100 tend not to skimp on.

4. Buy smart. The past few years have not been kind to big companies driven by an indiscriminate urge to get bigger. Among the B2 100, acquisitions tend to be purposeful — deals meant to help companies become better at what they already do. For example, none of the more than 100 acquisitions made by Fiserv (FISV) (No. 28) in the past 18 years altered the nature of its business, but they greatly expanded its client base of banks, credit unions, and brokerages. For five years running, the company has grown earnings more than 17 percent.

5. Supply the suppliers. Remember the bubble-era bromide that the way to get rich in a gold rush is to sell the prospectors picks and shovels? It still holds. Qiagen (QGENF) (No. 57) supplies nucleic-acid extraction kits that biotech researchers use to search for new cures. In plain English, that means Qiagen’s customers carry the risk that their painstaking lab work won’t uncover Food and Drug Administration-approved treatments, while Qiagen gets to enjoy the biotech gold rush here and now.

6. Hitch your wagon to a star. Many B2 100 companies are a study in the power of relationships with the powerful. II-VI (IIVI) (No. 51), Paravant (PVAT) (No. 71), and at least half a dozen others are suppliers to Uncle Sam, whose patronage is all but immune to the business cycle. Thanks to a decade-plus spent cultivating relationships with Hollywood studios, Macrovision (MVSN) (No. 47) owns the copy-protection technology used in most DVDs and players. The downturn would have to get pretty bad before customers stopped renting movies.

7. Have a backup plan. After a disastrous effort to market its own game-development platform, Nvidia (No. 13) did an about-face, began collaborating with Microsoft (MSFT), and landed a multibillion-dollar deal to supply chips for the Xbox. In unpredictable times, you have to be prepared to scramble.

http://www.business2.com/articles/mag/0,1640,43532,FF.html