Getting better.

Even companies that have created - and mined - successful formulas face the test of time. Competition arises. Public concerns and policies change. New markets emerge. Technologies arrive. Companies serious about growth must adapt to change - or shrink and die. Here are three that met the challenge.

U.S. SURGICAL CORP.

The Cutting Edge

In 1994, Leon C. Hirsch, chairman of the Norwalk, CT-based U.S. Surgical Corp., wrote a sobering letter to stockholders in the company's annual report. "1993 was by far the most difficult year in our corporate history," Hirsch reported. "With the entire health-care industry in the throes of change, many of the strategies that contributed to our past successes became ineffective. As a result, we have had to rethink our entire way of doing business."

Some 25 years earlier, USSC had established itself as a pioneer among makers of surgical equipment with its surgical staples and non-invasive surgical instruments. As non-invasive laproscopic surgery grew in terms of applications, acceptance, and popularity, USSC was at the forefront. For physicians performing laproscopic surgery, its instruments were the tools of choice. The company had spent years building relationships with surgeons; training them in the use of the equipment; and fielding a force of highly skilled sales representatives, many of whom, as doctors, even had surgical training. Understanding that the surgeons controlled their hospitals' instrument-purchase decisions, USSC had invested heavily in research and development to make sure it had the technical leadership that was at the top of any surgeon's list of purchasing criteria.

This strategy paid off. By 1992, through 25 years of consecutive growth, the company had reached $1 billion in revenues. Margins were high. Shareholders were earning tremendous returns.

But then the bubble burst. First there was competition. Where USSC had long had the field to itself, it was now up against the deep pockets of Johnson & Johnson, a diversified, well-established health-care equipment supplier that was determined to move into USSC's desirable market niche.

More critical, perhaps, was the nation's move toward a system of managed care. Suddenly the skyrocketing demand for laproscopic products crashed to earth. Hospitals were looking to cut costs and reduce inventories. USSC salespeople, long accustomed to dealing directly with doctors, found themselves selling to cost-conscious CFOs and purchasing cooperatives instead. With the competition knocking at the same doors, cost became a competitive factor for the first time in USSC's history. The impact was dramatic: declining sales, eroding profitability, negative returns to shareholders, and diminishing R&D productivity.

It was clear that USSC had to respond, regroup, and even reinvent itself. USSC changed its competitive strategy from one that emphasized technological leadership and physician-oriented sales to one that looked at ensuring cost effectiveness and developing value-added partnerships with customers. Hospitals were no longer adversaries engaging in contentious negotiations over the price of a company's products; they were partners in service delivery. USSC commissioned a study of the real value of non-invasive surgery. This study, by Deloitte & Touche Consulting Group, showed that the actual cost of laproscopic surgery was often much lower than that of invasive surgery. Guided by these results, USSC refocused its product-development and marketing efforts on creating products for the most cost-effective laproscopic surgeries.

Realizing that huge variations in cost across hospitals indicated there was considerable potential for additional savings, USSC created a Best Practices Program to train physicians and clinical and administrative staff in cost-saving techniques. Staffed by former hospital executives, doctors, nurses, and other hospital personnel, this program provides customers with a host of value-added services, working with them to develop, for example, "critical pathways," marketing programs, and revenue maximization strategies.

Creating and implementing these value-added services, however, revealed a number of areas in which USSC's basic structure did not support its new competitive strategy. Selling to cost-conscious CFOs and other purchasers required different skills and a different knowledge base than selling to doctors. Salespeople had to develop savvy in the financial as well as the technical aspects of their products. Beyond that, compensation structures, which had long emphasized sales quotas, had to be reworked to focus on customer satisfaction measures, such as those that came from providing Best Practices services or training.

Over time, USSC has continued to deepen its customer partnerships with more extensive agreements. What was at first just a program to enhance product offerings has become the primary driver behind some major contracts.

Two years after "the most difficult year," USSC began to grow again. Regaining market share leadership, it increased net income by $160 million on sales of $950 million. Its stock price jumped by 50 percent. A more hopeful Hirsch had predicted this in his 1994 annual report message: "Our new strategies are winning strategies and...USSC will return to growth and renewed profitability in 1995."

RODALE PRESS 

To Your Health

The Rodale "campus" in Emmaus, PA, is alive with a sense of well-being. Employees work out in the company-sponsored "energy center." They eat in a cafeteria that serves only low-fat and low-sodium foods. They can put their trash in any of 50 different kinds of recycling containers. They stroll through buildings designed to maximize natural light and capture energy, and they work in offices decorated with a rotating Southwestern and African art collection. The focus at Rodale, clearly, is health. Its mission reflects that focus: "To show people how they can use the power of their bodies and minds to make their lives better." And even its logo, a three-leafed plant whose roots stretch as deep and as wide as its branches, exemplifies Rodale's formula for success: strong, consistent leadership; a commitment to health and better living; and a depth of knowledge. With 10 magazines (including Prevention and Men's Health) and some 400 books (including "The Doctor's Book of Home Remedies") in its stable, this family-owned publisher has enjoyed an annual average growth rate of more than 13 percent during the last 15 years, outpacing such magazine-industry stalwarts as McGraw-Hill, Forbes, Reader's Digest, and Hearst and such book publishing giants as HarperCollins, Time Warner, and Houghton Mifflin.

Rodale Press was the brainchild of J.I. Rodale, a New York City tax accountant who turned his belief in the health and soil-building properties of organically grown food into a magazine, Organic Farming and Gardening, and that magazine into a family of health-related publications. After Rodale's death in 1971, his son, Bob, took over the company, pioneering many successful titles and establishing the nonprofit Rodale Institute, which includes a research center and a Peace Corps-like international agricultural program. Bob died in 1990, and his wife, Ardath, who had spent some 30 years designing and decorating company facilities, took over as chairman and chief executive. Robert Teufel, a long-time Rodale executive and close family friend, became president and COO.

The company's own good health stems from its choice of titles, its comprehensive central resource library and reader data base, its programs that promote the health and well-being of both employees and the society at large, and its hiring of staff who, like Ardath Rodale, believe: "You don't have a job here but a way of life."

After growing so consistently in the U.S., and after establishing some international inroads, primarily in developing countries through the Rodale Institute, the company has looked to enter the overseas market more energetically. Some of its efforts have been, in fact, tremendously successful: "The Doctor's Book of Home Remedies," for example, has been a strong seller internationally, and the U.K. launch issue of Men's Health, in January 1995, outsold the already established British versions of Esquire and GQ.

Other efforts, however, have proved more difficult. Realizing it needed to coordinate its efforts and find a way to translate the success it's achieved domestically into the international arena, Rodale engaged Braxton Associates. Working with Braxton, Rodale identified the skills needed for international expansion and put together a plan of action. Successful international growth, they found, required some very different tools and strategies than those Rodale had been using back home. Rodale's decentralized structure, for example, which allows individual titles the freedom to pursue great ideas, can be something of a liability internationally because of the huge increase in communication and coordination problems. Knowledge that different titles were gaining from their overseas experiences was not necessarily being communicated; individual titles going abroad started from scratch and sometimes overlapped. Rodale's self-contained campus, complete with pre-press and distribution facilities, wasn't a model that could be easily transported abroad, where partnering is critical for market knowledge and access.

In its quest to become "the leading provider of 'how-to' consumer health information in all media throughout the world," Rodale has found synergies between international and U.S. markets as well as between books and magazines. It's identified promising markets and titles, appointed a leader for international magazines, and is working on building an international data base equal to its well-known domestic one. With clear revenue goals in mind, and its successful domestic formula carefully translated, growth appears to be well on its way.

THERMO ELECTRON 

Spin Doctors

As a teenager in Nazi-occupied Greece, Thermo Electron founder George Hatsopoulos built illegal radios and transmitters. As a young man, he won a scholarship to MIT to study mechanical engineering. His goal was to be not just an inventor but a businessman, too. In 1956, he and his brother, John, started Thermo Electron, a company Hatsopoulos hoped would let him live his dreams.

"My idea," Hatsopoulos has explained, "was a broad-based technology company that would work simultaneously on lots of ideas that were risky. But if any one of them worked out, we would be profitable." Forty years later, his company makes a full range of what, at first blush, appear to be unrelated high-tech products: devices that detect cancer, bombs, and drugs; power plants fueled by alternative energy; hair-removal systems powered by lasers. What ties these disparate products together is a spirit of enterprise that takes a technology, applies it in a process that could be called "concentric innovation," and finds layer upon layer of uses for it. And what keeps Thermo Electron moving forward - as a pacesetter, perhaps, in an age focused on core competencies - is its willingness, in fact its eagerness, not only to experiment with new technologies and products, but to spin them off as separate, majority-owned, publicly traded subsidiaries as soon as they're ready to make it on their own.

"People traditionally spin off things they don't want," Hatsopoulos told Forbes magazine recently. "They want to get rid of them. They want to cash in. We spin out our best ideas."

By going public, these spun-off ventures can raise the necessary capital and grow at much faster rates. At the same time, the corporate parent provides them with, in Hatsopoulos' words, "the services it takes to face the world": cash and pension-fund management, leasing, customer financing, investment banking services, employee-benefit administration, executive recruiting, SEC filings, patent and trademark protection. This support leaves the new companies free to focus on innovation and market needs, rather than on internal administration.

For Thermo Electron, the core business, then, is creating new businesses - through a very specific, well-oiled process. At any given time, the company may have 100 projects in the early stages of development. Divisions can authorize experiments that cost up to $100,000 (more costly experiments need a wider review). "Patient" money for development comes from the corporate budget as well as from government and industry grants. Projects may be nurtured for as long as 10 years as wholly owned subsidiaries, but when it's clear they need much more capital, are ready to grow at a rate of at least 30 percent a year, and have the depth of management to handle the pressures of being a public company, they're sent out into the world.

This build-them-up, spin-them-out culture has helped Thermo attract and retain entrepreneurs. Though highly talented employees of many high-tech firms often leave to start their own businesses, Thermo's entrepreneurs have found they can pursue their visions within the confines of the company. As heart-pump inventor and Thermo-Cardiosystems Chief Executive Victor Poirier has explained, "If Thermo Electron hadn't spun off my company, I'd be gone." Adds Hatsopoulos' brother, John, "If you don't have this kind of culture, what are you going to spin out? Most companies don't have many new ventures. Sure, they have wonderful, established businesses, but they lack the venture spirit."

In perhaps the ultimate example of the company's willingness to shed its many-layered skin, Thermo spun off its own key central R&D unit, Thermo Electron Technologies, in 1991. The result: The spun-off unit is more focused and motivated than ever, and the core - which, over the past 20 years has generated 9.2 percent growth and 16.7 percent return to shareholders - now functions essentially as a service clearinghouse that supports innovation. Clearly, innovation, the willingness to change as change is demanded, and a well-established process to ensure that both innovation and change actually take place pervade the entire, continually growing enterprise - ensuring that it will continue to unleash successful, growth-oriented spin-offs for some time to come.