In sequence.

In celebration of Chief Executive magazine's 20th anniversary, we've asked CEOs who've held their positions for the better part of that period - or longer - to reflect on the changes they've experienced during that time: Changes in their industry, changes in their company, and, particularly, changes in the job of chief executive. In the second installment in this series, NovaCare's John H. Foster helps his diverse health-care services company navigate the waters of a turbulent growth industry.

Managing change and formulating strategy to drive growth are among the two most important responsibilities of the CEO. At NovaCare, a $1 billion national rehabilitation services company and emerging professional employer organization, we've found that managing change first requires establishing core competencies that are constant and stabilizing. In driving growth and shareholder value, we found success stems from "business sequencing" - that is, building each new business upon the core competencies developed in predecessor businesses. More specifically, we target fragmented, immature service industries, acquire and consolidate small businesses within that industry, and then establish the preeminent market share by bringing to bear resources and a common set of core competencies. As that business matures, we identify a new growth opportunity, in part on the basis of our ability to apply the same skills to create yet another leadership position.

In building our service businesses from scratch, in industries without scale or service sophistication, the core competencies we consistently invest in are: a values-based culture, brand name, professional management and a management operating system, information technology, clinical excellence (in health care), regulatory affairs, and, very importantly, human resources.

Over the last 12 years we have applied this common set of core competencies to five successive businesses: speech-language pathology, outsourced rehabilitation program management in nursing homes, orthotic and prosthetic patient-care services, outpatient physical therapy and, most recently, the professional employer organization, or PEO, industry. This is what we mean by business sequencing.

The groundwork for our rehabilitation business was set in 1983 when the federal government changed its method for financing hospital care. This forced most services out of hospitals and gave birth to today's health-care services industry. Rehabilitation services flourished. In 1985, we acquired a 10 year-old company, InSpeech, Inc., the nation's largest speech-language pathology practice, with $5 million in revenues. We were providing our services in nursing homes, which were just beginning to benefit from the shift of patients from hospitals into lower-cost settings and were, for the first time, adding health care to their traditional services. Speech therapy is only one element of rehabilitation following a stroke or other trauma, and our customers wanted "one-stop shopping" for all rehabilitation therapies. So NovaCare entered the physical and occupational therapy fields. This was our first experience in business sequencing, where we extended our clinical service from one to three disciplines. With a 1987 federal mandate strengthening nursing homes' responsibilities regarding rehab care, we grew rapidly to become the nation's largest outsourced manager of rehab programs. This seriously taxed our management controls.

We took a break from the consolidation process and focused on developing a values-based culture, professional management and management control systems, information technology, clinical leadership, regulatory expertise and human resources management - the core competencies we continue to leverage today.

We faced the challenge of developing a management team when there were no executives with experience in both health care and managing professionals in dispersed settings. Initially, we trained our clinicians to be managers - with limited success. We finally succeeded by analyzing the attributes of our most successful managers, and using that profile in our hiring process.

Our investments in information technology have resulted in two fundamental returns. First, the time formerly invested by field management in gathering information has been reduced from 25 percent of their time to 1 percent, allowing us to increase their span of control by 20 times. Second, these investments have enabled us to offer our customers information specific to their needs and generally unavailable from their own systems.

Another constant in NovaCare's history has been an emphasis on clinical and regulatory leadership. In rehabilitation, as in all health care, we believe that while low cost is a fundamental need, clinical leadership is the long-term basis for differentiation. For that reason, we have invested heavily in research and development and training. Our clinical investments are evidenced by state-of-the-art "bionic prosthetics," the nation's largest database of geriatric rehabilitation outcomes and the establishment of a professorship at the Harvard School of Public Health. Our reputation for regulatory expertise has been built on patient advocacy, defending patients against those who would deny care for the sake of false economies.

Our most critical resources, our 17,000 people, are highly dispersed and working in our customers' facilities-in 43 states. As a result, human resources management capable of delivering clinical and management training, flexible benefits, and healthcare risk management has been essential to our success. To serve customer demand for our services, we have created the largest recruiting organization in the world for allied health professionals, which next year will recruit 4,700 clinicians!

Having learned the rehab business and established our core competencies, we were ready to diversify from nursing homes, where our reimbursement is linked to one payer, Medicare. Watching closely the continuing shift of health care to lower cost, outpatient care, we entered two other rehab segments - orthotics and prosthetics patient care services - in 1987 and outpatient physical therapy clinics in 1989. This extended our brand name, values, and clinical reputation to a larger community of patients, employees, and health-care institutions and realized efficiencies by leveraging our investments in management and management control, IT, regulatory expertise, and human resources.

NovaCare's most recent extension of business sequencing is its 1996 entry into the PEO industry with NovaCare Employee Services, Inc., already a $1 billion business. This is the outsourcing of the human resources function for small- and medium-size businesses. A PEO distributes payroll; buys and administers health insurance plans; establishes compliance with employment regulations; recruits and hires; and manage workers' compensation arrangements.

Some might ask what a health-care company is doing in the PEO business. Fundamentally, I don't view NovaCare as a health-care company but as a set of portable core competencies that we transfer from business to business to create shareholder value. The obvious advantage to an employer is our ability to control the cost of health care, including workers' compensation and rehabilitation. In recent years, we have reduced workers' compensation costs per employee by two-thirds, and we have developed an understanding of the case management and rehabilitation aspects of speedy return-to-work. We have become expert in outsourcing - managing rehab - one of a nursing home's most profitable departments. We have also become proficient at managing a huge and growing employee base, geographically dispersed and working in other people's businesses. This is the business of a PEO - managing other businesses' work-site employees on an outsourced basis.

Over the past 20 years, my view of what is required of a CEO has changed. I came to NovaCare by way of the investment business - J. P. Morgan and a venture capital firm, Foster Management Company. The most significant transition I had to make was from the transactional world of investments to the process world of operations. In the investment business, success is about discrete transactions, maximizing personal wealth, and short term. In the the corporate world, success is about continuous process improvement, maximizing team results, and the mid to long term.

I have since realized that it was at J.P. Morgan where I first experienced a values-driven culture, As it turns out, the reason we wanted Morgan on our resumes was that people within and outside the organization recognized that the values pursued and developed over 100 years had created a high-integrity, high-respect, high-success community.

Between the time I left Morgan in 1972 and the time I started NovaCare in 1985, I built a number of businesses. One of those businesses, Foster Medical, had become a leader in home health care by the time it was purchased by a Fortune 500 company. I sold that company because I was still in a transaction mode - that is, in the business of creating personal wealth. The acquiring company had no experience in health care, and, when the industry became turbulent, the subsidiary crashed. Many employees, who had invested their lives and emotional energy to build Foster Medical to the leadership position, watched their careers prematurely explode. It was painful, and I resolved to make every effort to build a company that would endure - to the benefit of customers, employees, and shareholders.

As a business builder, I brought certain concepts to NovaCare: (1) only play if you intend to be number one; (2) prize the entrepreneurial sense of urgency and orientation to action; (3) be strategic... watch what's happening around you and anticipate environmental change - regulatory shifts, and industry dynamics; and (4) don't be overly influenced by Wall Street's short-term view.

I reinforce these concepts through quick, decisive decision-making; by setting high expectations with demanding deadlines and follow-up; and by delegating aggressively. I reward people who take charge, have answers, make decisions, and are impatient. I invest in regulatory and industry experts to help me anticipate the future. Most importantly, I make investments if they build core competencies that will create long-term shareholder value.

I see my most important role as constantly reinforcing our values. At NovaCare, they are not just words on the wall: they are the ballast of the corporate ship. Our company almost ground to a halt in 1987 when in 45 days, 65 percent of our therapists quit. Our management team gathered, bludgeoned and weary. Someone looked up from the table and said, "The problem with this company is that it has no soul." That was the birth of our value set and the day that NovaCare really began its successful climb.

My role has changed as NovaCare has developed scale. I spend less time "doing" and developing the basics. Today, more time is spent creating focus No. 1 in a few select markets, building core competencies, and instilling a sense of urgency. Mostly, my emphasis is upon those things which are constants and that engender stability in times of radical change. Those are values and competitive position. The latter derives from the No. 1 market position and core competencies. This creates a platform for business sequencing, which leads to integrated, rational growth in the service industry and builds shareholder value.