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Excellent Companies
The notion of thinking about excellence for companies and corporations grew out of Peters and
Waterman's book, "In Search of Excellence" published in 1982. Underlying the book is the
concept that some companies are able to manage in such a way as to create success. How they
chose to define success is not clear. However, this whole idea that broadly defined, some
companies are better than others and identifying those attributes which define excellent
companies goes to the heart of what the financial analyst does. Peters et al's work has produced
a great number of imitators with lists of all sorts. Outlined below are the Peters et al list and two
other very well known lists of excellent or "hot" companies.
Peters and Waterman, "In Search of Excellence"
Peters and Waterman (P-W) put together a sample of 62 firms, which they defined, as
excellent. The sample was constructed to reflect a list of companies that were considered to be
innovative and excellent by an informed group of observers of the business scene. It also
reflected the industries in which that the authors had an interest. In one sense, P-W initial
selection was based on perceptions of prestige. On top of this they imposed 6 measures of
performance.
1.
2.
3.
4.
Compound asset growth from 1961 through 1980.
Compound equity growth from 1961-1980.
The average ratio of market value to book value, 1961-1980.
Average return on capital, 1961-1980. (net income divided by total invested capital,
where invested capital consists of long-term debt, nonredeemable preferred stock,
common stock and minority interests.)
5. Average return on equity, 1961 through 1980.
6. Average return on sales, 1961-1980.
In order to qualify as a top performer in an industry, a company had to have been in the top half
of the industry in at least four out of six of the above measures for the full twenty-year period.
Of the original 62 firms identified, 43 met the performance criteria. See Exhibit 1 for a list of the
P-W sample.
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Based on their studies of the companies, P-W identified eight attributes that they felt
characterized excellent companies.
1.
2.
3.
4.
5.
6.
7.
8.
A bias for action.
Close to the customer
Autonomy and entrepreneurship
Productivity through people
Hands-on and value driven management
Operate businesses they know
Simple organizational structure and lean staff
Excellent companies are simultaneously centralized and decentralized.
Fortune Magazine - "America's Most Admired Companies"
For over 15 years Fortune has annually produced a list of the most admired companies in
the US. Fortune asks senior executives to rate the ten largest companies in their own industry on
a scale of zero (poor) to 10 (excellent) on eight attributes. The attributes were:
1.
2.
3.
4.
5.
6.
7.
8.
Quality of management
Quality of products or services
Innovativeness
Long-term investment value
Financial soundness
Ability to attract, develop and keep talented people
Responsiveness to the community
Wise use of corporate assets.
The implication of this list is that companies that perform well on these attributes are excellent
and ones that do not are not good companies. Exhibit 2 lists the ten most admired and the ten
least admired for certain years. Overall, there is a certain persistence in the firms that appear on
the most and least admired corporations. Again, the implication is that the attributes listed above
are good measures of excellence.
Business Week-Hot Growth Companies 1996.
Every year in the May issue of Business Week, the magazine provides a list of the 10 hot
growth companies. While not quite a list of excellent or admired companies the list does
highlight companies that Business Week considers to excel. The list (See Exhibit 3 for list of the
top 10 companies) is constructed as follows. The sample starts with the 10,000 publicly traded
firms with financial information on the Standard & Poor's Compustat data base. To qualify a
company had to have had annual sales of more than $10 million and less than $150 million, a
current market value greater than $1 million, be actively traded and had a stock price greater
than $2. Banks, insurers, real estate firms, and utilities are excluded. The remaining
companies are ranked according to their three year results in sales growth, earning growth and
return on invested capital. A company's composite rank is the sum of 0.5 times its rank in return
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on capital, plus 0.25 times each of the other ranks. Sales and earnings are the latest available
through the most recent 12 months. Earnings include net income form continuing operations,
before gains or losses from extraordinary items. Increases in sales and profits are based on least
squares estimates. Return on capital was estimated as earnings plus minority interests and taxadjusted interest expense expressed as a percentage of total debt and equity.
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Exhibit 1
Peters and Waterman's Sample
Structured Interviews plus 25-year Literature Review
High Technology
Consumer Goods
General Industrial
Allen-Bradley**
Blue Bell
Caterpillar Tractor*
*
*
Amdahl
Eastman Kodak
Dana Corporation*
*
**
Digital Equipment
Frito-Lay (Pepsico)
Ingersoll-Rand
Emerson Electric*
General Foods
McDermott
Gould
Johnson & Johnson*
Minnesota Mining &
Hewlett-Packard*
Proctor & Gamble*
Manufacturing*
International Business
Machines
NCR
Rockwell
Schlumberger*
Texas Instruments*
United Technologies
Western Electric
Westinghouse
Xerox
Limited Interviews plus 25-year Literature Review
Data General*
Atari (Warner
General Motors
General Electric
Communications)**
Hughes Aircraft**
Avon*
*
Intel
Bristol-Myers*
Lockheed
Cheesbrough-Pond's*
National Semiconductor* Levi Strauss*
Raychem*
Mars**
TRW
Maytag*
Wang Labs*
Merck*
Polaroid
Revlon*
Tupperware (Dart &
Kraft)
*
**
Service
Delta Airlines*
Mariott*
Mcdonald's*
Project Management
Bechtel**
Boeing*
Fluor*
American Airlines
Disney Productions*
K mart*
Wal-Mart*
Passes all hurdles for "excellent" performance, 1961-1980
Privately held or subsidiary: no extensive public data available, but estimated to pass all hurdles for "excellent" performance.
Resource Based
Exxon
Arco
Dow Chemical*
Du Pont*
Standard Oil
(Indiana)/Amoco*
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Exhibit 2
Fortune's "America's Most Admired Companies
Most Admired
1991 Rank (1990 Rank)
Merck (1)
Rubbermaid (2)
Wal-Mart Stores (4)
Liz Claiborne (10)
Levi Strauss Assoc. (20)
Johnson & Johnson (8)
Coca-Cola (6)
3M (6)
Pepsico (5)
Proctor & Gamble (3)
1996 Rank (1995 Rank)
1 Coca-Cola (1)
2 Mirage Resorts (7)
3 Merck (6)
4 United Parcel Service (25)
5 Microsoft (7)
6 Johnson & Johnson (4)
7 Intel (5)
8 Pfizer (12)
9 Proctor & Gamble (2)
10 Berkshire Hathaway (17)
1
2
3
4
5
6
7
8
9
9
1996 Rank (1995 Rank)
431 TWA (417)
430 Standard Commercial (408)
429 K mart (415)
428 Canadaigua Wine (-)
427 Morrison Knudsen (416)
426 Flagstar (401)
425 USAir Group (414)
424 Beverly Enterprises (399)
423 Amerco (411)
422 Cal Fed Bancorp (407)
1991 Rank (1990 Rank)
307 Crossland Savings (304)
306 Continental Air. Hold. (301)
305 HomeFed Corp. (272)
304 Wang Laboratories (303)
303 Unisys (299)
302 LTV (298)
301 Dime Savings Bank (-)
300 Cal Fed Bancorp (266)
299 JPS Textile Group (294)
297 Glenfed (269)
1988 Rank (1987 Rank)
1 Merck (1)
2 Rubbermaid (2)
3 3M (6)
4 Philip Morris (7)
5 Wal-Mart Stores (9)
6 Exxon (21)
7 Pepsico (14)
8 Boeing (19)
9 Herman Miller (12)
10 Shell Oil (11)
Least Admired
1988 Rank (1987 Rank)
305 Financial Corp of Amer. (306)
304 Gibraltar Financial (296)
303 texas Air (301)
302 Maritor Financial Group (294)
301 BankAmerica (304)
300 LTV (303)
299 Goldome Savings and Loan(-)
298 Control Data (298)
297 Manufactures Hanover (291)
296 Kaiser Tech (299)
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Exhibit 3
Business Week's "Hot Growth Companies"
Company -Top Ten
Current Results
Sales
Earnings
$ mil.
$ mil.
Three-year Averages
Increase (%)
Return on
Sales
Profits
Capital
1
Remedy -Designs, makes and markets software to track data on request.
46.8
9
160.5
272.9
43.4
2
Eltron International- maker of bar-code-label printers
42.4
6.4
182.5
179.6
49.9
3
Logic Works - Client/server database design
34.7
1.7
175.7
153.1
42.9
4
APAC Teleservices- an alternative to in-house customer service and sales
131.9
15.1
107.7
123.2
51.7
5
Datastream Systems-window based software for industrial automation
23.5
5.2
78.7
165.5
48.3
6
Unicomp-develops, markets, and supplies software and Unix-based services
21.4
2.1
82.7
206.6
39.1
7
Retirement Care Associates-owns and operates nursing homes
119.2
6.5
313.9
196.9
32.5
8
Ontrak Systems-makes equipment for the semiconductor industry
47.7
3.9
101.2
228.1
33.4
9
Logan's Roadhouse-full service restaurant: steak, seafood, ribs, and chicken
31.9
2.2
78
92.9
70.1
10
Opal - semiconductor equipment and high resolution microscopes
51.9
10.5
82.3
861.5
27.8