What Makes a Great Company? Ask Adobe Systems and International Paper

Jeff Hayes
Jun 24, 2013

The April 2013 issue of the Harvard Business Review has an excellent article on the three rules for making a truly great company. Deloitte consultants Michael Raynor and Mumtaz Ahmed analyzed extensive financial and operational data on more than 25,000 publically traded companies over a 45-year period and identified only 170 companies that qualified as a “Miracle Worker”. These companies were in the top 10% in Return on Assets (income divided by book value of assets) for a long enough period of time (either 16+ years for companies with 45 years of data or all 10 years for companies with just 10 years of data) to be more than just a random result.

After looking at the strategic choices over decades of success made by the “Miracle Workers” the analysts boiled down the choices to three elementary rules:

  1. Better before cheaper – compete on differentiators other than price
  2. Revenue before costs – prioritize initiatives that increase revenue over ones that reduce costs
  3. There are no other rules – change anything you must to follow Rules 1 & 2

Several of the companies that made the cut include IBM, 3M, and McDonald’s. Each of these companies is in very different businesses and has been able to outperform their peers as well as the overall S&P 500 stock index (SPX) over the last 10+ years as the following chart attests.

The analysts point out that having a competitive price is essential for any company, but focusing on price and cost leadership is usually not associated with long term value creation and competitive advantage.

So why do companies put so much emphasis on having the lowest prices and cost structure? One reason that comes to mind is that selling “lower price” is usually easier than selling “higher value”. Are your sales reps or resellers quick to lower price to meet the customer’s budget or competitor’s bid, or are they able to sell the value of a superior offer?

I also believe that many CEOs and executives while preaching “value and revenue” are complicit in the low price/low cost approach that so many companies employ. Let’s face it, cutting costs has an immediate impact on the bottom line and is rewarded by Wall Street — lower costs today means higher profits next quarter, and up goes the stock price.

When pursuing a low price/cost-driven strategy (either explicitly or implicitly) you need to ask yourself:

  • What is the impact on your brand and ability to serve other customers?
  • How much will you have to invest in new/better products?
  • Can you afford to retain your best employees?

Today’s costs savings and low prices often sow the seeds for tomorrow’s problems. Unfortunately, many companies prioritize operational efficiency over excellence in customer service, real product innovation, superior brand marketing, and other non-price differentiators.

Who Are the Miracle Workers In Our Industry?

Identifying Miracle Workers in the imaging/document/graphics industry is difficult because many of the companies are privately held and their financial data is not readily available. However, without doing the rigorous analysis that the Deloitte analysts performed, a couple companies that come to my mind are Adobe Systems and International Paper.

Adobe Systems has never focused on being the low price provider for its graphics tools. The company has differentiated with product innovation (PostScript, PDF, Flash), creative go-to-market methods (OEM/developer licenses, free reader/writer tools, cloud-based usage), strategic acquisitions (Macromedia, Omniture), and a great brand. People pay a premium because it’s Adobe. Over the last 10+ years Adobe’s stock (+116%) has outperformed the NASDAQ (+77%) and Dow Jones 30 (+40%) stock indices as well as its larger peer Microsoft (-5%). Adobe’s recent push into a cloud-based subscription licensing is another example of its efforts to differentiate on non-price factors.

Opposite the software industry is the paper and packaging industry where operational efficiency and lowest prices are often crucial for success. International Paper — the world’s largest paper company — certainly has world class operations, but its competitive differentiation is based on other factors. IP has prioritized becoming a global company through joint ventures and acquisitions to establish a significant presence in all regions especially the emerging economies of Brazil (Grupo Orsa), Russia (ILIM), India (APPM), and China (Sun Paper). IP has also vertically integrated by acquiring the largest paper and packaging distributor in North America (xpedx) to improve customer service and create opportunities to provide paper and non-paper products and services (software, equipment, support) to its large customer base. Finally, the company has expanded its presence in key growth markets including fluff pulp (Franklin Mill) and industrial premium packaging (Temple-Inland acquisition).

IP achieves its tremendous production volume through its global presence, distribution and product innovation which then give it advantages in operational efficiency that yield competitive prices and above average profit margins. This approach is very different from using price to drive volume to drive operational efficiency and, hopefully, profit.

While IP’s stock performance (+8%) doesn’t compare with Adobe or even the Dow Jones 30 Industrials, when comparing the company with its peers, IP has clearly demonstrated its long term staying power and “Miracle Worker” status. Versus some of the other large paper, board, and packaging materials manufacturers such as Sappi (SPP -58%), Smurfit Kappa (SKG -32%), Stora Enso (SEOAY -22%), and Domtar (UFS -95%), IP’s increase of 8% over the last 10 years is particularly impressive.

I think it is worth noting that Stora Enso has traditionally been an industry leader by offering premium products, high quality and innovation particularly related to sustainability (i.e. non-price differentiators). During the growth years from 2001 through 2007 Stora Enso did exceptionally well, even outperforming International Paper, when demand was high and many customers could afford to pay a premium. However, the company also was very dependent on the European region (over 75% of revenue) and has suffered from the recent downturn in demand. This prolonged downturn in a key region illustrates one of the perils of focusing on a non-price position. Customer requirements can change quickly leaving the higher priced supplier in a disadvantaged position.

While Stora Enso has reduced costs in response to the downturn by closing mills (primarily in newsprint) and consolidating some administrative functions, the company continues to invest in product development (e.g. using paper to replace plastic-based packaging). Stora is also placing greater emphasis on establishing a larger presence in Asia and other growth regions.  I suspect that as the European economy improves Stora will outperform the industry and may be in a stronger position to the extent it has a pipeline of innovative products and a more global customer base.

Strategic Decisions

It seems that just about every client I speak with is trying to transform their business. I encourage you to check out the studies InfoTrends has recently completed or is conducting in the office and production markets to help you make better strategic decisions.

Management cannot ignore the company’s price position and must be very wary of new competitors that offer “good enough” at significantly lower prices — particularly if this advantage is achieved through a platform or disruptive business model. However, for long term success, companies need to be investing in new services, innovation, their brand, customer service, and other growth initiatives and non-price differentiators. Not every company can be in the top 10%, but every company can learn from those that are.

Jeff Hayes


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