What keeps great companies winning year after year, even as yesterday's most hyped businesses fall by the wayside? It's not what you think—or what you've read. Carlson School Professor Alfred Marcus reveals the real answers in his new book, Big Winners and Big Losers: The 4 Secrets of Long-Term Business Success and Failure.

Published this month by Wharton School Publishing, the book shows detailed performance metrics for the 1,000 largest U.S. corporations from 1992-2002. Drawing on this unprecedented research, Marcus identified the few companies that consistently outperformed their industry's averages for a full decade and their patterns of success. Most of them fall below the radar of the press. Marcus also identified patterns associated with consistent losers: these patterns were regularly followed by many of the world's best known and highly celebrated companies.

Marcus, Carlson School professor of strategic management, talked with Insights@CarlsonSchool about Big Winners and Big Losers. Marcus holds the Edson Spencer Chair in Strategic Management, Center for Development of Technological Leadership, University of Minnesota Institute of Technology.

Q: How did this book come about?

A: Part-time students who work in major Minneapolis/St.Paul-area companies from General Mills to 3M are enrolled in my strategic management course. I introduce them to strategies that might be used to achieve sustained competitive advantage and ask them to write reports on winning and losing companies using publicly available information. I started seeing patterns in their reports and decided that they could be the basis for a book.

Q: What did you find?

A: Companies that keep winning are rare. Only about three percent of the 1,000 largest U.S. corporations outperformed their industry’s average stock market performance from 1992-2002 using the criteria I established. About 6 percent did the opposite, with most companies falling in the middle. So, one of my key findings is that it is much easier to be a persistent loser than a persistent winner. Three winners, by the way, were Minneapolis/St. Paul-area companies Best Buy, Alliant Tech, and Donaldson. And the winners, I found, had certain qualities in common. They were in sweet spots. They had the agility to get to these spots. They had the discipline to protect them from the encroachments of competitors, and they had the focus to fully exploit them.

Q: What do you mean by a sweet spot?

A: A sweet spot means that these companies offered something of unique value to their customers, something that their customers could not easily obtain from other sources. Customers could not easily leave these firms because of the following three factors that I identify in the book that bound them to their customers. The winning firms tend to be embedded in their customers’ infrastructure, tend to co-create products and services with their customers, and are effective brokers, knowing where to get what their customers want and knowing how to supply their customers’ needs.

Q: How is this book different from other business management books?

A: Many of the winning companies featured in this book are not ones that are getting a lot of publicity. They fall below the radar. Other books tend to draw on the same old examples, like Southwest Airlines. And then too, other books tend to either overemphasize traits I call being in a sweet spot and agility, or those I call discipline and focus. Companies that achieve long-term success have to do it all.

Q: What does it take to be a winning company? What makes a consistent loser?

A: The most important attribute of the winners is their intimate knowledge of their customers. It is not just a matter of knowing who your customers are. You have to be able to serve them with unique bundles of products and services they can't get elsewhere. Winning companies are able to define a niche, keep the competition out, and stay focused in their business models. Losing companies have the opposite qualities: a poorly defined market niche sustained by their rigidity, ineptness, and diffuseness.

Q: OK, so how do winning and losing companies apply these?

A: Best Buy is an example of a great company that was able to find a sweet spot in an extremely competitive industry: consumer electronics. They knew their primary customer well, the 18 to 32-year-old male, and developed the store around that customer understanding. They didn’t have a commissioned sales force, and they had good store design, and product selection. They offered high-quality products at discount prices, kept the sales pressure off, and had plenty of myth items for their customers to play with—expensive products customers would want someday but might not be able to afford now. These items, along with Best Buy specials, built traffic. Customers kept coming back because the stores kept getting better. The stores were part of the selling experience and they were pretty well managed– good inventory management, logistics, and the like. So Best Buy had the discipline to keep improving and the focus to grow.

Another example of a retail winner is Family Dollar discount stores, while the equivalent “loser” is The Gap. Family Dollar was embedded with its customers, opening stores in the rural South for low and middle-income consumers who needed cheap everyday items like soap and toothpaste. Many of these people did not own the pick-up truck you had to have to make the trek out to Wal-Mart. Family Dollar achieved prominence one store at a time, not spending money it didn’t have for expansion. It had the focus to grow: it took the model and moved it to the urban North. It recreated it again and again in poor urban neighborhoods throughout the United States.

The Gap’s business model, on the other hand, got out of hand. It was too complicated. The company created brand confusion when it spread to such diverse segments as the high-brow Banana Republic and the low-brow Old Navy. Its brands competed against each other. But the biggest problem was that it lost touch with its main customer base -- young professionals who wanted casual clothes. As its customers grew older, The Gap didn’t move with them. Instead, it moved to a younger market and started selling clothes that its original customers felt they would no longer look well in – tight-fitting jeans, for instance. The company was doing too much. It designed the clothes, distributed, and marketed them. The creative types in design and marketing didn’t work well with the efficiency mavens in distribution and operations. The clothes The Gap had on the shelves did not move. They were sold at steep discounts. This just goes to show that sustaining a competitive edge in a fashion-based business is very hard. The company’s sweet spot evaporated and it lacked the discipline and focus to recapture it.

Q:What about technology companies?How does the theory apply to them?

A: We can compare LSI Logic, a semi-conductor manufacturer, which has some facilities in the Minneapolis/St. Paul area, with Amphenol, a company that makes computer cables and telecommunications connector equipment. Both companies took a hit in the late 90s with the burst of the tech bubble and had to change their product platforms.Amphenol did this extremely well, while LSI Logic did not. LSI Logic had a very high tech, sophisticated employee base that was absolutely dedicated to the product. The company was not able to adapt to an environment where it had to sell commodities at low prices, nor did it have the service model to support this model.

Amphenol, on the other hand, had the capacity to change. It not only served the computer and telecommunications industries, but had other markets like defense and automotive. It was able to provide one-of-a-kind products of high-quality at a comparatively low cost. It co-created these products with its customers, who shared in its development. While many of the products were relatively low in cost, they were absolutely essential to the performance of its customers systems. For example, they made sophisticated military gear of various kinds that had to be fail-safe in nature. And Amphenol made sure that once its connectors hooked up with its customer’s system, no one else’s products could do so. So its customers had to stay with Amphenol. There was no switching allowed. LSI Logic’s customers, on the other hand, had lots of choices.

Q: Aren’t some of these things contradictory? You say a company needs to focus and have discipline, but some companies also had to abandon these traits for new markets.

A: Yes, that is the key point. The real take away for managers is to cultivate in their companies the ability to combine opposing characteristics. That is why being a long-term winner is so hard to do. It is why it is rare. It is difficult to really dig in and exploit the niche you currently occupy while at the same time you explore for a new position. You have be certain about the mission you are carrying out today, while at the same time you have a vision of where you want to go tomorrow. This has been called concurrent management: doing what you are best at now superbly and at the same time getting yourself ready for the future. You have to put in place the options that will allow you to thrive next, while you hunker down and take care of business right now. This is not simple, but what is needed for long term advantage. Another way of thinking about it is that you have to be highly efficient and profitable at the same time you throw off constraints and make some serious bets on the future.

Q: Why is it so hard to copy these traits?

A: It is because lots of companies get unbalanced. They do just a part of this right. They are too focused on the here and now to think about the future, or they are so absorbed and taken by what they want to do next that they neglect what they have to accomplish at this moment. 3M might be a good example. At one time, it was all about innovating for the future. Now, it seems obsessed with squeezing every inch of fat out with high doses of Six Sigma. So, under its next CEO, let us hope it has the potential to get this all together in the right proportion. It might even happen.

Q: So, should we invest in the companies you’ve identified as winners?

A: I don’t think people should use this book as an investment tool, because it is historical in nature. It explores why a certain group of companies had long runs of success in the 1990s up to the year 2002. Not all of these companies are outperforming their industries now, and some of the losers have started to make comebacks. I even have a chapter in the book that talks about these turnarounds. The important thing is to take the basic insights and use them to try to identify which firms are likely to be winners and losers next. Indeed, with hedging strategies so prevalent these days, it might even be possible to make more money identifying the losers.