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To Fill a Widening Niche

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View the 2002 Hispanic Business Fastest-Growing 100 DirectoryView statistical charts on the Hispanic Business Fastest Growing 100
In a static market, companies with a competitive advantage grow, while those without it shrink. This classic economic model doesn’t completely explain how the Hispanic Business Fastest-Growing 100® companies increased revenues 62.6 percent compounded annually since 1997. Interviews with these companies’ CEOs reveal not only that their businesses grow within their niche; in addition, the niche grows larger as the customer base or product utility expands.

Sterling Financial Group, the number 1 name on the Fastest-Growing directory, provides a clear example. Sterling offers several investment services, but CEO Charles P. Garcia identifies research on biomedical equities as the company’s core competency. After gathering public information from the Food & Drug Administration, Patent Office, and Securities and Exchange Commission, a panel of Sterling scientists determines whether experimental treatments will pass regulatory muster. “They give their best guess as to what will happen. There hasn’t been one time in three years they’ve been wrong,” says Mr. Garcia. “It’s valuable information, and we get paid well for it.”

Mr. Garcia’s clients include most large mutual funds, banks, and brokerage houses, as well as wealthy individual investors. And with continuous research and new crops of drugs coming to market, the value of biotech investment advice keeps growing. “When the [stock] market was going up, every taxi driver thought he was a genius,” comments Mr. Garcia. “When the market went down, it proved they weren’t as smart as they thought, so they needed advice.”

Other CEOs on the Fastest-Growing list also report stories of carefully choosing their niche to benefit from market forces. Cetrom, a construction firm specializing in federal projects and ranking number 46 on the list, focuses on building hospitals, biomedical laboratories, and other health-related projects. Its market advantage lies in providing a one-stop shop for federal agencies by combining architecture, design, and construction management under one contract. The current trend toward streamlined government and larger contracts fits perfectly with the company’s strategy.

“We believe the turnkey solution method is where federal contracting should be going,” asserts Patricio Ochoa, Cetrom’s CEO. “It saves time, which translates into cost. It minimizes change orders. … Especially in the federal government, a lot of conflict develops between architects and builders, a lot of finger-pointing. The contracting agency wants one company responsible for the whole project.”

Mr. Ochoa also knows when to accept half a pie rather than lose a whole one, in keeping with the forces driving his growth. “We can’t be everything to everyone,” he says. “If we don’t have a certain expertise, we don’t place our position in jeopardy. We integrate the solutions provided by other companies. We act as the prime [contractor].”
The challenge for growth-conscious CEOs at start-up is whether to pitch their company as a niche provider or a generalist. While the niche strategy defines the company’s strength, it can limit growth later on. CEOs from the Fastest-Growing 100 advise Hispanic entrepreneurs to follow the niche route, with the caveat that they develop a long-term growth strategy.

“We started as a niche company, and we were very successful,” says Susana Navarro-Valenti, CEO of Navarro Research & Engineering, based in Oak Ridge, Tennessee.

“We decided we needed to expand in a logical way, into a related field. We started with nuclear safety, and we have worked very hard to change the perception that we are only that. Now we handle environmental work, insurance, safety and health consulting, and information technology contracts. Still, you can see we’re in technical services.”

“You can be a successful generalist, but we have tried to be the best at one thing,” comments Mr. Garcia of Sterling Financial. “We looked for the niche that no one else was doing. I want my customers to say, ‘Sterling does this better than anyone in the world.’”

Where do the growth-prone niches lie? Almost half of the companies on this year’s Fastest-Growing directory fall in the catch-all service sector (see table, “Composition/Performance by Industry”). Most of them work in business services such as environmental remediation, workforce management, consulting, and information technology. Close to another third of the directory’s companies work in construction. Again, a close look reveals that these firms specialize in a growing niche of the construction market. In terms of money, the largest players among the Fastest-Growing tend toward the telephony, healthcare, and automotive sectors (see table, “Top 10 Companies by Dollar Growth”).

Looking forward, the niches filled by the Fastest-Growing 100 firms still appear good long-term bets, since CEOs expect growth to resume this year after a slight off-pace performance in the 2001 recession. “Next year will be better,” promises Luis Spinola, CEO of Azteca Enterprises, a construction firm whose revenues have grown 695 percent since 1997. With 80 percent of those revenues coming from the government, Mr. Spinola plans to target local school districts for future growth. The company ranks 28 on the Fastest-Growing 100.

“It’s our plan to continue growing,” affirms Ms. Navarro-Valenti, whose company revenues have increased 137 percent per year since 1997. “Our plan is to diversify by targeting the Department of Defense for contracts.”

Asked to cite obstacles to their companies’ progress, CEOs mention the familiar themes of discrimination and lack of access both to money and to markets. Mr. Spinola cites the difficulty of persuading people to believe in his company as his main impediment to expansion. “The stigma that you are a minority company means they think you’re less capable of doing the work. People who work with us know what we can do, but with others it’s hard,” he says.

“With some agencies [in the federal government] there is little accountability,” adds Mr. Ochoa. “That is the major challenge we face. It’s hard to compete with multibillion-dollar companies, or companies that simply want to use your name to comply with certain regulations.”

The National Institutes of Health recently pulled out of a $50 million contract after Mr. Ochoa’s company completed only $15 million of the work. Being a minority firm in the 8(a) program, he has sought help from the Small Business Administration, which oversees 8(a). “If they were dealing with a large company, this wouldn’t have happened,” Mr. Ochoa says. “There are no mechanisms to resolve this kind of situation, and much larger companies then take over the market. … Now other companies – multibillion-dollar enterprises – are building [the project]. The lack of accountability troubles us.”

Mr. Spinola reports good relationships with his bankers, but difficulty in acquiring the bonding necessary for federal or commercial construction. Like insurance providers, bonding issuers quote rates based on perceived risk, which works against small firms trying to grow. After reviewing financial statements, contracts, and managerial resumes, the bonding company issues coverage for a charge that varies from 1 percent to 3 percent of the budget – a wide range for large-scale construction projects. “They give you the bond and they give you a bill before you start the job, Mr. Spinola says. “You need to take care of your bonding company as well as your bank.”

Although Fast-Growing 100 CEOs made strategic payroll cuts during the recession, overall employment for the 100 grew 75 percent during the 1997–2001 period used by Hispanic Business to determine the directory. More tellingly, the productivity for the 100, measured in revenues per employee, nearly tripled in the same time span (see box, “Statistical Composite: Typical Fastest-Growing Company”).

As a human resources manager, Mr. Garcia likens himself to an athletic coach, or even a cheerleader, for his team. “The hardest part of building a business is that you’re only as good as the people on your bench,” he says. “My advice to new entrepreneurs is that rather than focusing on your business plan or strategy, get the right people. If you were a world-class coach, you would find the right players, and the players would shape your plan. You need world-class brain power driving the business.”

Whether or not the U.S. economy picks up steam later this year and into the next, the leaders of the Fastest-Growing 100 companies expect to move ahead on a speedy trajectory. “Our business has been growing around 400 percent per year. I see that slowing down in the next two years, but it will still be 300 percent,” predicts Mr. Garcia of Sterling Financial. Adds Mr. Ochoa: “I believe Cetrom will develop strategic alliances and open new markets. We are positioned to grow, and I feel very optimistic.”

Written by Senior Editor Joel Russell. The 2002 Hispanic Business Fastest-Growing 100 directory research by Chief Economist Frank Chow, Research Supervisor J. Tabin Cosio, and Research Assistants Cynthia Marquez and Mike Caplinger.

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