What makes a Top CEO? Is it their business strategy, or is a Top CEO an inventor?<\/p>\n\n\n\n
William Thorndike argues that the Top CEOs of all time are ones that went above and beyond what their competitors did, and successfully grew their businesses. These 8 Top CEOs followed smart, but unorthodox business strategies that made them the best in the business. <\/p>\n\n\n\n\n\n\n\n
Editor\u2019s note: This article is part of Shortform\u2019s guide to success<\/a>. If you like what you read here, there\u2019s plenty more to check out in the guide!<\/em><\/p>\n\n\n\n In general, Top CEOs have to do two things to succeed:<\/p>\n\n\n\n Most CEOs and most management books focus on the former. In contrast, Henry Singleton<\/a> of Teledyne<\/a> and the other outsider CEOs in the book focused on the latter. Rather than seeing themselves as company operators, the outsider Top CEOs saw themselves as investors and capital allocators first and foremost<\/strong>. <\/p>\n\n\n\n Despite the importance of capital allocation<\/a>, little training is devoted to it. Business schools don\u2019t feature capital allocation in curricula, and CEOs are promoted from functional roles (like product or marketing) without strong experience with investment in the business. Outsider CEOs saw it as their core job.<\/p>\n\n\n\n The 8 Top CEOs on this Top CEOs list each employed some version of the following strategies to make their companies successful:<\/p>\n\n\n\n For this Top CEOs list, we’re focusing on one of each CEO’s core business strategies as an example. As you read think about how the strategies fit into the concepts outlined above, so you can get a sense of how they deployed the basic tactics of success in different ways. <\/p>\n\n\n\n First on this Top CEO list is Tom Murphy<\/a> of Capital Cities. When acquiring companies, Capital Cities focused on businesses it knew it could run well\u2014media businesses that it could buy, make more efficient using its operating playbook, and thus turn into productive assets that could fuel further similar acquisitions<\/strong>. They knew the business model well\u2014advertising-driven revenue with good margins and strong competitive barriers.<\/p>\n\n\n\n In contrast, its peer company CBS engaged in the conventional practice of acquiring unrelated businesses, such as toy businesses and the Yankees baseball team. The conventional thinking was that these acquisitions would lead to diversification, thus avoiding the variability of economic cycles, as well as synergies, where larger companies magically become more profitable through efficiency. However, like many acquisitions by conglomerates of this era, these did not materialize in meaningful synergies or better profits. Often, conglomerates acquired too rapidly and underestimated the difficulty of improving operations to realize cost efficiencies. Tom Murphy avoided this and become one of the Top CEOs. <\/p>\n\n\n\n Henry Singleton ran one of the most successful business<\/a> empires of the twentieth century, and he’s often featured on top companies CEO lists. In the era of conglomerates, the idea among many companies was that central headquarters could find large synergies among its subsidiaries. Thus, they employed armies of executives to conduct planning and strategy.<\/p>\n\n\n\n In contrast, Teledyne\u2019s headquarters had fewer than 50 people, while its company employed over 40,000<\/strong>. <\/p>\n\n\n\n They even had a small board, featuring just 6 directors, including Singleton. Singleton ran a large conglomerate and quickly become of the Top CEOs. <\/p>\n\n\n\n Outsider CEOs tended to avoid concrete strategic plans, instead preferring flexibility to adjust to the circumstances<\/strong>.<\/p>\n\n\n\n When Anders, one of the Top CEOs, was actively selling businesses, he had actually intended to grow the fighter jet business through acquisition. He approached Lockheed\u2019s CEO with the intent to buy their business, and was surprised when Lockheed instead countered with a generous offer to buy General Dynamics\u2019s F-16 business. Had Anders been more stubborn about retaining the business, he might have missed this opportunity.<\/p>\n\n\n\n Likewise, a company needs different strategies in different situations. Anders grew the company\u2019s value by aggressively shedding its non-core businesses and shrinking the company through improved operations. Just 6 years later, Chabraja grew the business lines through thoughtful acquisitions, including the massive bet on Gulfstream. Even more notably, he did so by selling stock, a rare move among outsider CEOs but appropriate at the time given that their stock was at an all-time high.<\/p>\n\n\n\n Like many acquisitive outsider CEOs, Malone used debt to finance acquisitions<\/strong>. As described earlier, he saw that growth for cable companies could come more cheaply than expected\u2014depreciation of capital expenditures and interest expenses would reduce taxes, even if the company had healthy cash flow. Furthermore, increasing scale allowed TCI to access cheaper debt.<\/p>\n\n\n\n Through much of his tenure, he maintained a ratio of 5x debt to EBITDA<\/a><\/strong>. Malone also structured the debt intelligently to prevent defaults in one loan from cascading and causing systemic problems\u2014in technical terms, he avoided cross-collateralization. (Shortform note: Enron\u2019s downfall was caused in large part because of complicated dependencies between their loans. Read our summary of The Smartest Guys in the Room<\/a> to learn more.<\/p>\n\n\n\n Graham is featured in many top companies and CEO lists, and is on this one because of her careful calculations as a Top CEO. As with the other outsider CEOs, Graham\u2019s choices around how to get money and how to spend it caused the Post\u2019s outperformance:<\/p>\n\n\n\n Buying back shares was controversial in the 1980s, since it meant shrinking the company or admitting that there were no worthwhile investments to make. Instead, Top CEO Bill Stiritz<\/a> used buybacks as a yardstick for return on investment\u2014if an acquisition or internal investment could beat the return on buying back shares, it was worth doing. As with other outsider CEOs, most shares were purchased when company stock was at low P\/E ratios.<\/p>\n\n\n\n By the late 1960s, Bill Stiritz figured that theater growth would likely plateau at some point, so he began looking to diversify into other businesses<\/strong>. His ultimate goal was to have three legs in the company, each a strong business that wasn\u2019t correlated with the others.<\/p>\n\n\n\n In 1968, he entered beverage bottling by purchasing American Beverage Company (ABC), the largest independent Pepsi bottler, for 20% of his company\u2019s enterprise value. His work in theater concessions had given him an appreciation for the attractive market dynamics of beverage bottling<\/strong>:<\/p>\n\n\n\n Over the next decade, Smith purchased more bottling companies. Increasing scale allowed for ever more efficient operations, such as negotiating down can prices and buying its own sugar instead of having it supplied by Pepsi.<\/p>\n\n\n\n Of course, Warren Buffett of Berkshire Hathaway is still one of the Top CEOs in the world, and is featured on numerous top companies and CEO lists. A big part of Berkshire\u2019s investment strategy is its use of low-cost insurance float<\/a> to invest in higher-return businesses<\/strong>. As a reminder, insurance float is money the company receives in premiums before they are paid out as claims. The time gap can be many years. In essence, this is like getting cash at 3% to reinvest at 13%.<\/p>\n\n\n\nWhat Makes a Top CEO?<\/h2>\n\n\n\n
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#1: Tom Murphy, Capital Cities: Focus on Core Business <\/h2>\n\n\n\n
#2: Henry Singleton, Teledyne: Decentralization <\/h2>\n\n\n\n
#3: Bill Anders, General Dynamics: Flexible Strategy <\/h2>\n\n\n\n
#4: John Malone, TCI: Intelligent Use of Debt<\/h2>\n\n\n\n
#5: Katharine Graham, The Washington Post: Financial Allocation <\/h2>\n\n\n\n
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#6: Bill Stiritz, Ralston Purina: Share Repurchases<\/h2>\n\n\n\n
#7: Dick Smith, General Cinema: Diversification <\/h2>\n\n\n\n
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#8: Warren Buffett: Investment Strategy<\/h2>\n\n\n\n