Long before GE was a global leader in financial services and health care, a major TV studio and water purifier, and a pioneer in the alternative energy and green technology spaces, GE was General Electric -- a Schenectady, N.Y.-based maker of electric lighting and appliances.
Yes, this was high technology back in 1892 when the company was founded (with roots back to Thomas Edison), but had GE stuck to its knitting in that niche, it would not be the nearly $300 billion conglomerate we know today. In fact, GE recently announced that it plans to sell its appliance business, and I've heard rumors that it also plans to get out of the legacy lighting business, due in part to pressure from low-cost Chinese manufacturers.
No way to conquer the world
Instead of being content as a lighting company, the people at GE decided to be an idea company. That's why GE became such an incredible success, and why it continues to churn out market-beating returns a century after its founding. Indeed, over the past 20 years, GE has returned more than 1,235% -- turning a $1,000 investment into more than $13,000 today.
What gave GE the flexibility to move up the value chain? Besides hard work and know-how, it was the company's bulletproof reputation for high quality. In other words, it was the company's brand.
Big brands, big money
But GE isn't the only company that parlayed success in a single niche into global domination. Consider IBM (NYSE: IBM). This $170 billion blue chip used to make computers. That's right, used to. It sold that business to China's Lenovo and the former International Business Machines is now largely a high-margin consultant.
Then there's Amazon.com (Nasdaq: AMZN), which was founded to sell books over the Internet, but is now a one-stop shop for everything from convection ovens to old Descendents T-shirts. It's even now making its own digital reading device, the Kindle. How did a trusted bookseller become a trusted technology designer? The answer, of course, is brand.
Brand will also be the answer if Wal-Mart (NYSE: WMT) ends up becoming a trusted and inexpensive source for pharmaceuticals.
This is not a new phenomenon
While GE, IBM, Amazon, and Wal-Mart have leveraged their brands to achieve extraordinary growth, the importance of a good brand to a business is not a new discovery. The Atlantic recently reported on a National Bureau of Economic Research paper by Gary Richardson called "Brand Names Before the Industrial Revolution."
Richardson found that even in medieval markets, "Buyers were willing to pay more for goods that came from reputable outlets, and this encouraged manufacturers to fashion their products with identifying features."
Entrepreneurs found out fast that brands are why companies can expand geographically, expand their product lines, and earn outsized returns for shareholders. After all, without its sterling brand, Pepsi (NYSE: PEP) would just have a product portfolio of sugar water ... and as any five-year-old lemonade proprietor can tell you, that's no way to make milk money, let alone the $5.8 billion in profits Pepsi banked over the past year.
There's gold in them thar logos
It turns out that a strong brand is one of the few sources of sustainable competitive advantage in this world. And while brands can be difficult to value (the best way is to estimate their replacement value, or how much it would cost a competitor to earn the same trust and mindshare from consumers), they are one of the core traits we look for to find promising small-capitalization stocks for our Motley Fool Hidden Gems subscribers.
After all, if you can find a small company with a big brand, then that company has a much better than average chance of becoming a big company along the way. Sure, they could mess it up (things like profits and a strong balance sheet still matter), but a strong brand is a significant head start.
Companies with that head start
This is why Netflix (Nasdaq: NFLX), Callaway Golf (NYSE: ELY), and Playboy (NYSE: PLA) have all popped up on our Hidden Gems radar at one time or another. Each is capitalized at less than $2 billion, and yet how many other mail-order DVD companies can you name off the top of your head?
The Netflix brand is the reason the company could get into streaming video or even video production, Callaway into apparel, and Playboy into casinos and cable television. A great brand, in other words, can provide unstoppable long-term growth potential.
If you're looking for more small companies with powerful long-term brand potential, sign up for Hidden Gems free for 30 days and see all of our research and recommendations. Our picks are beating the market by 19 percentage points on average, and you have no obligation to subscribe. Click here for more information.
This article was originally published on June 20, 2008. It has been updated.
Tim Hanson
does not own shares of any company mentioned. Amazon.com and Netflix are Motley Fool Stock Advisor recommendations. Wal-Mart is an Inside Value pick. Playboy is a Rule Breakers selection. Writing witty lines about our disclosure policy is one of The Motley Fool's branding strategies.
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