The Dow Jones Industrial Average (DJINDICES:^DJI) includes 30 of the most successful U.S. companies, with a reach that extends across the globe. Yet among those 30 companies, you'll find a variety of different paths to their success, with some companies opting to target relatively narrow niches and strive for excellence in them, while others extend their reach across an entire industry to achieve overall dominance in the field.
Today, let's look at four Dow companies that have managed to earn big profits from specializing in a particular area. By seeing how these companies succeeded, you can get insight into the traits to look for in up-and-coming companies that aspire to follow in their footsteps and become tomorrow's Dow components.
Home Depot (NYSE:HD)
Simply put, big-box home-improvement retailer Home Depot transformed the way homeowners maintain and renovate their homes. By taking what used to be the province of building contractors and other home-improvement professionals and opening the doors to ordinary homeowners, Home Depot eliminated what for many was an unnecessary middleman. In doing so, the retailer tapped into the do-it-yourself impulse and produced billions of dollars in revenue from millions of customers handling their own projects.
Home Depot's success hasn't come without some hitches, as international expansion plans haven't always gone perfectly. But by focusing on its core North American market, Home Depot has held back its rivals in the space and given shareholders impressive long-term growth.
At least on the surface, McDonald's has what appears to be a perfect, simple business. With an attractive franchise, McDonald's has would-be business owners clamoring to open restaurants, while the company just sits back and collects franchise fees and related revenue from providing food services to franchisees.
In reality, McDonald's is a lot more complicated than that. Managing immense distribution networks and delivering a unified marketing message is more complicated than one might think. Moreover, McDonald's caters to regional tastes with differing menu options around the world. Still, by creating a similar experience for diners across the globe, McDonald's has tapped into the desire for consistent quality and value and delivered it.
To call this megaretailer simple is perhaps stretching the definition of what makes a single-segment business. Nevertheless, Wal-Mart has a simple mission to deliver low-cost goods to shoppers, and it has put together the operation necessary to do that.
To provide its common store experience, Wal-Mart expends plenty of effort. From negotiating with suppliers to get the best possible deals to its unparalleled distribution networks, Wal-Mart defined the big-box experience. Its online store has become an increasingly important part of its business, requiring it to modify its operational processes to accommodate different profit-making strategies. Yet through it all, Wal-Mart has stuck to its core values and found ways to deliver shareholder value consistently.
What could be simpler than giving people something to drink? That's the business model that Coke has used to near-perfection throughout its long history, and in the process, it built up operations that are the envy of the retail world.
Coke makes its business look easy, but building the bottling operations, distribution facilities, and retail relationships that are all key parts of the Coke network is no small effort. That's why some of Coke's rivals rely on Coke for distribution rather than trying to reinvent the wheel themselves, and it provides a lasting competitive advantage that puts the company in an attractive position to extend its global reach and duplicate its success in emerging markets around the world.
Keep it simple
The lesson from these four winning Dow stocks is that a business doesn't have to be complicated to be successful. Sometimes, all it takes to win is a good idea and the ability to execute on that idea well.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Coca-Cola, Home Depot, and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.