The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

by William N. Thorndike Jr.

A contemporary analog for Capital Cities can be found in Transdigm, a little-known, publicly traded aerospace components manufacturer. This remarkable company has grown its cash flow at a compound rate of over 25 percent since 1993 through a combination of internal growth and an exceptionally effective acquisition program. Like Capital Cities, the company focuses on a very specific type of business with exceptional economic characteristics. In Transdigm’s case, this area of specialization is highly engineered aviation parts and components. These parts, once engineered into a military or commercial aircraft, cannot be easily replaced and require regular maintenance and replacement. They are critical to the performance of the aircraft and have no substitutes, and their cost is insignificant relative to the overall cost of the aircraft. As a result, their customers—the largest military and commercial aircraft manufacturers—are more focused on performance than price, and the company has an attractive combination of pricing power and phenomenal margins (cash flow [defined as EBITDA, or earnings before interest, taxes, depreciation, and amortization] margins are north of 40 percent). Transdigm’s management team, led by CEO Nick Howley, realized these excellent economic characteristics in the early 1990s and evolved a highly decentralized corporate structure and operating system for optimizing the profitability of these specialized-parts businesses. Howley, like Murphy at Capital...