"Growth is our double-edged sword"
David Barasch, Ben & Jerry's
THE MOST IMPORTANT ENGINE
Refer back to the business self-evaluation questionnaire at the end of the last chapter. Which of the five components has been the most important engine for the growth of revenues and profits in your company up to now? Which should be the engine for its future growth? Which of the five has the greatest inherent power to propel growth?
The relative importance of these five has always been a lively issue for debate. Dedicated sales people will emphatically insist that the market, the customer, is the real key to any business. With equal vigor, design and production engineers will stress the dominant role of technology in the success of a business. Of course, every human resource manager knows that people are the real key. As one put it: "Without people you've got nothing!" Financial analysts often laugh at the other three and quietly remind them that, after all, capital is the foundation, the means and the end of every business, without which the others are powerless. And occasionally-very occasionally-you run across an experienced executive who will present a view similar to that of Andrew Carnegie, who once said, "Take away everything else, but leave me my organization and in ten years I'll be back on top."
And as with people, so with companies. In board rooms across the country there are intense debates as to whether the company should be market-driven or product-driven, people-oriented or systems-oriented, dedicated to profits or to quality, and so on. Ask most managers and they will immediately tell you one or another of the five is most important. And within the same company, you can hear many different views.
Who's right? Which is the most important engine for growth? Steve Bedowitz, CEO of AMRE, insists quite emphatically: "All of them. Every single one of them makes up the engine. It is not any one alone. I know a brilliant man who has great ideas, but every time he starts, he goes bankrupt because he doesn't have all the pieces of the engine. No one piece can stand alone. There are a lot of pieces. One reason we will keep on growing is because we found all the pieces to put together."
Bedowitz has hit on the secret. A closer look at any business will reveal that not one but several engines have played important roles in its growth and that all five have been developed at least to the minimum level required to support that growth.
People was certainly a driving force for the growth of Expeditors, but the highly decentralized entrepreneurial structure the company has developed relies to a great extent for its success on the standardized operating procedures employed by all the branches and the strong control systems top management employs to monitor their activities.
Technology has been a major driving force behind the growth of Gartner Group, but the company's ability to attune its research products very carefully to meet the information needs of its customers (market) and its ability to attract and motivate bright, high energy sales people, who are nearly twice as productive as the competition (people), have also been critical success factors.
Linear Technology's growth is the result of a fine balance and coordination between research (technology) and the market supported by an environment that provides great freedom and high levels of compensation to its people.
The rapid influx of new capital enabled Patten Corporation to increase its inventories and expand its operations 26-fold, but it has been the company's ability to properly recruit and motivate managers for its new branches (people) and its expertise in identification and acquisition of the right properties for investment (technology) that has ensured that proper utilization of those funds to consistently return high profits.
The global expansion of Minit International was made possible by the organizational structure and systems it put into place. But recruiting the right type of people who possess qualities of both craftsmen and entrepreneurs, training them in a wide variety of technical skills and motivating them to high levels of productivity and customer service was made possible by the emphasis the company placed on the engine people.
The real issue is not whether a company should be market-driven, product-driven, people-driven, systems-driven or profit-driven. If any company wants to grow and keep growing profitably, it needs to develop all five; because each of these five is an engine that contains within itself virtually unlimited potentials for expansion and in order to more fully tap the potentials of any one, the others must be developed proportionately as well.
That is what Waltz Brothers discovered in 1986.
A BANKER'S ERROR
Waltz Brothers is a precision machining company founded in Chicago 50 years ago by three brothers, who all retired in 1976 leaving the business to their four sons.to manage The company specializes in machining parts to incredibly close dimensional tolerances of three-ten thousandths of an inch. The four cousins worked hard to build on the good reputation established by their fathers and their work soon began paying rich dividends. In the early eighties the company became a major supplier of computer disk drive shafts to IBM and to companies in the aerospace industry.
In 1985 sales soared and revenues rocketed from $3 million to $5 million in one year. Excited by the great potential for continued growth, the company purchased new equipment, moved into a new modern building in a suburb of Chicago, hired lots of new people and took every new job they could get their hands on.
For a while rapid growth was exhilarating. Then problems began to surface. In a business where quality and on-time delivery are paramount, quality declined and deliveries fell behind schedule. Only 40% of jobs were completed on time. Dissatisfied customers started sending back rejected parts. Then they stopped sending in new orders. Orders by one major customer dropped from $500,000 to $10,000. As suddenly as the surge of new business had appeared, it suddenly disappeared and with it the partner's profits and their dreams.
One day their banker called them in to point out that the company was losing money at the rate of $350,000 a year. It came as a big shock to the partners, because profit was something they had always taken for granted. The banker asked them how they planned to repay the plant and equipment loans. Then he said, "Your days are numbered. By our estimate you can survive for only one or two more months." The cousins were stunned by the imminent demise of a business which their fathers had nurtured and developed over five decades and which had recently seemed on the verge of taking off.
In that brief meeting with their bankers, the Waltzes discovered what thousands of companies have learned in the past. Rapid growth is not only one of the most exhilarating experiences that a company can have, it is also one of the most challenging and potentially dangerous. It is not very difficult to grow rapidly, but it is difficult to grow rapidly and profitably and to keep growing profitably over a prolonged period of time. That explains why 23% of the fast growing companies on INC.'s 1988 list were losing money.
All these fast growing companies have discovered the explosive power of at least one of the five engines. But why when they are so buoyant and expansive do they so often run into trouble? Because they have not learned the second basic truth about the five engines, a truth which we all were taught at the dinner table when we were children-the importance of balance.
The Waltzes discovered that truth after their meeting with the banker. When the Waltzes returned to their office, their sole objective was to prove that the banker's prophecy was wrong. They realized that in expanding rapidly they had focused almost all their attention on two of the five components-market and technology, the customer and the machine-and in the process had neglected other essential components of profitable growth-people, organization and capital. Sales had grown faster than their operating systems could handle and their people could manage. Expenditure rose faster than their financial systems could control. In other words, in growing rapidly the five components had grown out of balance.
So the Waltzes formulated a comprehensive strategy for saving their company by eliminating weaknesses in each of the five components and restoring the balance between them at the same time. First, they took a serious look at their market and decided they had to change their approach. They redefined their mission as a company, evolved a new marketing strategy and made a serious effort to improve the service they provided to customers. They set as a goal to raise on-time deliveries from 40% to 90%. Rejection rates were brought down from 8% to less than 1%. On-time deliveries rose above the 90% standard.
They energized their people by introducing a series of training programs. They hired an outside agency to teach 8 week courses on statistical quality control and gave their foremen a five week advanced course in supervisory skills. They also introduced a profit-sharing program to enable their employees to participate in their success. As a result, productivity soared and costs fell.
They also tapped the potentials of the component capital. They introduced some stringent cost cutting, eliminating every unnecessary expense-including free coffee in the office. They found they could achieve a 25% cost savings on raw materials by negotiating long term contracts with vendors like their customers negotiated with them. Expendable tools was another area that improved. Machining bits were being thrown away prematurely. By purchasing one with a better coating, they found productivity could be raised. Then they introduced a sophisticated budgeting system to help them control costs and closely monitor key performance indicators which enabled them to accurately project manpower requirements in advance of actual need. They carefully analyzed new machinery purchases to determine whether the investments were actually justified.
They also tapped some of the potentials of technology. They purchased a computer controlled grinder, which met a small need, and then marketed their new capabilities and filled the expanded capacity.
And finally, they restructured and streamlined their organization by redefining the responsibilities of the four partners and improving the systems for inventory control, budgeting, monitoring performance, scheduling, and quality control.
As a result of these efforts, net income went from a negative $350,000 in 1985 to a positive $30,000 in 1986 and to $500,000 in 1987-a net increase equivalent to 17% of revenues in two years. The company also received a prestigious quality award from IBM.
Waltz Brothers recovered from the brink of bankruptcy by tapping some of the latent potentials of the five engines and by restoring the balance between them. What the Waltz Brothers have done in a time of crisis, every company can do at any time to grow rapidly and profitably.
A DELICATE BLEND
The real key to non-stop growth is a harmonious and balanced development of all five components, either successively or simultaneously. Each of the five is a powerful engine for growth, but each also depends on the other four in order to fully flower and express its potentials. When the development of any one of the five exceeds the present requirements of the company, the surplus energies from that component overflow and begin to stimulate the development of the others. When people are energized, customers are attracted to the company, systems work faster and better, money is utilized more efficiently and technological innovation increases. When the market is energized, employees are more enthusiastic, development of new technologies is stimulated and systems are constantly being improved. When organization is tuned to perform at peak levels of efficiency, people feel more relaxed and happy, service to customers is superior, costs are reduced and coordination between research, production and the market improves.
The reverse is also true. The lack of development of any one of the five components retards the development of the other four. The market for our product may be strong. But if we lack the technology needed to maintain quality, we cannot fully tap that market. We may have the most talented and highly motivated people, but without the right type of structure to direct them and the right type of systems to carry out routine operations effortlessly, anarchy and burnout will be the main result. We may have the best technology, but if we lack people with enough energy and the right skills, the market may not respond to what we offer.
UNIVAC learned from IBM the cost of ignoring one of the five back in the 1950s when it became the first company to bring computers to the marketplace. Despite the fact that the UNIVAC machine was considered far superior, IBM took away 75% of the computer market within the first five years. IBM knew that a highly educated, trained and motivated sales force (people) was as important for success as a good product (technology).
Figure 1. A Typical Profile of the Five Engines of Business
Figure 1 is a very typical profile of the five engines of a business. It shows that the components market and technology are relatively well developed. Like Mr Minit and Linear Technology, it is in close touch with the needs of its market. Like Gartner Group and Patten, it has developed technology to a high level. But the components people and organization are relatively weaker, as they are in a majority of fast growing companies. The horizontal line shows the level of full utilization of potentials based on the development of the weakest component, organization. The areas of market and technology above the line represent capacities that cannot be fully utilized for lack of appropriate supporting strength in people and organization.
A THREE-ENGINE PLANE
As the Waltzes found out, an unbalanced development of the five components can slow or stop growth in its tracks and that is precisely what happens to most fast growing companies. Like many other small commuter airlines, the birth of Mesa Airlines in Farmington, New Mexico in 1982 was spawned by deregulation of the commercial airline industry. However, unlike many other young commuter services, Mesa has been able to remain profitable.
One of the keys to Mesa's survival and growth in a highly competitive market, where even the majors have taken some beatings, has been its ability to identify markets with latent demand for commuter services in which it could effectively compete against other carriers. When competition on the Farmington-Albuquerque route heated up, Mesa dropped its fare from $48 to $25 to match the competition. When competitors later raised their prices again, Mesa kept theirs low because they had discovered a significant increase in demand for seats at the lower rate, which enabled them to achieve 20% higher load factors than their competitors.
But apart from just competing cost-effectively, Mesa has been able to actually create new markets between cities where air travel had not existed earlier. Founder-President Larry Risley explained: "We want to get the price down as low as we can and get the volume up as high as we can...That way we get people travelling. We make less profit per seat, but because we fill more seats, the flight is making a profit...We've stimulated the market with fares. We get people talking about how easy it is to travel from point A to point B. That's how we built the market from Farmington to Albuquerque, which was non-existent...The engines that have propelled our growth have been the ability to recognize the potential markets and fit the right size equipment to them, so that we could operate profitably." Mesa has become adept at entering new markets, testing out new fares and quickly withdrawing from those that are not profitable.
Market, technology (the right equipment) and capital (cost management) have been the engines that propelled the growth of Mesa from $2.1 million in 1984 to $14.4 million in 1987. During this same period profits also rose from $185,000 to $790,000. Then quite suddenly, everything stopped. Even with three engines driving it forward, the airline lost its momentum.
When we visited Mesa in mid-1988, Larry Risley, the company's founder and CEO, explained why Mesa had stopped growing last year.
"We've hit a point of stabilization. Our growth is down to 4-5% annually. What caused us to stop growing was our inability to staff it properly. I'm not saying that we quit growing purposely. I'm saying it went beyond my capacities at the time. I didn't learn quick enough. My management staff didn't learn quick enough. It put us on the back side of the power curve. Our reliability was going down. Our customer confidence was starting to fall. The employee loyalties began to drop-morale and all. You couldn't go out and put your finger on the cause exactly."
Mesa stopped growing because it lost its balance. While Risley was focusing on market, technology and capital, the components people and organization got left behind. The company was so busy developing its markets, that it forgot to develop its people and its organization. As market expansion continued, it quite literally overran the runway. Mesa was slow to build up the management team, structure and systems needed for nonstop growth. Risley continued to manage the company as he had when it was much smaller, keeping information "close to the chest" and refusing to delegate.
THE DOUBLE-EDGED SWORD
Mesa has been fortunate. Even though growth has slowed, the company has remained profitable. It may be able to restore the balance and take off again in the near future. Many other companies are not so fortunate. In the early 1970s a dynamic young entrepreneur with a real talent for marketing and a real appreciation for high technology products opened up an electronics store in Chicago. The store's sales grew rapidly and it was quite profitable. Soon the entrepreneur opened a second store, then a third. Within a few years the company was operating eight stores in Illinois, which the CEO visited regularly by private plane. Revenues soared to $8 million, but profits remained at about the level they had been when the company operated only two stores. By 1978 the company was in trouble. To the surprise of top management, an analysis of the business revealed that only the first two stores were making money and, in fact, the other six had never been profitable. Although the company had expanded its number of outlets, it had never built up an organization to manage its growing empire and it had never put in the financial systems to control inventory and costs in multiple locations. The owners did not even recognize they had a problem until it was too late. Here too, an unbalanced development of the five components halted growth.
The experience of this company is in striking contrast to another company in the same industry, Audio Craft in Cleveland. The company is a leader in its field with one of the best profit records year after year. An analysis of the company shows that all five components are well-developed and in balance. The company shares the traditional strengths of other companies in the industry-a very strong commitment to customer service and a high level of technological expertise. But Audio Craft is also strong in three areas where many of its competitors are relatively weak-finance, organization and people. CEO Wayne Puntel is famous among his peers in the industry for the sophisticated systems he has installed to help him manage and control his six stores efficiently and effortlessly. He also has developed very effective training programs to continuously improve the skills of his sales force and strong incentive and recognition programs to motivate and reward them. In spite of this high performance, Puntel is continuously striving to generate more power from the five engines by developing them further in a balanced manner. Last year that effort generated an additional 40% increase in profitability.
When things get out of balance, some companies take a conscious decision to slow down or stop the growth before it leads to trouble. At the time we visited Ben & Jerry's Homemade Ice Cream in Burlington, Vermont, the founder and President, Ben Cohen, had just put out a directive-"No more growth." Ben and co-founder Jerry Greenfield started the company in an abandoned gas station in 1978. Between 1981 and 1988, sales multiplied 75-fold to top $45 million. Now there is heated debate going on regarding an issue quite familiar to ice cream lovers-Is it possible to have too much of a good thing?
The growth of this company has been propelled by the engines market (great ads and promotions), technology (a wonderful product) and highly motivated people. Its one weak point has been organization. "Growth is our double-edged sword," says David Barasch, "The number 1 issue here is whether we should keep growing. Do we have the internal organizational tenacity and structure to be able to do it? Do we have the right people? The right checks and balances? It all boils down to communication...things happening out of coordination...The feeling that we are swimming up stream."
Ben described the issue from his perspective: "Growth has been a heated topic in our company for the last eight years. The word growth is interesting. You have inner and outer growth, qualitative and quantitative growth. Right now I want to stop the quantitative growth, so that we can concentrate on the quality." To which Jerry retorted, "We talk about slower quantitative growth, but we continually make decisions that will fuel greater growth!"
The issue which Ben and Jerry are coping with is far from academic. Companies that refuse to pay attention to these symptoms are forced to compensate by driving their people harder or spending more and more money or compromising further and further on quality or lowering prices to maintain growing volumes. The result is steadily rising costs and complications, steadily deteriorating customer and employee satisfaction-until finally the floor or the roof caves in and they are forced to stop and pick up the pieces, if it is not already too late. Two of the 100 companies listed by INC. in 1986 were already out of business one year later.
Any company that focuses on one or two components to the exclusion of the others, runs the risk of becoming a leaning tower-a company like Chrysler Corporation in the 1960s and 1970s which focussed on technology at the expense of the other four (particularly market), until the company was brought to the brink of disaster.
There are many similarities between the functioning of the human body and the functioning of a company. But they differ in one major respect. As a biological life form, the body naturally grows and develops in an organic manner. The growth of each part of the body occurs simultaneously and in correct proportion to all the others. The right arm and the left lengthen proportionately. The nerves, muscles and blood vessels extend in proportion to the growth of the bones. As they grow, the links between them-the cartilage, ligaments and tendons-automatically extend to ensure proper connection between the bones and muscles.
Whereas in a company, balanced and proportionate growth cannot be taken for granted and is, in fact, rather unusual. Like the body, organizations do expand in many directions simultaneously. Structures, systems, positions, policies and rules grow along with the number of people and offices and the volume of production. But they often grow at different rates and in different directions. Frequently they grow without proper systems and procedures to link them together. Therefore, in examining the anatomy of a company, the human body is a good image of how a company should but usually does not grow.
The body and the organization differ in one other important respect. The growth of the body is not only organic, it is also subconscious, which means that it is not under our conscious control. Organizations grow subconsciously too. They expand naturally without anyone really thinking about all the parts and their interrelationships. But they do have a choice. Companies can exert conscious control over their own development and achieve through effort and alertness what the body accomplishes through subconscious processes. The ability of management to understand the subconscious process of human physical development and replicate it in the company is a key to non-stop, rapid corporate growth.
The five engines constitute the anatomy of a business. They are like the essential organs of the body-the brain, heart, lungs, stomach and liver. Their role in corporate growth can be understood from three distinct perspectives. First, each is important and crucial in its own right. The heart, like the market, must be strong and healthy. The brain, like the people, should be alert and energetic, etc.
Second, each must also be developed in proper proportion to the others. As the lungs must be sufficiently developed to provide all the oxygen needed by the brain and heart, technology must provide new products and services to serve a growing market. As the liver must be capable of purifying all the blood which the heart pumps, capital must be capable of providing sufficient support for innovations in technology.
Third, in addition to their absolute importance and the need for balanced development, there is also a need for harmonious interaction and close coordination between them. When the heart beats faster, the lungs must pump more oxygen and the liver must filter more blood. When the market expands, people in all parts of the company must be able to respond with energy and skill. Capital must circulate more quickly. Production and research (technology) must accelerate their activity. If for even a short interval the synergy is lost between the organs of the body, the body collapses into coma. The same is true of companies.
This harmonious coordination is not only essential for life. It is also the key to health and vitality-both for the body and the company. Companies that are able to establish and maintain very high levels of synergy between the five engines are able to continuously grow rapidly and profitably.
THE VIEW AT THE TOP
What determines the relative strength, balance and coordination of the five engines in a company? It starts with the people at the top-their understanding, their attitudes and their preferences. If the CEO or the top management team believes that this is a technology-driven company, it will be. If they believe that people are the driving force, people will be. The real balancing act takes place in the minds of the leaders.
There are many ways to spoil a healthy diet. We have been in companies where top management only believes in the market and never builds up an organization or people to support the market. We have been in companies where the CEO was so committed to organization that he has systematized the life out of the company. We have even met senior executives put so much emphasis on training that sales people, who are subjected to the same "motivational" video-taped training programs year after year, secretly speed up the tapes whenever the training supervisor is not looking.
The role of the CEO is to ensure that all five powers are seen in proper perspective, that their capacities are fully recognized and their interrelationships are fully appreciated. Fred Smith, founder and CEO of Federal Express, has understood that maintaining a dynamic balance between the five engines is an important part of his job.
"I purposely populate the ranks of the senior officers with champions of disparate points of view. I don't want a chief financial officer who is an existentialist. I want a chief financial officer who is very dollars and cents oriented, almost to a fault. Then over on the marketing side, I'd like somebody who is very dissatisfied unless we're prepared to give away the product and pay the customer. In this way you create a contention in the organization where there are alternative points of view. That keeps me intellectually honest...As you grow you have to be careful that you don't get the components out of balance. Companies that survive have this sort of intuitive knowledge."
A BALANCING ACT
The view from the top is not the only view or necessarily the most objective. CEOs who ask other managers of the company to evaluate the relative strengths and weaknesses of the five components are often surprised to learn how differently the company is perceived from other vantage points. One CEO who had performed the exercise three or four times over two years commented jocularly, "Every time I rate the company, my scores go up. Every time the rest of the management team rates it, their scores go down!"
Chuck Kittleson of Century Stereo in Palo Alto administered the questionnaire to his employees and then undertook a systematic effort to strengthen the company on all the areas they had identified as relatively weak, even those that appeared relatively minor. Apart from the changes he implemented, the effort itself had a profound impact on morale and performance. Over the next one year, the company's profits doubled.
Henry Triesler, president of Precision Grinding Inc. in Phoenix, gave the questionnaire to all his managers. He then held weekly staff meetings for the next six months discussing their answers to each question and eliciting suggestions on how to raise the company's performance in each area. This exercise helped his company go from heavy losses to strong profits in a little more than a year.
The very act of giving serious attention to all five engines has a power to release some of their latent energies. That was enough to double the performance of these two companies. Then what will be the result if these powers are fully tapped and systematically utilized? An endless expansion of revenues and profits.
Examine the relative strength of the five engines of your company and sketch them on a bar chart. Which are the strongest? In an absolute sense according to your own ratings, how much further scope it there to strengthen these strong components? Which are the weakest and how much scope is there to strengthen them? Now compare the relative levels of their development. How evenly are they balanced? How much developed capacity in the stronger components remains unutilized because one or more of the other components are not sufficiently developed to support it?
Where should a company be concentrating its efforts for further growth? Should it focus on the stronger components or the weaker ones? About 50% of companies have excess unutilized capacity already developed (a strength which is not able to fully express itself) in at least one component. If fully utilized, this capacity is often enough to double the company's performance. But utilizing that excess capacity requires the proportionate strengthening of the other components. Companies that focus on fully exploiting their strengths invariably end up reinforcing the weaker areas to restore a balance between the components. The balancing occurs naturally, even if the strategy is not conceived in this manner. If you review the growth of your own company, you should be able to identify this process at work.
An understanding of where we are is the first essential step. But recognizing the power of the five engines and the importance of balanced development is not enough to generate and sustain high rates of rapid, profitable growth. For that, we must know how to tap the potentials of each of these five, to release their energies, to channel them effectively and convert them into practical results in terms of high performance, high profits and increasing revenues. For that there is a process, the process we referred to in Chapter One, a process which anyone can learn and apply in their own business. This leads us from the subject of corporate anatomy to the realm of corporate physiology.