Back to the future Featured

12:30pm EDT May 23, 2005
Sometimes you have to look to the past to find the answers that elude you today. Times may change, but often the underlying principles of success for a business remain the same.

Black and white photographs hanging on the wall show how things were, but sometimes they are inspiration for how things should be.

It was just such a photo that inspired Frank Sullivan, president and CEO of Medina-based RPM International Inc., back in 2001. The $2.5 billion manufacturer of industrial and consumer paints and sealants had fallen on hard times. Wall Street was enamored with cutting-edge Internet companies with ideas about moving commerce to the virtual level. Companies with bricks-and-mortar facilities and tangible products were frowned upon by investors who saw limited growth potential in the old industries.

RPM couldn't have been any further from the Internet bubble. The company makes products such as Rust-Oleum brand paint, Day-Glo colorants and DAP caulk, and no one saw much potential for selling spray paint over the Internet.

The company was also completing its first restructuring, giving investors one more reason to look elsewhere.

"In the midst of the restructuring, our stock went from $16 to $8," says Sullivan. "It was a combination of our first-ever restructuring and maybe market questions as to whether we could do this thing right, and it was the first time our earnings went down in our history because of the restructuring charges we took. It was the height of the whole dot-com Internet bubble, and the valuations for our types of businesses and those of our peers were dropping anyway.

"It was a tough period of time for me. I was leading the charge on the process that closed 18 plants and reduced our head count by about 800 people or 10 percent. The market didn't believe the story we were telling them, as evidenced by the stock dropping. Everyone was talking about the 24/7 economy and how the world had changed forever. I was feeling pretty bad."

An old photo provided the inspiration Sullivan needed to start thinking positively again. A picture of his grandfather, his car and a license plate with the number 168 got him thinking. 168 had always been the favorite number of his grandfather, who founded the company. It is the number of hours in a week and serves as a reminder that everyone has a limited amount of time and a duty to use the gift wisely and productively.

"I was sitting in my office at home doing some work, and I stared at a photo of my grandfather next to his Lincoln with the '168' license plate," says Sullivan. "Being the bright math major that I am and in the midst of feeling bad, I looked at the 168. It dawned on me that this was the number he had been talking about for decades. Even in the '50s and '60s he was telling everybody that there are 168 hours in a week and we need to put them to use, whether you are working hard or having fun. He said that we have been given two gifts: Life and the time to do something with them, so use them to the fullest.

"With all the things swirling around us about the new economy and Internet, it dawned on me that 168 and 24/7 were the same thing. The value of 168 is the value that is instilled in this business. It allowed us to go from a small business in a garage to a $2.5 billion company today that is still very entrepreneurial. It was like an epiphany for me looking at that photo and realizing that 24/7 was the same as 168. Maybe the world wasn't changing all that much. If we had the courage of conviction to stick to what we thought would improve the business, then things would work out."

Fundamental principles had gotten RPM this far. When Sullivan looked at that photo, he was reminded of that fact and knew that those same principles would move the company forward once more.

Restructuring recovery

Sullivan needed to boost the morale of a company that was still sluggish following a restructuring that started in 1999.

RPM's business model had been to acquire smaller, entrepreneurial companies and provide them with the financial support, marketing and distribution to achieve results they couldn't achieve on their own, all while leaving the existing management in place.

As the result of a series of acquisitions over the years, the company had accumulated 30 independent units reporting to RPM. There were 38 different IT platforms and 70-plus manufacturing facilities, 40 of which were making paint on a one-shift basis.

The restructuring combined the units with related products into six groups, the number of IT platforms was reduced to five and some plants were closed while others increased production.

Increased efficiency was a must because customer consolidation, particularly on the consumer side, had shifted a lot of buying power to just a few buyers.

"Our margins were being squeezed, and growth was slowing," says Sullivan. "The cost of acquisitions, which we had been doing successfully for the prior 30 years, was going up, and our valuation was going down. We realized we had to do something."

The corporate office put together a broad-based strategy that would address the core problems while involving the managers of the operating units as much as possible.

"We gathered our top operating people and then basically laid out for them what was happening," says Sullivan. "Then we said, 'You guys have to fill in the rest. Each of you has to go back and put together plans on how you can execute this.' Some grumbled, and none of them were happy because nobody likes to close a plant or let people go, but everyone went back and filled in the details and put together a plan to execute the reorganization. Then we did what has always been a hallmark of RPM, which is we executed it."

With the reorganization done, Sullivan needed to convince his managers that RPM would survive, even though it wasn't a hot Internet company.

"We had an executive management team retreat in the summer of 2001," says Sullivan. "I talked a lot about using strategies, using tools from our past. I used quotes from my grandfather. I told them how we had really relied on these fundamentals to get this far. There was a lot in the world that is changing, and we have to be responsive to that change, but the great businesses are great in part because they have solid principles and fundamentals they don't abandon.

"I think in some cases, bad businesses are, over time, in trouble because they don't have those principles or fundamentals and they don't know what they are about except making money. In the short term, that can work, but in the long term, it is not sustainable."

The three keys

Sullivan says that from a big-picture standpoint, the three things that matter most to success are strategy, attitude and execution.

"Strategy, in many instances, is pretty basic," he says. "It's just making sure you are in the automobile steering wheel business instead of the buggy whip business. It's hugely fundamental in nature, but in a lot of instances it doesn't change much, or at least it doesn't change much if you have a good strategy.

"Some people overthink it. Having a good one is vital, but contemplating your navel forever about strategy is a big distraction."

Attitude comes with having the right people in place to execute your strategy.

"It goes back to what my grandfather said: If you don't have the right people, a good strategy doesn't matter," says Sullivan. "A lot of that is just creating an environment or atmosphere for people to succeed. They have to believe what they are doing makes a difference. They have to be motivated and engaged, and if they have that, they are going to beat the next guy."

RPM has created that atmosphere by letting people do the jobs they are good at. Part of the company's acquisition strategy is to find organizations with strong management teams and leave them in place.

"We never bring in RPM people," says Sullivan of newly acquired companies. "We are either acquiring a family business or a free-standing business that's part of a larger company that has its own strong ma nagement team. One of the key factors for us is that there is a good management team that will stay and run the business. Of our companies, 40 percent are still run by original family members, the founder or second- or third-generation family members.

"We have not lost the entrepreneurs that have joined us, even though they realized a lot of liquid wealth in the process of selling to RPM. We are proud of that, and it's a real strength of ours."

In fact, it's what Sullivan says separates RPM from the competition. It may be a $2.5 billion company, but it's made up of a bunch of smaller, entrepreneurial firms.

"At a management meeting, I asked the newest guy what the experience was like after being a part of a larger global organization for a year," says Sullivan. "He said he felt like he had joined the entrepreneurs' club, and that was music to my ears. If after a year with RPM, he still feels like an entrepreneur, then we are continuing to adhere to our fundamentals."

This system allows RPM companies to respond to change quicker because decisions are made at a lower level.

"We empower people to make decisions and make plans they can commit to and go out and do," says Sullivan. "There isn't a hierarchy where people are waiting to be told what to do. Honest to God, there is no one in this office that has anything to do with, or knowledge of, customer pricing or competitive shifts at the product-line level. That's all at our operating companies, and it is their job to make decisions and get it done. I think that's a vital part of why we've been able to grow internally 5 percent in an industry that typically grows 2 to 4 percent.

"Our challenge as we get bigger is to continue to be that. It's what sets us apart. A lot of analysts or people on the outside are saying, 'Why not bang everything together?' I don't think that's our intent. We have a 48-person corporate staff. As one of our operating people told me in a sort of backhanded compliment, 'One of the great strengths of RPM is that with a corporate staff of only 48, you don't have enough people in your corporate office to really screw up a good business.' I thought about it for a minute, laughed and said, 'Yeah, that's right!'

"I'm real sensitive to statements like that and about joining an entrepreneurs' club. It's those types of statements that tell me we are still practicing what we preach."

With a strategy in place and an atmosphere that creates the right attitude, all that's left is execution.

"Having a great strategy and a collection of people, that doesn't get it done unless you can execute," says Sullivan.

Part of achieving solid execution is having people who believe in the plans they are implementing, and that comes from involving them in the planning and giving them the freedom to manage.

"The tactical or day-to-day decisions are not made at the corporate office," says Sullivan. "They are made by incredibly good leaders who are running units they are very proud of. In many instances, they have a family heritage at the business and are close to people there and in the market."

Planning is done from the bottom up, not the top down. In March, all the managers come in to present their plans for the fiscal year that begins in June not only to Sullivan but to their peers in other units. The plans have one main goal: growth.

"We also have here a passion and culture for growth," he says. "It's something I inherited. We've grown revenue every year of our existence no matter what the markets have brought our way.

"In essence, the plans are answering the question of how they are going to grow. In that process, we don't provide any corporate guidance on growth rates, numbers or anything. Our business is diverse enough with different dynamics where it is reasonable to expect the projected results to be different. Our challenge is to grow. Give us a growth budget. Give us a growth plan."

Other than that demand, the planning process is from the bottom up.

"They figure it out," Sullivan says. "Some grow 2 percent, some grow 12 percent. We pound through the budget process to determine where the best growth opportunities lie. It goes back to execution. Our people put together growth plans and go out and execute them."

People are rewarded for performance with bonuses that are tied directly to the plan.

"If you want to create a culture of growth and execution and the discipline that goes with it, you have to talk about it, plan for it and pay for it," says Sullivan.

With the plan for each unit coming directly from the people who have to implement it, everybody knows exactly what is expected of them.

"It eliminates anybody saying at the beginning of the year, 'This is a bunch of malarkey. We can't meet that plan; they don't know our customers or market.' We don't do that," he says. "Our one demand is that they put together a plan for growth. If you focus them on growth, rather than coming back with excuses on why the market will inhibit their growth, they will come back with plans. If I'm an operating guy and I put together a growth plan with good ideas, then I can say, 'Hey RPM, you've got to fund it.'

"That's the real challenge and discipline in the planning process: You have to balance good growth plans with disciplined funding with an eye to the bottom line. Anybody can fund growth. Funding profitable growth is the trick."

Continued success

Fast forward to today. Most of the Internet stocks that were the darlings of the investment world have long since melted down and been forgotten

Sullivan's restructuring plan worked, and the inspiration from the old black and white photograph put the company back on track. Investors now believe the story Sullivan tells.

The stock price has been between $16 and $20 since September of last year. Compound annual revenue growth has been 5 percent. Compound annual net income growth has been 19 percent. Cash generation has improved dramatically, and the company has been supporting its acquisition program with cash while at the same time reducing its debt level.

"I think the real lesson is you need to have sound fundamentals, sound philosophies that are fundamental to who you are and what you do beyond any financial results, and you need to have the courage and conviction to execute the strategy you think makes sense," says Sullivan. "I firmly believe the right way to build a company is to take care of employees and let them do their job. If you do that, you will be able to attract top talent, attract customers and build shareholder value.

"For a long time, the focus of the business community was the opposite. They were starting with shareholder value and how they could meet the short-term numbers. That translates to what are the strategies to take care of the customers, and the employee base is just a contribution that is no different than the equipment and capital you put in a business. I think that could not be further from the truth. Shareholder value is an end result, not a strategy."

Sullivan faces the pressure of not only running a $2.5 billion company but also of being the third generation to head the business.

"We've got a lot of pride here in what we do," says Sullivan. "We have really great people that really get it done. But from a day-to-day perspective, in terms of how we compete and succeed, I'm the most expendable guy in this place. I'd like to think for the long term that what I do makes a difference in terms of philosophy or strategic perspective.

"My grandfather laid down the marker and set the philosophies. The guy that really put them into practice is my father, Tom. So far, my distinct contribution is to be smart enough not to screw up the good work and excellent strategy inherited from them."

Sometimes it might take an old photo to serve as a reminder of which path to take, but Sullivan knows that the strategies created by his father and grandfather will always be inherent in the success of RPM. The "Value of 168" is part of the company culture and has kept the company focused on its basic philosophies, even when the m arket didn't approve.

"We ended up with what turned out to be a good strategy, the strategic adjustment turned out to be right and people approached it with the attitude of understanding what they had to do," says Sullivan. "Everybody executed and got it done."

How to reach: RPM International Inc., (330) 273-5090 or www.rpminc.com