Shortly after the movie “Saving Private Ryan” was released, I spoke with a World War II veteran who was one of the first soldiers to jump out of a landing craft to storm the beaches of Normandy. He said the movie was the most accurate depiction of that glorious and horrific event that he had ever seen. He was one of the lucky ones.
The beaches of Normandy are a good analogy to today’s post-recession landscape of buyout investors and operating companies: Many are dead, many more are severely injured, and a few are strong and thriving. What factors make the difference? The first and most important of these is debt. When used appropriately, debt can be a very cost-effective source of capital for growth. When used excessively, debt can put a company at risk of loss and cause a tremendous shift of resources and time away from your main focus — value creation.
The problem with debt is that lenders cycle greatly in their willingness to lend. At times like today, underwriting is very strict, and except for the most ideal borrowers, debt is very hard to get. Typical leverage today is around 2 to 2.5 times earnings before interest, taxes, depreciation and amortization (EBITDA). By contrast, at times like those from 2003 through 2007, debt is abundant and aggressive. Typical leverage during that period was around 3.5 to 4 times EBITDA, and often got as high as 6 or 7 times.
Lesson 1 from the recession: Don’t overlever
Even if lenders are willing to lend, only borrow to the extent the company can cover under conservative projections. If debt alone cannot meet the company’s capital needs, then look at bringing in equity. We often say, “It’s better to own half a watermelon than a whole grape.”
Lesson 2 from the recession: Run your company during boom times as if times were lean.
We have heard many leaders bemoaning that their companies would be far more successful if they had run them during the boom period as they are running them now. Without question, success can bring complacency. However, the best leaders we know resist this tendency. Their companies’ cultures foster continuous improvement and cost-reduction regardless of great performance.
Similarly, the advice we often give entrepreneurial and family business owners is, “Run your company as if you are preparing to sell it in three years.” This means eliminating underperforming employees (which can be difficult, even when done with great care and consideration, but is critical), and building cost-cutting and improvement initiatives. These efforts will grow EBITDA and result in a more successful, resilient and valuable company.
Lesson 3 from the recession: If you follow lessons 1 and 2, recessions can create great opportunities for growth and value creation.
Recessions eliminate the weak and reward the survivors. The weak generally are overlevered and are spending their time and significant dollars appeasing their debt holders. The strong, by contrast, are appropriately capitalized and well run. They are poised to bring in more work and to acquire other companies.
There are many companies, including our portfolio companies, which have thrived during the recession. These companies are growing revenue and EBITDA and are taking market share. They are accomplishing this both organically, often picking up business from failing competitors, as well as through acquisition. Those acquisitions often are of struggling competitors at very advantageous valuations.
Follow these lessons, and your company will be positioned to thrive through down cycles, and to dominate once the market turns positive.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle-market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world. Reach him at firstname.lastname@example.org.
Jeffrey S. Davis and his team at Perficient Inc. were not ready for the bursting of the dot-com bubble back in 2001. Despite the warning signs, tough decisions were put off and fingers were crossed that the seemingly inevitable recession wouldn’t turn out as bad as everyone feared.
“We waited too long to really respond to it,” says Davis, who was COO at the IT consulting firm at the time. “We knew what we were going to have to do in terms of layoffs was going to be very unpleasant. So we had a lot of noise among the executives and senior managers in the company. Some people were saying, ‘That’s disaster. If we lay off anybody at all, everybody else will quit, and we won’t have a business left.’ Or people said, ‘That’s not what I’m here for. I refuse to lay anybody off.’”
Davis and his team were in denial.
“People didn’t want to believe it after things had gone so well, especially for the prior couple of years,” Davis says. “From 1999 to 2001, it had just been a phenomenal year for the tech industry. It was hard for people to accept that it was over and over really rather quickly. Denial is exactly the right word.”
Perficient took a pretty big hit like a lot of businesses, but eventually did what it had to do in order to survive and the lessons that Davis learned through that difficult time stuck with him. And those enduring lessons proved to be crucial when the economy began to plummet again in late 2007.
“It was amazing to me the kind of repeat that we had,” says Davis, currently the president and CEO at the 1,015-employee company. “We had the same type of people, salespeople, saying, ‘Oh, we just have to sell our way out of this.’ All the same things were playing over again.”
Fortunately for Perficient, which took in $215 million in 2010 revenue, Davis and his colleagues on the senior management team knew they couldn’t afford to wait around and hope for the best.
“We were able to tune that out and move the business along with what we needed to do,” Davis says.
Make a list
The first thing Davis did this time around, and the first thing you should do when you sense that trouble is ahead, is make a list.
“I would start making a list of every area where I can cut costs as quickly as I can,” Davis says. “It is fairly complicated, especially when you’re talking about taking people out of the business. Any kind of resource you have in the business, theoretically, you needed. Otherwise you shouldn’t have had it. And that happens too. When find yourself in these situations, you start to realize, ‘Gosh, why were we doing that anyway?’ So you start making that list with, ‘Here are the things we can impact immediately.’”
Davis suggests making your list in three tiers to account for the range of severity you might be about to experience.
“Here’s the not-so-bad recession list,” Davis says. “Here’s the pretty bad recession list, and here’s the Armageddon list. We were prepared in phases to go through each of those if we had to.”
This list can’t be something that you do yourself while locked alone in your office. You need to get your colleagues on the management team and your department heads involved from the beginning.
“I wanted to make sure people bought into it and as unpleasant as it is, this is where we are and this is what we have to do,” Davis says. “While none of us liked it, we all agree it’s the right thing for the company and ultimately, it’s the right thing for those folks who are left behind. So it was definitely a collaborative effort and not a mandate.”
Davis had each manager and department leader come up with percentages of cost reductions and dollar figures. It’s not your job to identify specific individuals to let go. Let your people who work with them on a regular basis and know their strengths and weaknesses make those decisions.
“They are closer to it than I am,” Davis says. “I hope they have the right answers because it’s going to be difficult for me to come up with given that I’m a couple steps removed. You’ve got to rely on your folks, hold them accountable but also rely on them to make the right decision.”
You can acknowledge that these are decisions that no one likes to make without falling into tired clichés.
“Just be upfront and honest,” Davis says. “This sucks, but here’s where we’re at. I’m not going to candy coat it for you. Here’s what we have to do. For the people I mentioned and I would even extend it to your 17 general managers, our executive team is about 21 people, I would treat everybody on the team like that. They wouldn’t be in those positions if I felt like a conversation like that was going to be send them into a tailspin.”
You can also offer your hope that the worst doesn’t happen and that the draconian cuts you’re talking about won’t have to be made. But if you don’t plan for the worst and the worst happens, your stress is going to be a whole lot worse. So you need to maintain a sense of urgency.
“I never had anybody that was that much of a holdout,” Davis says. “But if I did, I would say, ‘If you’re not going to do it, I’ll do it for you.’ Usually when you offer something like that, they tend to take it more seriously. Because the last thing they want is for you to be making the decisions for them.”
Help people grow
Unfortunately for Davis, he did have instances where people came back to him and hadn’t come up with enough to cut out of their part of the budget. The claim was that there were too many things they couldn’t afford to live without.
“It’s a process of education and less of a negotiation,” Davis says. “It’s not really a negotiation when we know who the winner is going to be and that’s me.”
If your people have a hard time even drawing up a list of possible cuts, try being a mentor to them rather than a tyrant.
“With those people, it’s more of a process of, ‘Let me walk through it with you.’ Make it more of a mentoring exercise. ‘Let’s go through it together. Here’s why this function is no longer going to be necessary or here’s why you’re not going to need this many of that particular title or function in the scenario we’re talking about.’”
You can also encourage people to look beyond just getting rid of employees to reduce costs.
“Those are some of the things that don’t immediately strike the person serving in the trenches wrestling with this,” Davis says. “To your point, maybe they are hung up on the people side of it. And they aren’t even thinking about the fact that, ‘Hey, we’ve got that extra conference area over here that some other tenant has been wanting for two years. Let’s get rid of it.’”
Whether it’s offering alternatives or just encouragement, you need to remove the fear your leaders may have about making important decisions. Show that you trust them to make big decisions in the best interest of the business.
“You’ve chosen this person for this job,” Davis says. “They are either your person or they are not. If they’re not, you should do them a favor and get rid of them. If they are, you should support them. People are motivated knowing they have a boss who believes in them. I can’t think of a better way to be motivated myself than knowing my board has confidence and believes in me and believes in where I’m taking the company.”
If people do make mistakes in the cutback process, try to remember that you’ve made plenty of mistakes yourself.
“At this level, if you’re still trying to manage people, there’s something wrong,” Davis says. “You’re not doing your job correctly or you’ve got the wrong people. But your business is not going to grow. You’re not going to reach your potential either if you’re still trying to do everybody else’s job for them.”
You’re not going to have a team of leaders that feels like it’s marching forward together if you become a micromanager. You need to buy in to them and they need to buy in to you and you need to trust each other.
“If you’ve got that buy-in, they’re going to work really hard,” Davis says. “They really believe in their heart of hearts this is what needs to happen not just because you told them so, but because they understand that it really does need to happen. They’re going to work very hard to make it happen.”
Davis has been two through major recessions at Perficient and he has seen the cultural damage they can cause. So when cuts need to be made, he suggests you try to get it right the first time.
“Honestly, as cold as it sounds, the right thing to do for the business is to go down as deep as you can,” Davis says. “If that’s more than necessary, that’s unfortunate. But that’s better than having to make four cuts. That continual cut, cut, cut just kills morale. In the service business, those are your assets. That’s what you care about and that just kills it.”
Once the announcements have been made and those who are being let go have been notified, you need to move quickly to refocus everyone’s energy. Show people that this isn’t the first step toward going out of business.
“Try to give some concrete evidence that you’re taking action,” Davis says. “When the chips are down and they’re kind of down anyway, they want to know that you’re doing something. You’re not just sitting around waiting for the economy to get better.”
Davis took advantage of a declining market and made some investments that the company might not otherwise have made.
“We’re trying to gain share, so frankly, we did some experiments,” Davis says. “It allowed us to try some things that we might have been a little more reticent to try if we weren’t working so hard to turn things around.
“We invested and built organically a health care business unit that is focused on that industry. Before we did that, it was already part of our business, but in 2008, it was probably about 15 percent of our revenue. It’s 25 percent today. From 2009 to 2010, we added $12 million in revenue in the health care industry.”
You can’t promise people that you’ll never have to make cuts again. But you need to reassure them that the company is moving ahead.
“Let’s all get back to work,” Davis says. “It’s unfortunate, and we’ll miss our colleagues, but we’ve still got a job to do. For your own sake and the benefit of your family and yourself, we need to keep slugging it out every day. Let’s move on and keep moving it forward. That’s the speech I would give.”
Davis says it’s the need to work with his people and help them continue to grow that helped him weather the storm at Perficient a little bit better the second time around.
“I’m pleased to say we never got more than even halfway through the second list of cuts and never even had to get to third list,” Davis says of the three cutback scenarios that were considered.
He added that he continues to grow as a leader and learn the value of empowering others.
“I’m a better motivator of people that I was 10 years ago and I hope I get better every day,” Davis says. “That’s the most important thing as a leader is motivating. It’s making sure you have the right people around you, of course, but motivating them and not managing them.”
How to reach: Perficient Inc., (314) 529-3600 or www.perficient.com
The Davis File
Jeffrey S. Davis
President and CEO
Born: Tulsa, Okla.
Education: Bachelor’s of science in electrical engineering, University of Missouri-Columbia; MBA, Washington University in St. Louis
What was your first job?
I ran a newspaper route when I was 10 for the St. Louis Post-Dispatch. I collected my pay, and I got a checking account and for 1975, I was making pretty good money for a 10-year-old kid.
Who has been the biggest influence on you and why?
My dad, James. There are a number of things [he taught me], and they are all an offshoot of the same thing. He had an incredibly high level of integrity.
What’s the best advice you ever received?
My mother used to always say, ‘Your sins will find you out.’ I think the best thing I ever learned in my life that I’ve tried to always apply is to do the right thing. I was like any other kid. I was probably about 15 when I finally figured out I can’t lie my way out of trouble. Some kids probably learn younger than that, but I was 15. That was a life lesson that stuck with me.
Who would you like to meet, and what would you want to ask that person?
President Ronald Reagan. How did he manage to muster up as much charisma as he did in the face of a bunch of crappy stuff and a bunch of naysayers? How did he always manage to hold his head up and do the right thing and convey that in an amazingly charismatic way? He connected with people at all levels and from all walks of life in this country. He did a better job of that than any president in my lifetime.
Growth is nothing new to Manu Shah. His company’s been experiencing it for 36 years straight – ever since M S International Inc. opened in 1975.
Shah, president and CEO, is in the stone business; his company is a global distributor of natural stone, and the largest supplier of natural stone products in the U.S. His team knows a thing or two about staying rock solid, and not even the economic downturn could keep them from growing.
Competitors cut back or closed down, but Shah set out to follow core values, seek new opportunities and invest for the long-term by innovating everywhere, from sales and marketing to the supply chain. So while his industry shrank 40 percent during the last two years, Shah grew 45 percent.
Because of this, Smart Business, ThinkASG, IBM and Union Bank named Shah one of the 2011 Smart Leader honorees. He shared how he innovates to expand while investing in employees and the company.
Give an example of a business challenge you and/or your organization faced, as well as how you overcame it.
Since opening in 1975, MSI has grown for all its 35 years of history. In the last quarter of 2008, the political and economic uncertainty, the volatility of consumer sentiment and the continuation of the global debt crisis caused a large business challenge in the form of how to compete with fear. Most of our major competitors – and the building industry in general – dealt with the fear by laying off workers, reducing pay, curtailing investments, closing locations and stopping new product innovations. Many companies in our industry decided to just shut down, or fell into bankruptcy.
After one year of survival tactics, we put aside our worries and charged forward taking risks and making calculated investments for the long term.
Instead of copying our competitors during those turbulent times, we asked all our leaders to keep our core values intact, continue to invest for the long term, and take advantage of once-in-a-lifetime opportunities in the industry. We asked our leaders to plan for knock-out punches and demand the necessary resources for execution. Some examples include:
1) Continued hiring at an aggressive pace and encouraging hard work and over time where required
2) Continued expansion of new branches and necessary infrastructure spending.
3) Continued investment in innovation and marketing and product development
4) Extended helping hands to key vendors, needy employees and few longtime customers.
5) Most importantly, did not lay off a single employee due to lack of work.
6) Most importantly, did not lay off a single employee or reduce benefits due to a lack of work!
The strategy worked wonders: Between 2008 and 2010, MSI grew by 45 percent while the industry shrank by 40 percent.
Most companies measure their success by top-line or bottom-line growth; we at MSI look at the market share growth. Market share is calculated geographically, customer segments and different product lines. The best time to get market share is during a downturn in the economy when opponents are weak.
We hired and trained over 150 employees nationwide in 2010. Opened three new branches. Made huge investments in IT software and hardware to improve productivity. Revitalized HR, including a focus on wellness and a digitized review process.
In what ways are you an innovative leader, and how does your organization employ innovation to be on the leading edge?
Innovation is the engine of growth.
Innovation in sales and marketing – developing state-of the art display systems physically and in the virtual world.
Innovation in product packaging – attractive packaging to the consumer and more green, environmentally friendly packages.
Innovation in hiring and retaining talent.
Innovation in supply chain management, including clarity and transparency with all major vendors.
Innovation in never using “OPM” – Other People’s Money. About 95 percent of our A/P is paid as soon as shipments are confirmed shipped from 35 countries – 30 to 90 days before our competition pays.
Innovation in information systems to get all info as soon as it happens to all with the need to know.
Introduce many databases with ARC (Analysis, Recommendations, Conclusion) by using over 40 servers with real-time data.
How do you make a significant impact on the community and regional economy?
We expanded wellness program to every employee, introduced matching charitable contributions to all 500-plus employees, trained 15-plus college students during summer (which we do each year), added 40-plus employees locally in Orange County, received “Best Place to Work” recognization in Orange County as well as an award for large family-owned business and an award for the Business of the Year by the City of Orange.
We work with numerous community organizations on their needs, as well.
How to reach: M S International Inc., (714) 685-7500 or www.msistone.com
Emerging from the darkest days of the great recession, Richard Bolte Jr. came to one undeniable conclusion: Predictability was gone. It left with the economic downfall in 2008, and it wasn’t coming back.
Change was the new constant for his company, BDP International Inc., and he needed to adapt BDP to deal with the new reality.
“The financial crisis left us with unpredictability and market volatility,” says Bolte, BDP’s president and CEO. “So as a result, it’s a new environment that is volatile and unpredictable, and you have to transform and change, as well. You can no longer serve your market with that business model. Your customer requirements have changed. They’re moving their supply chains around. They’re making different decisions. They’re looking to outsource things they used to do themselves.”
To react to the new volatility, Bolte had to transition his company from a controlled, structured environment to a company that nurtured new ideas, promoted innovation and valued entrepreneurship. It was a dramatic shift for the global logistics solutions provider, which generates $1.65 billion in annual revenue and employs 3,000. It meant not just new processes and policies, but a complete reconfiguration of the way the company collectively thinks.
And to make it all happen, Bolte had to start at the individual level and work his way up.
“The challenge I gave to our guys was, rather than looking at global operations as something that needs to be controlled, you need to ask one question: ‘How can I help you grow?’ he says. “That would underscore and focus the team on transformation, because from a support perspective, it is quite a journey to go from controlling to nurturing.”
Build the case
As Bolte and his leadership team surveyed the damage from the recession, he came to the conclusion that the companies that could adapt on the fly would be the companies that survived. Knowing that, he realized one of his first duties as the head of the organization was to create a sense of urgency around the need for change. He needed a management team that wanted to embrace change now, not a year from now.
“It’s one of the things you need to do as a leader,” Bolte says. “The message needs to keep coming out that we’re not kidding, we believe we need to migrate to these things. We need to change and why. You’d better have a good answer as to why you believe things need to change and why they need to change now. Because even if you get buy-in on change, you might find those who want to change in a year or so. So you need to create that sense of urgency. You need to create a tremendous sense of clarity around why you think things need to change and why they have to happen now.”
Bolte built the case for change by collecting and presenting data to his managers, and then cascading that data throughout the organization. Bolte and his leadership team built a three-year strategic plan that identified where BDP currently stood and where it needed to be in 36 months to maintain profitability. The basic points of the plan were then rolled out to every corner of the organization.
“We came out with a three-year plan that says, ‘As a result of going through this crisis, things need to change, and here are the things we’ve identified that need to change now,’” Bolte says. “Then we communicate that through town-hall meetings, through webcasts, through our management team and senior team. We embedded those exact same messages into their communications. We then developed a strategic plan and published progress as to how we were performing against those changes we had identified.”
The change areas that Bolte and his team identified centered on what he calls “centers of excellence.” Bolte wanted employees in each area of the company — IT, finance, global administration, sales and marketing, and transportation services — to identify ways in which their department could evolve into a more entrepreneurial, innovative team. It was easier for some areas than for others, and in some cases, it took a personnel shift to fulfill the company’s shift.
“Let’s take finance, which is controlling by nature,” Bolte says. “One of the things we looked at is that finance can be a valuable tool to the organization, if employed correctly. It can be a partner to growth instead of a ‘threat to be audited’ kind of mindset. One of the things we had to do was actually look at the people within the organization.
“Some individuals are actually not going to be able to make that leap over to a nurturing environment. We actually had to go out and bring in new and different talent into organizations like finance and IT, who thought in different ways and could accommodate that kind of transformation.”
Even though the organization was shifting away from centralized processes, Bolte was starting to rally BDP around a strong central vision, which required buy-in from people who also embraced the vision, necessitating the need for new blood in certain positions.
“The notion we asked them to embrace is that we need to create an environment that is easy to do business in, where we treat people how you want to be treated, not a highly structured or controlled environment,” he says.
But with that newfound need for entrepreneurship and innovation comes a need for boundary lines. You might not want rules weighing down your people, but you can’t let them innovate themselves into left field, where their ideas do nothing for them or the company.
Bolte harnessed his employees’ brainpower and used it to cement his new culture by turning innovation into a competition of sorts.
“Last year, we actually had a specific program we named BDP Fusion,” he says. “We encouraged employees anywhere in our system to submit ideas for a new business plan. We then held a contest in each region where we picked the top three ideas. At the end, it boiled down to one winner, and we actually implemented that idea as a new business plan. We had contests in three regions and myself and some other senior members went around, and the finalists were able to present to us.
“There was a tremendous amount of energy and excitement around these teams presenting, and in addition to ending up with a great business plan for tank management in Asia, it was very good for morale. A lot of companies say they listen to their employees, but here was visible evidence of a company seeking direction on a new business from its employees. It sends a powerful message that we do listen and we do care about these new ideas.”
Build change agents
You can hire people who will embrace your vision for the future, but until you can fully leverage their ability as leaders, you won’t have much more than passive order takers.
You not only want your best and brightest to get on board with a new organizational direction, you want them to get others on board, too. In some companies, they’re called change agents, but whatever title you want to stamp on them, they’re a critical ingredient in making your vision a reality.
At BDP, Bolte has formalized the process of getting buy-in from his future leaders, partnering with outside resources to train and enable the next generation of change agents.
“We went and aggressively developed what we call a leadership development program involving the top 40 or 50 next-generation-type leaders,” Bolte says. “We did a partnership-type program with [Dale Carnegie Training]. We did a two-week course with instructors from Dale Carnegie, but we also developed a program with senior staff from BDP, where we ran a highly energetic and entertaining two-week session. The energy coming out of that was tremendous.”
The training program goes hand in hand with an internal mentoring program that Bolte and his leadership team initiated. The mentoring program is designed to give potential leaders a wide-angle view of the company by pairing the young protégé with a mentor from a different department.
“It’s very cross-functional in our case,” Bolte says. “We might have the CFO mentoring two people in operations. Or you might have an operations person mentoring someone in the finance department. The mentoring process is a bit better than just identifying top performers. It takes it a bit deeper, because you’re getting direct feedback from senior management members who had these individuals under their wing for the program, which runs six months. So I think you’re developing a deeper understanding of your top performers.”
But sometimes, it comes down to the lessons learned from your years of experience as a manager of people. If your gut is full of experience, it’s OK to trust it sometimes.
“In addition to the processes, don’t be afraid to use your gut feelings,” Bolte says. “Sometimes you’ll get a good sense about somebody, and in business, I think you can trust your sixth sense, so to speak. But other than that, if you do not have a mentoring process or a leadership development program, you should study various forms of those types of programs and consider implementing them.”
Maintain your momentum
Once you have forged a new direction for your company and gotten all of your key players on board, your job isn’t done. You have to keep enforcing the rulebook and reinforcing the behavior you want to see.
In the final months of 2010, Bolte was involved in budgeting and strategic planning meetings for the upcoming year, as many company presidents and CEOs were. But he took the opportunity to reinforce the direction of the company through the budget and planning process.
“These meetings that we’ve been having internally are designed to build complete alignment among the business units and the infrastructure that supports them,” Bolte says. “They all have an agreement that these are the priorities for 2011, this is the order that we hope to accomplish them, here are the critical success factors, and so on. So there are different elements of the plan, and we come together and sign off on it — ‘This is how we’ll move forward as a team.’
“I like the simplistic approach. You don’t need a 51-page strategic plan. You need strategic principles and a two- or three-page paper, and that is really the strategic plan. Because if anything is bigger than that, you start to lose people.”
Bolte says you still need to allow your team to bounce ideas off of each other and off of you. You can’t throw water on innovative brainstorming. It simply goes back to ensuring that you have broadly defined the direction in which you want everyone pointed and nudging people back on track when they stray.
“If it’s something I don’t like, I’m pretty quick to tell them,” he says. “If you think of it like they’re presenting their wish lists, I don’t give much comment unless they’re really in an area where I think it’s not aligned with our vision. So it’s really an opportunity to listen to those plans, see how it’s going to impact the whole group and figure out what they’re going to need to do to support those plans moving forward. That’s how you keep everyone on the same page with regard to a vision.”
How to reach: BDP International Inc., (215) 629-8900 or www.bdpinternational.com
The Bolte file
Richard Bolte Jr.
president and CEO
BDP International Inc.
Education: Business/finance and Spanish degrees, Mount St. Mary’s University
What is the best business lesson you’ve learned?
You can’t do business with people or companies you don’t trust. If you don’t have that element, you can’t have a relationship, and you can’t do business.
What traits or skills are essential for a business leader?
You need to be a great communicator and have really strong public speaking skills. You need to be trustworthy and ethical, be passionate about what you do, and show that passion when you have the opportunity.
What is your definition of success?
Meeting all predefined goals. But you can define it in other ways. Success can be creating a successful culture, and that means not accomplishing a goal but how you accomplish a goal. Did you do it in a moral and ethical way?
Bill Ford Jr. never thought he’d see the day when Chrysler and General Motors would be forced into bankruptcy proceedings, when American automakers were in such peril that they had to look to the government for a bailout or when the entire auto industry was teetering on the brink of disaster.
Yet that’s exactly the depths to which the automotive industry sank over the past two years. As the worldwide economy slumped into a massive recession, the auto industry took one of the worst beatings of any area on the business landscape. Car sales slumped, auto component suppliers went bankrupt, Chrysler partnered with Fiat, and GM underwent a restructuring and downsizing that included the elimination of the Pontiac, Saturn and Hummer brands from its lineup.
As the executive chairman of Ford Motor Co., Ford — the great-grandson of company founder and American business icon Henry Ford — helps lead the one U.S. automaker that didn’t face bankruptcy proceedings or the humiliation of limping to Capitol Hill with its hands out. But that doesn’t mean Ford Motor Co. has emerged in 2011 unchanged or unchallenged by the events of the past two years.
In November, Ford gave a presentation at the Ernst & Young Strategic Growth Forum in Palm Desert, Calif., moderated by veteran journalist Charlie Rose. During the presentation, Ford talked about the recent past of the auto industry, where the industry is headed and what business leaders in other industries can learn from the lessons taught to automotive executives in the past couple of years.
“Every industry says they’re in a time of great change,” Ford says. “I suppose when you’re in it, you really feel like you are. But if you just look back a few years and look forward a few years, you’d be hard-pressed to find any era in any industry that will comprise more change.”
Do the right thing
When the other American automakers went to Washington seeking a federally funded lifeline, Ford figured his company would be at a disadvantage on the consumer sales front.
“We didn’t really know what a bankruptcy meant for us,” he says. “Would a customer buy a car or truck from a bankrupt company? What we didn’t realize at Ford was that it would resonate with the average person on the street that we didn’t take a bailout. We thought the average person would take the opposite stance, as in, ‘I have so much money wrapped up in this company, I’m going to buy their car or truck.’ We were worried that no one would buy from us, because they were now shareholders of sorts in GM and Chrysler.”
Instead, Ford received — and still receives — letters of support from small business owners and operators who admire Ford’s ability to get his company through the recession without the need for taxpayer dollars.
“The letters I got, and continue to get, are incredible,” Ford says. “Things like, ‘I’m a small business owner in Des Moines and no one would ever bail me out, and we’re really glad that you guys did it the right way.’ It really was heartwarming to see the response we got.”
But there was a cost for staying financially self-sufficient. Ford Motor Co. had to borrow against many of its assets to finance the research and development projects that allowed it to stay away from the jaws of bankruptcy and bailouts. The company amassed a large amount of debt, compared with GM and Chrysler, who emerged with clean balance sheets thanks to their sources of external funding.
But Ford believes a commitment to developing your business internally is one of the most reliable methods by which you can weather an economic storm. If you’re developing new products and services and finding other ways to enhance your business from within, you’ll become much more strategically diverse and self-sufficient as a company.
Ford’s emphasis on internal development is reflected in one of the first conversations he had with Alan Mulally, who succeeded Ford as the company’s president and CEO in 2006.
“One of the things I told Alan in our first meeting was, ‘There is no point in going through all of the pain we’re going to have to go through if we don’t keep investing in research and development and product development,’” Ford says. “He agreed completely. Now that we’re through and out the other side, most of our competitors, both domestic and foreign, slashed their spending during that period. Not only didn’t we do that, we actually accelerated some key areas. So when the clouds started to lift, we had the products, technology and features that made our vehicles very desirable.”
Ford and his leadership team set those wheels in motion even before Mulally came on board, working with bankers to get capital to pump back into the company’s development areas. From Mulally’s first day on the job, he began making the rounds to banks, trying to secure the loans necessary to make it all happen.
“It was a pretty dicey period,” Ford says. “You can imagine it was a pretty interesting conversation I had with the extended Ford family.”
To build the case to the other stakeholding members of his family, Ford needed to go back to the basics of good business communication from the executive level: Lay out your plan, be as forthcoming with information as possible, answer questions and seek feedback.
“I was very proud of the fact that, over the course of that discussion and over the next couple of years, when every day they’d pick up a paper that says, ‘Ford, GM and Chrysler aren’t going to make it,’ they all hung in there,” Ford says. “I had to continually sit down with them and say, ‘We do have a plan, you’re not seeing it yet, but it’s going to work.’ To their great credit, they all hung in there. And that really allowed the rest of the management team to not have to worry about the shareholders. They could focus on fixing the problem.”
The patience of the Ford family is being rewarded. Not only did the company emerge from the financial crisis without the need for federal money, but Ford says the company’s debt is being paid off much faster than either the company’s leaders or industry analysts anticipated.
“There was a disadvantage to doing it the way we did. But that disadvantage [of debt] is shrinking almost on a daily basis,” Ford says. “I wouldn’t trade places with anybody. I love where we are. I love our product, our direction and our freedom to operate without interference.”
Face the future
Before you can build something, Ford says you have to value it. You have to value the end product as a company and as a marketplace. The failure to adequately value the domestic manufacturing sector is something Ford believes the American business community will continue to face.
To increase the value of manufacturing businesses, Ford says it will take a combination of new, innovative ideas, intellectual partnerships, capital investment and an appreciation for how other countries handle their manufacturing bases.
“Manufacturing was kind of seen as yesterday’s news, brownfields, and we’re going to become a high-tech and service economy,” Ford says. “The problem is, the multiplier effects of those jobs versus manufacturing jobs is minuscule. To put it another way, every country that Ford does business in around the world will really do everything they can to help their manufacturing base. In our country, it was the opposite. The feeling in Washington, and even on Wall Street, was ‘Who cares? Shut your plants here, because we’re going to be a different kind of economy.’”
It’s taken the economic downfall of the past several years to increase awareness about the importance of maintaining a manufacturing base.
“Manufacturing has to change, and it is changing,” Ford says. “We’re making new things, high-tech things. The auto industry is one of the biggest users of high tech. We should now be building those high-tech components and clean energy components here in America. If anything good has come out of the last three years, it has been a recognition in Washington, and I think on Main Street, that manufacturing matters a lot, and we ought to have a strong manufacturing base. That recognition in and of itself is a great start.”
New avenues to maintaining the manufacturing base won’t be discovered without new ideas. And to that end, Ford sees a great deal of fertile soil in the nation’s universities. Whenever possible, the business sector needs to partner with and leverage the research capabilities of educational institutions.
“In terms of where we go forward, one of the great advantages we have in this country are our universities,” Ford says. “And we have great venture capital activity. We really need to take advantage of those great resources, both the venture capital mentality and the help that the universities can provide to all businesses in terms of R&D, partnering and I’m happy to say those are all vibrant pathways.”
But even with the external financial and intellectual avenues available to businesses, growth still boils down to what is going on under your own roof. You need to have the manpower and the brainpower to take advantage of the opportunities presented to you, which is why Ford promotes an innovative and entrepreneurial spirit among his employees.
“It’s something we struggle with every day,” Ford says. “I believe that now, we have the equation right at Ford. A few years ago, we didn’t. Part of it is you have to look at what the inhibitors are, because people really do want to be innovative. Most people want to try new things. But in our case, one of the things I did was do a deep dive into our product development system. We had a terrific R&D function, built with a couple of Nobel laureates. But somehow these great innovations weren’t making it into our vehicles.”
It demonstrated to Ford how a company’s leaders need to remove internal barriers to innovation — barriers that might exist within your company’s structure that you might not even realize.
“In our case, it was our finance system that created the barrier,” he says. “Whichever program it was — let’s say it was the new Explorer — wanted to adopt the new rear seat belt we just introduced. That program would have to take the cost of that entire innovation. So you wanted to be the second program to take the innovation, not the first.
“That is just one example of how you need to look at what the structural barriers to innovation are. People often blame the culture. People often say, ‘It’s a big company; nobody wants to take a risk.’ That can all be true, but there can also be structural inhibitors like the one that I just mentioned. You have to get those out of the way.”
The other critical component in building your business for the future is a motivated work force. You motivate employees by giving them avenues to pursue their ideas and removing roadblocks. But you also need to encourage the behaviors you want to see.
Ultimately, your internal culture needs to work in tandem with your outside resources. When a motivated work force can draw upon extensive financial and intellectual support, your company can have the tools to weather just about any circumstance that comes your way. There will still be adversity, but you’ll be prepared for it.
“You have to celebrate success,” Ford says. “That is a cultural thing. We do a lot of that, we have awards within the company for innovation. It’s great when you recognize externally. For instance, we’ve been the keynote at the consumer electronics show for the last three years. They never had an auto show up, much less give a keynote. We won the award last year for best in show. That is very reinforcing for our employees, when they’re recognized not just from an auto trade standpoint but something completely different that is seen as really cutting edge. That emboldens people to continually go further.”
How to reach: Ford Motor Co., (800) 392-3673 or www.ford.com
Ford Motor Co. Executive Chairman Bill Ford Jr. touched on a number of topics during his November presentation at the Ernst & Young Strategic Growth Forum. Here are some additional nuggets of information from one of the world’s leading automotive executives:
Ford on where the auto industry is headed: When you think about this industry, for 100 years, we had a changeable line. The Model T had an internal combustion engine and was sold through dealerships. But now we sit on the threshold of some very interesting technology coming into vehicles on the safety side, on the data management side, in terms of real-time road information, where traffic is, where the parking spaces are, all of that will be available very fast.
Ford on the future of electric cars: If you think of electric as we know it today, there are three types. There is the hybrid, there is the plug-in hybrid, and there is the pure electric. To me, the pure electric is great because it is totally clean depending on how the power is derived, which is a whole separate discussion.
If you live in San Francisco and just need to drive around town, that’s OK. But if you all of a sudden want to drive down to Los Angeles, that’s an issue. Plug-in really alleviates that. With the plug-in hybrid, you can drive on the electric motor for the first number of miles, but once the electric runs out, it will then run as a conventional engine. So that gives you a lot more versatility.
Then the current hybrids, which don’t require anything to be plugged in, we keep refining those so the batteries become more fuel-efficient. So really, it will be a three-pronged approach in terms of electric. You’ll have all three of those in the mix.
Ford on international growth: By the year 2020, there are going to be 9 billion people in this world. If you look 10 years beyond that, there are going to be 30 cities of 10 million or more. Most of those will not be in the U.S. or Western Europe, and they don’t have the infrastructure to start shoving cars into those cities. So mobility starts to become a big issue. How are people going to move in big urban areas? The answer is not going to be to put two cars in every garage. So how do we help countries and municipalities solve the urban mobility issue. That will require us to define ourselves not as a car and truck company but as a mobility company.
You can’t be afraid to fail. But there are still steps you can take to guard against unnecessary failure, even in the rough economic environment of the past two years.
If you can take the lessons you’ve learned from your missteps, and the often-harsh lessons the recession has taught you, and use them to become a better risk taker, you can emerge from adversity in better shape than many other companies.
With the Detroit area serving as one of the epicenters of the nation’s economic strife, the business leaders throughout the community have learned many such lessons and have shared a lot of them with Smart Business Detroit over the past several years. Here is what three of our previous cover story subjects had to say about dealing with adversity in the world of business.
“Failure becomes like scar tissue. Scar tissue is stronger than regular tissue, and people who step out, take risks and fail develop scar tissue. That makes them better and stronger the next time. What you can’t do is view it as, ‘They failed, they’re a bad person, they have no place with us.'”
president and CEO,
Valassis Communications Inc.
"Staying aggressive in an economy like this helps keep a team unified. People like to be a part of a winning team, and if you try to rally your team around aggressive but realistic goals, it’s amazing what you can accomplish, even in a bad economy."
president and COO,
Service Brands International LLC
"Whether it’s managing your personal affairs or leading an organization, you should never get lulled into a feeling that because times are good, they’re always going to be that way. You have to discipline yourself for the down cycle and gear your spending and decision-making around the idea that it’s going to come. When it does, you’ll be fine because you’ve prepared for it."
former chairman and CEO,
Domino’s Pizza Inc.
The past few years have brought about the worst economic climate we have seen since the 1930s, and for Steve Cuntz, president and CEO of BlueStar Inc., the situation was no different.
However, Cuntz saw the economic downfall coming and prepared his company for the worst. His actions have helped BlueStar not only get through the downturn relatively unscathed but put it in a growing position and expanding globally.
“We have been successful beyond my wildest dreams,” Cuntz says. “I really anticipated more problems than we have experienced. Having been in the electronics industry long enough, the one thing you can guarantee is change.”
BlueStar is a national business-to-business distributor of point-of-sale and auto-ID products. Its ability to adapt to ever-changing conditions played a big part in its success through tough times and in its growth.
“Any time you’re growing, it’s anticipating the strain that scaling causes on an enterprise,” he says. “In any organization, your growth can put you in a position where the things you never would have dreamed of doing, now you’re going to have to do.”
BlueStar’s ability to adapt and keep its 370 employees hard at work through the downturn resulted in 2009 revenue of $365 million.
Here’s how Cuntz created a company that can weather tough economic times.
As a private company, BlueStar has sometimes had trouble getting suppliers to pay attention to it as a viable distributor.
“Since we are a privately held business, [suppliers] have a tendency to sometimes question your capability,” Cuntz says. “We manage to overcome it one supplier at a time. There’s nothing like performance that wins somebody over. It takes awhile for people to drink the tea, but once they get a taste of it, they understand what we are about. Usually in business, especially in distribution when you are doing order fulfillment and things like that, it’s just take the order and fill it. We go out and try to find new orders and try to develop new customers for our manufacturing partners, and over time, that has helped us create a major difference.”
During a time when a lot of companies were losing money and struggling to keep business, BlueStar was growing. The company used its position to help its customers, and in return, BlueStar gained valuable relationships.
“During the last recession, we bent over backward to extend credit terms and find ways of creating a business flow of capital that allowed our customers to live and keep their credit ratings while we continued to try and expand the marketplace,” Cuntz says. “That was a bit unusual, which may have had an impact to our suppliers, because during the recession, our sales actually went up. It’s ironic because a lot of what we sell is exactly what an enterprise needs to do to cut expense overhead.”
Cuntz didn’t think twice about stepping in and helping customers through their tough times. In fact, that kind of effort is a company philosophy.
“Going above and beyond is just part of our organization’s philosophy, which is ‘Give more than you receive,’” he says. “It provides a differentiator in so many ways. In the long term, it provides an advantage. Providing that extra value also provides you extra recognition, notoriety and opportunities that might not exist otherwise. You have to create a unique difference for yourself. Fill a need or a void that currently isn’t being filled. It depends on the business you’re in, but always be good for the money and always create a value-add difference for your business, and it will work.”
Hire strong employees
During the recession, companies like BlueStar had to keep people motivated by keeping them busy at work.
“It became very activity-based,” Cuntz says. “Call the customers up and let them know that if they have a deal, we want to help them close it. Call them up and tell them the good news that we’ve got extended credit. Call them up and tell them that we’ve got inventory. We didn’t cut our purchase orders, we stayed the course. We became one of the few distributors that actually had product available. They saw an immediate return on their investment because of increased activity. So it wasn’t hard to keep people motivated because they were writing orders as fast as they could.”
That motivation was also fueled by strong leadership and employees who were hired because they would grow within BlueStar and help the company succeed.
“We’ve got substantial managers in our organization,” Cuntz says. “Our philosophy is you can’t move up until you replace yourself with someone better. Our management team has continued to get better because we keep hiring better people than we are ourselves and after awhile that becomes attractive to talented people who look for a career path.
“You have to create an environment where you lead by example. Every day, people are watching you, and unless you have somebody better than you sitting behind you pushing, it’s easy to fall into that yes-man trap, and we haven’t had that. It’s very important in a growing company that you have people that want to grow.”
BlueStar’s challenge quickly changed from “How do we stay motivated?” to “How do we meet goals in this down economy?”
“You have to be honest and communicate with your employees,” Cuntz says. “You should tell them what you expect them to be doing. We use budgetary goal setting to discuss our future plans and growth. Sometimes we will use weekly meetings depending on what things are happening within the company. We have weekly meetings with our sales and marketing teams, and we communicate through terms of budgetary accomplishment and feedback loops and what we expect. Are we hitting our goals? Are we not hitting them? Why do you think that is? You have to ensure that employees are doing the things necessary to succeed. If you’re not meeting goals, then you need to communicate with staff and see what things need to be changed.”
Cuntz and BlueStar are also constantly combing for people who will bring drive and the desire to grow to the company.
“Hiring people is kind of like Glengarry Glen Ross with the ABCs of selling, ‘Always be closing,’” Cuntz says. “We use the term ‘Always be recruiting.’ I think you have to always be in the frame of mind when you see a talented person who expresses a desire to be a little bit more in life or has some desire to make a change; we just try to be sensitive to that and keep our ears open. Networking is critical. With the nature of our business, we are constantly at trade shows, and we work with hundreds of suppliers, so we are constantly networking with folks. We try to carefully define what we are looking to accomplish and what kind of skill sets and characteristics it’s going to take to fill that position. It’s not just a saying, ‘Always be recruiting.’ We are always thinking of that.”
Grow and invest
In the world of technology, the industry is never quiet. It is constantly changing and progressing forward, and it is crucial for companies like BlueStar to be able to grow, adapt and invest within those changes.
“The things that seem intuitively obvious with an enterprise package are not,” Cuntz says. “That was a real challenge for us, and it continues to be. We knew coming in that we will face change. How you change and how you succeed with that change is the real key. With a flexible mindset and a flexible business plan, you have to expect that it’s going to happen and you have to be willing to make the investments. You have to invest in change. I’m always thinking about what’s our next investment.
“You have to have some expectations of three things when you think about investing. First of all, you have to understand what the investment is thoroughly. I don’t care whether that’s stock of a Fortune 5 company or a small business. You need a real thorough understanding of who that company is and who the people that are managing the company are. The second thing is does the company have the capacity to do better than it’s currently doing? Look for the missing links. What could you do to bring about change that would help make this company or this investment more than it is? The third thing you should look at is does it fit with your culture? Also, is it attractively priced? If all those elements are in place, then you could probably move forward with that investment.”
In recent years, BlueStar has grown to a level where it has been looking to expand globally and make acquisitions that will augment and enhance its business. However, with global growth comes more changes and challenges.
“The one thing I didn’t plan on was the organizations’ cultures,” Cuntz says. “Different parts of the world have different customs, labor laws and things like that. The biggest challenge to us has been to understand not so much that the business appears to do the same kind of work that we do but to understand the underlying business development of that organization and what the thought process of those employees are. Those are the challenges of understanding if you bought a company that doesn’t match up philosophically with yours.
“You have to focus on companies that are in the core market of the kinds of products you sell. If you’re going to look for a merger or key acquisition, you have to look for key managers that are going to stay on that share your corporate philosophy. And you really have to know what it is you want to accomplish. You have to look for similarities where you don’t necessarily have to reinvent the wheel but where you can offer them something that they need that will help both of you grow.
“You have to understand the market you’re getting into and the culture of that market. Does the market have the potential to grow? What’s the economic climate? The U.S. is not the best benchmark for how most of the other parts of the world operate. You have to understand that there are other costs involved of managing foreign entities that we are not aware of. You have to have a team in those regions that can clearly explain to you what those costs are and what those opportunities are so you can make a valid decision whether that’s going to fit your business model.
“We can determine pretty quickly whether they’re of a like mindset or not. You have to sit down and say, ‘Here’s where we want to go, and here’s how far we have reached.’ And if they’re not in agreement with that, then sometimes you have to make a change. It’s going to come down to communication. Communication is not a quantifiable formula. It’s a skill set on both ends of the communication.”
If you’re the investor, it’s your job to make sure that you are being understood. And it’s your job to make sure that you understand what’s also implied or said or inferred in a relationship.
“It’s an art form, a skill set to make sure that you know your partners,” Cuntz says. “That’s something there is no formula for. You have to be completely unassuming. My method is I assume that I was not clearly understood and there’s the old saying, ‘Inspect what you expect.’ My first inclination is maybe I didn’t say it right, so I’m going to monitor the response to the communication to make sure that I’m seeing the results to the request. You have to be very, very specific.” <<
How to reach: BlueStar Inc., (866) 830-0140, or visit www.bluestarinc.com.
The Cuntz file
President and CEO
Education: Received a bachelor’s degree in accounting and a master’s degree in finance at Xavier University
What was your first job, and what did you learn from it?
My first job was as a night manager for a fast-food restaurant called Burger Chef. What I took away from that job was that I found out I didn’t have any ability to know I was making a correct hiring decision at the time I was making it. Some people interview well and wind up being terrible employees, and some people are terrible at being interviewed, but they make tremendous employees.
What is the best piece of business advice you’ve received?
Always spend less than what you make. The gentleman I heard that from was my loan officer, Bob Herman, who actually helped BlueStar get going when I became CEO. I asked him, ‘What advice do you have for me, because I don’t want to ever let you down?’ He said, ‘Steve, you’ve got to spend less than what you make and you got to set money aside for contingencies, and the businesses that fail to do that usually don’t make it.’
What do you enjoy most about your job and why?
I really enjoy setting budgets and goals and then hitting them. I’m a very goal-oriented person. It’s kind of an architectural thing. You put it up on the board, and you look at it and wonder if you can build that thing, and then you put together plans to achieve it.
If you could invite any three people, past or present to dinner, whom would you invite and why?
I would love to have George Washington, Albert Einstein and Lou Gehrig to dinner. I would be curious to know how Washington kept it together in the face of that kind of adversity. His skills and leadership just floored me.
Guys like Einstein, I’ve admired my entire life, because I wish I’d been a better science student. Einstein was able to take really complex ideas and make them really simple. I still don’t understand half of what Einstein talked about. And Lou Gehrig, to me, was an icon. He was a natural-born leader and had the respect of his teammates and was one of the first truly great athletes that also was a role model.
The global financial crisis that began in 2008 brought a sudden end to a number of businesses. However, according to Jeremy Gutsche, author and founder of TrendHunter.com, history suggests that a great business of the future will trace its roots back to the darkest days of the past three years. The reason is that many companies that struggle do so because they get too caught up with the day-to-day routine of getting through the crisis and forget the importance of really understanding the changes that are taking place. In this interview, Gutsche discusses his book, “Exploiting Chaos,” why Fortune magazine was able to succeed during the Great Depression and the reason that culture beats strategy.
You profile Fortune magazine in ‘Exploiting Chaos.’ Why was it able to succeed despite being launched during the Great Depression?
Fortune magazine is particularly interesting to me because the magazine was launched just four months after the 1929 Wall Street crash. It was priced at $1 an issue, which in that day made it the same price as a wool sweater. A price of $1 an issue made it more expensive than any magazine that had been on the scene at that point. But during the Great Depression, it grew its subscriber base to half a million people. They made about $7 million in modern-day profit.
Why that’s interesting is not that it was a luxury publication during such a difficult time, but rather that Fortune followed a new consumer need. If you put yourself in the mindset of people during the 1930s, they were trying to figure out what happened to our economies. For the first time, the decisions that put people in economic hardship were caused by corporations that were operating behind boardroom doors. Fortune offered a glimpse into what was happening behind those boardroom doors. How did we get here and when would we emerge? Like many of these other success stories, [Fortune’s story] is simply an example of a company that was able to spot new opportunities and consumer needs and, thereby, reinvent.
At one point, you discuss your own experience as head of Capital One Canada’s up-market lending business. You were given an odd goal: Don’t let profits decline by more than 20 percent. What did this crisis teach you, and how did you turn this business around?
This period of crisis really enabled us to cut through the red tape. Instead of having a couple of weeks to get legal or compliance approval, now suddenly, you could get it a little bit quicker because they had to cut out the unnecessary steps. This need to change can be used by companies when you’re trying to think about how to really compel people to move and try new things. You can use that external economic motivator, that crisis flag, as a way to really create a sense of urgency.
I got my entire team to set up booths across Canada where, if you went to the Capital One booth, you were actually talking to a marketer or an ad agency rep or a finance person. Their purpose was to work the booth so we could just talk to customers and really understand how consumer needs had evolved. As a result, we ended up launching new products and with that red tape cut, we could get them out a little faster. Instead of shrinking the business by only 20 percent, we tripled our monthly bookings and that business went on to become a billion-dollar business.
For me, the interesting takeaway wasn’t the general idea of how you should reinvent a product. It was the idea that the sense of urgency, the customer obsession and that crisis can actually help you to create miraculous things.
Exploiting Chaos: 150 Ways to Spark Innovation During Times of Change
By Jeremy Gutsche
©2009 HarperCollins, 272 pages, $20
About the book: “Exploiting Chaos” offers readers 150 strategies to spark innovation and reinvention during difficult economic times. Author Jeremy Gutsche argues that turbulent economic periods present windows of opportunity. He examines historical examples of companies that successfully innovate during crisis periods and provides a detailed four-part plan to accomplish the seemingly impossible.
The author: Jeremy Gutsche is an innovation expert and the founder of TrendHunter.com, the world’s largest network for trend spotting and innovation. Gutsche has appeared in the pages of The Economist and The Financial Times as well as on “Entertainment Tonight” and Fox News.
Why you should read it: Gutsche presents information in a rapid-fire fashion, but the accompanying stories are so memorable that a reader won’t need a notepad. His focus on customer obsession is a much-needed message for businesses looking to distinguish themselves in today’s global economy. Gutsche’s expertise on innovation means readers receive a comprehensive set of ideas delivered with unparalleled authority.
Why it’s different: The book’s design stands out against the majority of business books available in today’s market. Its large type and eye-catching use of photographs make it instantly engaging. Gutsche offers one of the most powerful arguments for a shift from strategy to culture. This idea is gaining ground, and “Exploiting Chaos” will no doubt help the movement. Businesses that want to improve their innovation strength would do well to heed Gutsche’s revolutionary call.
Can’t miss: “Observe in the Zone” — In this example, Gutsche writes about the experiences of John Manoogian, Cadillac’s head of external design. Cadillac was taken by surprise when the Escalade, an SUV designed for older, affluent males, became the dominant symbol of hip-hop culture. What Manoogian did to learn more about this audience will leave some readers in disbelief. It’s a powerful lesson in customer obsession.
To share or not to share: The format of “Exploiting Chaos” makes the book perfect for sharing. In fact, Gutsche’s short, explosive chapters could easily be adapted into blog posts or a page-per-day calendar.
Soundview Executive Book Summaries:
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If there’s one word that describes the manufacturing sector moving forward, this is it.
“There’s macroeconomic uncertainty, public policy uncertainty, uncertainty in terms of the value of Chinese currency, and that is going to make the business sector — particularly in manufacturing — very cautious when it comes to capital investment,” says Edward Hill, dean of the Maxine Goodman Levin College of Urban Affairs at Cleveland State University.
There are signs of better days ahead, with more orders coming in and North American factories running at higher capacity than in the past few years.
“A big barometer for manufacturing is auto sales, and auto sales just took a dive the last couple of years, but it’s picking back up and demand is back up,” says Eric Burkland, president of The Ohio Manufacturers’ Association. “The good news is, the economy has clearly turned and demand is picking back up, but the cost pressures globally remain just incredible, so that dampens the hiring.”
Chuck Hadden, president and CEO of the Michigan Manufacturers’ Association, says that things are slowly turning around.
“We’re one of the sectors that are doing a little bit more hiring out there — not a lot, but we’re starting to get some hiring,” Hadden says. “There was a lot of uncertainty toward the end of the year — what was going to happen with federal taxes, elections, and that uncertainty is now gone. We know what’s going to happen with those things, and now people can start moving forward, and I’m optimistic at the direction we’re going.”
While no one can say for sure what the next 12 months will bring for manufacturing, there are two things that the experts agree on: Success in the sector will be driven by diversification and innovation, something Jim Nicholson, vice president of chemical maker PVS Chemicals Inc., will attest to.
“This year, we are really working on continuing to expand our customer base — we’re looking for new markets that we traditionally have not served and adding those markets to our customer base, and we’re making investments in new kinds of people, with different kinds of experience, specifically related to market and marketing,” Nicholson says. “We think this is going to be a pretty good year for manufacturing.”
Diversification has been critical the past few years and will continue to play an integral role this year.
“If you’ve made it through, you’ve probably figured out a way to diversify your company from one product to another product so you’re not reliant on one business sector,” Hadden says.
But he says it’s time to take it a step further in 2011.
“Let’s diversify your customer base so you’re not totally reliant on one customer in that business sector,” Hadden says. “Find ways to expand your business that way, still doing what you ... do best but find more customers. It’s a big world out there, and there’s no reason why we can’t be competing in a lot of markets out there.”
He says one of the keys to effectively doing this is to look beyond America’s shores.
“Our biggest growth opportunity for us as manufacturers that we haven’t taken advantage of is finding customers in other countries that we can help supply,” Hadden says. “I think that’s the biggest tone that we’re going to try to set this year. We all know we can’t rely on one or two customers anymore. … If you’re making a part here for an auto company, why can’t you be making it for someone in Germany or Japan or India?”
Hill agrees that diversification overseas is important because of the growing demand that will come from those markets.
“There is a lot of opportunity out there, but the opportunity is going to be based first on international markets, particularly in growing, developing economies,” Hill says. “It is really important for American manufacturers to really pay attention to international markets.”
For example, one of the biggest markets that American manufacturers need to be involved with is China, but it’s not because of cheap, offshore manufacturing.
“They should be looking seriously at China, because it’s an incredibly growing demand and middle class that’s going to drive global sales for years,” Hill says.
Diversification also means that you have to look at other ways to position your expertise and capabilities in the market.
“Companies are continuing to look for new markets and new ways to use their knowledge and their capital for new products,” Burkland says.
But when you look at the global economy and look at your industry and look at your business, you could get dizzy from seeing everything that could potentially happen. That’s when you have to choose a few things to focus on in your diversification efforts.
“Survey, and then pick a couple that are likely winners,” Nicholson says. “Trying to do everything is logistically impossible.”
The way Nicholson and his company decided was by looking at the products they know really well and then looking at applications where they felt their products weren’t well represented. Finally, they looked to see if they could move into those markets with their products.
“Again, [it’s] trying to leverage what you know into a new market. It’s very hard to get into a new market where you know nothing about the product and where you know nothing about the market,” Nicholson says. “You have to choose to either serve a market where you know something about the product or serve a market where you know something about the market and need to develop the product. There’s too much risk and investment to try to solve both those problems at once.”
One of the other keys for manufacturers to find success this year is to focus on innovation.
“That’s the trick today — cut costs but don’t cut innovation because innovation is the path toward future profitability,” Burkland says.
Giorgio Rizzoni can explain why innovation is so critical. Rizzoni is the Ford Motor Co. chair in electromechancial systems, as well as a professor of mechanical and electrical engineering and director and senior fellow for the Center for Automotive Research at The Ohio State University. He says that if you and a friend have the same laptop, in theory, you both have the same battery in that laptop, even though you could each get a different capacity out of that battery.
“You sort of adapt to whatever you have,” Rizzoni says. “It doesn’t matter, from a consumer perspective, that that one battery in your computer or cell phone has whatever performance it has, and if the variability is plus or minus 10 percent, who’s going to tell, right?”
While it may not matter in electronics like your laptop or your cell phone, it does make a big difference in larger items where batteries are needed, such as electric cars. In one of those, you have hundreds or thousands of battery cells.
“Some of them can range up to $15,000 a pack,” says Suresh Babu, associate professor for materials science and engineering and director of the NSF Center for Integrative Materials Joining Science for Energy Applications at The Ohio State University. “A pack means many batteries in it. That means you have to make sure these batteries last longer.”
And that’s where innovation is critical. If you have that 10 percent variability in those batteries, it makes a huge difference and is a serious liability to the car and its cost of maintenance.
“There’s an old adage that a chain is only as strong as its weakest link,” Rizzoni says. … “There’s an analogy there — if you have weaker cells, they will bring down the body of the entire battery pack so the ability to manufacture cells with a high degree of repeatability and quality is a very important thing.”
Improvements to these batteries aren’t happening on an annual basis either — they’re changing monthly. And the saying is that as the automobile industry goes, so does the rest of manufacturing go, and the auto industry is innovating at a rapid pace, so by rule, the rest of manufacturers will be, as well.
But innovation in the automobile industry will go beyond making better batteries. As it strives to reduce the mass of its vehicles, it’s looking for lighter-weight materials to help, and finding lighter materials will also help other manufacturers.
“The more you’re able to find new ways, lighter ways, more resilient ways, more flexible ways, more whatever the characteristics of the materials, that leads to opportunities in product innovation,” Burkland says.
Rizzoni says some of the new materials that are getting implemented in automobile manufacturing are plastics, aluminum, magnesium and high-strength steel. But new materials also mean more changes in the industry.
“One of the challenges that has surfaced when you start working with similar materials is that now you’re trying to join a piece of plastic to a piece of steel, for example, so joining techniques become, possibly, a real challenge,” Rizzoni says.
This is where you have to look at what you traditionally do and throw it out the window. Kevin Arnold is the business development manager for advanced energy for the EWI Energy Center, which helps manufacturers in the energy sector and other industries improve their productivity, time to market and profitability through new, innovative technologies. He says, for example, that if GM built every battery for its electric vehicles to Six Sigma standards, which for years was the gold standard of quality, none of the cars would run, because they would all have bad welds in them.
“You’ve got to get so many decimal places out of quality,” Arnold says. “This is a challenge. That’s part of the growing pains we’re seeing now is that what was considered good enough for many years is now not quite good enough, so it’s looking at the fundamentals, understanding and controlling them and ongoing monitoring to ensure that you’re within limits.”
Look at the processes in your organization and find ways to make them better — even if it’s something that’s been the same way for decades.
“What manufacturers have to be open to is don’t take processes that seem simple, like welding, for granted,” Arnold says. “Welding is a fundamental manufacturing process that’s been around for 100 years, but it’s often one of the least understood processes and one of the first that could go out of control and cause problems. Ensuring that they have the right expertise on staff to look at their processes, understand the variables and understand that what they’re doing is with increasing levels of scrutiny.”
The experts recognize that the money is likely not there in your organization for you to throw out your assembly line and start with something newer and better though, so that’s why they’re working to help manufacturers find ways to cost-effectively innovate.
“All of [the processes] have to be mature,” Babu says. “Mature means not only from the science aspect but also from the industry aspect — how can we implement them in an existing manufacturing line. That’s the biggest challenge.”
But it’s a challenge worth exploring because the way to succeed this year is to push your product and process innovation efforts to the limits.
Resources: Center for Automotive Research — The Ohio State University, (614) 688-3856 or car.osu.edu; EWI Energy Center, (614) 688-5000 or ewienergycenter.com; The Maxine Goodman Levin College of Urban Affairs at Cleveland State University, (216) 687-2000 or urban.csuohio.edu; Michigan Manufacturers’ Association, (800) 253-9039 or www.mma-net.org; NSF Center for Integrative Materials Joining Science for Energy Applications — The Ohio State University, (614) 247-0001 or www.matsceng.ohio-state.edu/faculty/babu; The Ohio Manufacturers’ Association, (800) 662-4463 or www.ohiomfg.com; PVS Chemicals Inc., (313) 921-1200 or www.pvschemicals.com
Manufacturing has led the economic comeback, but will it last?
When you look at the brightening economic picture, manufacturing has played a major role in the comeback. The biggest question facing the sector is simple: Will the good times last?
Robert Dye, vice president and senior economist for PNC Bank, says the odds are in favor of manufacturers, but there are still risks.
“It is my expectation that we continue to see strong growth but not as strong in the last year or so,” Dye says.
The overall recovery in the U.S. will eventually reach across all economic sectors, including service and construction.
“When I look at price conditions for manufacturers, I’m concerned about a profit squeeze as energy and higher commodity prices drive producer prices up,” he says. “Those prices will not be able to be passed through to the consumer at this point. Even though there are currently strong profits, there is potential for profit erosion down the road.”
Companies that make consumer goods should also see better times ahead.
“I do expect the consumer sector to show ongoing improvement through 2011, as we saw consumers bounce back in 2010, with strong retail sales and a strong holiday shopping season after three disappointing seasons in a row,” Dye says. “Measures of consumer confidence are improving and job creation should improve through 2011. Manufacturing sectors that will be able to take advantage of that will be the consumer-focused sector.”
There are also potential risks in the consumer sector, as well: Foreign debt woes could increase the value of the dollar, hurting exporters, unemployment is still high, and the housing market is still weak.
“We are still in uncertain times, and manufacturers will face cross currents in the year ahead, but most of the wind will be at their backs,” Dye says. “But the lingering risks are still with us.”
How to hire in 2011
While most manufacturers are seeing things on the upward swing, hiring can still be a difficult decision as you continue lean operations. Likely, you’re down to a core group of people who you trust and can rely on to do a good job, so if you have a good core and you want to hire, you have to take an approach that most manufacturers have never taken.
“If they do have to hire, it will be slowly — one or two at a time — and they’re not looking at the skill base they have, but how do they fit in with the rest of the people,” says Chuck Hadden, president and CEO of the Michigan Manufacturers’ Association. “Can they work as a team? Is it someone everyone else will get along with? Those are all crucial things they’re thinking about beyond can the guy or the woman do the job.”
Hadden says you have to take more time in your hiring now if you want to be successful.
“Your HR person does the interviewing, but maybe you include a couple people from the floor, and they sit in on a couple [interviews] and listen to them,” Hadden says. “It used to be, when I was growing up, somebody’s grandfather or uncle would get them a job in the place and they’d take off. It doesn’t work that way anymore.”
He says to make sure you look for people who are willing to learn and want to continue to learn through technical school, additional training or whatever the company may call for.
Jim Nicholson, vice president of chemical manufacturer PVS Chemicals Inc., says you also have to trust your managers to make good hires.
“The key on the hiring process is to have confidence that your managers can hire well,” Nicholson says. “Spend time and effort training your managers on how to hire well, and make sure your managers spend enough time on the process and have choices and present choices, so that they can get input from their fellow managers and hire the best person for that role.”
Doing these things will help you as you look to add bodies in 2011 and the years to come.
John C. Orr learned the importance of partnerships from a boss and a shoeshine kid.
When Orr was director of manufacturing for The Goodyear Tire & Rubber Co.’s Latin America Division, every place to which he traveled with his boss, his boss would create a partnership — even with the boy shining shoes in the hotel.
“When he needed something, he would call the shoeshine kid and the shoeshine kid would get it for him,” Orr says. “The partnership was created because he spent some time talking to the guy; he gave him time and effort and created a relationship.”
Orr has tried to replicate his observations ever since.
“You have to build partnerships with your employees; you have to build partnerships with your customers and your shareholders,” he says. “To me, a partnership means communication, it means openness, and it means a willingness to tackle things.”
Never has that theory proved more important then in the recent economic conditions. As president and CEO of the manufacturer and distributor Myers Industries Inc. (NYSE: MYE), Orr has worked hard to strengthen customer and employee relationships and, in return, strengthen the company.
Myers’ net sales were $701.8 million in 2009 and were up 7 percent at the end of the first nine months of fiscal 2010. While part of that growth is due to the uptick in the economy, part of it is due to Orr’s three keys to managing during difficult times, which, not surprisingly, are all linked to strong relationships.
Knowing that the recession was hitting most businesses hard, Myers tried to maintain constant contact with its customers to understand their situations and their needs.
“In a downturn, a lot of people try to do without,” Orr says. “They try to last longer with the same material handling products or our automotive and custom products. Talking with them and encouraging them to tell us what they need allowed us to innovate some new and exciting products during that time.”
In difficult economic times, good communication with your customers becomes even more essential as their needs and cost structure shift to deal with their own struggles.
“The worst thing you could possibly do is put your head in the sand and say, ‘Well, we’ll see you when things get better,’” Orr says. “You’ll be out of business as easy as that.”
One of the ways you can deepen that relationship, besides communication, is by being visible. And that isn’t limited to your sales team. Sure, Myers emphasized that members of its sales team should make regular calls and hopefully take orders on new products, but the company also pushed for its people to get past the purchasing desk and into the customer’s facility. Not only does it show that you’re interested in understanding more about their business, but it allows you to actually observe operations, see where your products or services might help and see where innovation may be needed with new products and services.
“Innovation starts with our people,” Orr says. “Our people have to get out there and find out what it is we can do to help our customers. They do that with feet on the street. It’s getting into their business; it’s looking at it with the idea that we have a different value proposition than perhaps what they’re using. Why not use reusable plastic containers that save you money on many trips, rather than using a cardboard container or a wooden pallet that gets two or three trips and then you have to throw it away?”
Ask the basic questions to understand your customers’ needs and make sure you’re helping them focus on their cost structure.
“You have to always ask, ‘What can I do to help?’” Orr says. “That’s probably No. 1. No. 2, ask, ‘What is your objective? What are you trying to do? Are you trying to lower your cost? Are you trying to put a better product out to your customer?’
“To me, it’s really kind of common sense. What is it that we can do for you? We want to be here to help you.”
Your salespeople shouldn’t be the only ones asking those questions. You and your managers need to make an effort to follow up with customers and show what the partnership you have with them means to you and the company.
As the leader, you set the example. Orr tries to visit at least the company’s top 25 customers. For instance, Myers has been in Brazil for five years.
During a recent trip to a trade show in Brazil, Orr made time to visit customers. But it’s nothing for the managing director of the company’s material handling segment to be on the road five or six days a month calling on customers and listening to their feedback.
“What’s important about it is sometimes salespeople tend to want to bring back and give to management what management wants to hear, ‘We’re doing great; don’t worry about it,’” Orr says. “Then we start to see numbers that show our business is falling off with that particular customer. In some cases, the salesperson might not be doing the job. That reflects on us.
“It’s important that you understand and hear it from the customer directly: ‘How are we treating you? How are our salespeople doing? How are our sales engineers doing? How is the quality of the product? How is the delivery?’ It’s very, very important to make sure that that happens. By management doing it, we’re making sure it’s actually happening.”
A greater presence and emphasis on your customers during difficult times will pay off in the long run.
“It’s really about communication and making sure you have their hand with your hand and you’re walking forward together in trying to help get through the situation,” Orr says. “I’ve found that customers are really appreciative of that. Even if you can’t maybe do something for them, at least they realize that you’ve been there, you’ve tried. As things pick up, things get better, they remember that. I’ve found that we secure additional business down the road when things do get better, because you were there trying to help.” Keep an eye on cost
Myers’ costs were high going into the recession, because it was still running at full capacity. But as business started to wane and plants began running at less than maximum capacity, they took the opportunity to restructure, which meant closing facilities, laying off employees and investing in more efficient technology.
Depending on your industry, your cost analysis might be directed at people or the price of your product and, to no surprise, you need to constantly monitor whether reductions need to take place.
“When you get into a downturn, that has to be one of the top three items that just absolutely has to happen,” Orr says.
So when do you make a reduction or even an investment? Before the recession, Myers was analyzing making changes to its material handling and lawn and garden businesses, so management took a deeper look at the metrics and weighed the cost against the long-term benefits.
“First off, you have to look at an objective,” Orr says. “What is the goal? Is the goal cost, quality or what is the end all? Let’s take, for instance, cost. If you’re looking at cost and you decide we’re in a downturn situation, we have an excess capacity [and] we probably don’t need that capacity in years to come. If we do, we would buy new or better capacity or equipment. The analysis comes in around what is it going to take to make that change.
“All in all, there has to be a fundamental goal to why you go ahead and do it, because they’re not easy decisions and they’re not fun. Anytime you’re involving people in the situation where it might reduce your manning of your employment, that’s a very, very tough decision, and we certainly don’t take it lightly.”
While all of those steps are crucial in maintaining the strength of the company, you can’t forget the aspect of cluing employees in on your decisions or even involving them in the decision-making process. Clearly communicating an investment in technology is a plus compared to closing down a plant, but good or bad, conversation has to happen.
“It’s very important to communicate,” Orr says. “I’ve always found that people are more willing to cooperate if they understand why. Before we take on a project, we make sure in our businesses that we have communication, discussions whether they be meetings or whether they be one-on-one information-type meetings to explain to our people why we have to do what we have to do. In a lot of cases with those projects, we try to enlist ideas and thoughts from folks who are actually doing the job, because I think that’s where you actually get the biggest bang for your buck.”
In a time when you’re probably looking for more efficiency and making operational changes, directly ask your employees for ways to streamline processes and perhaps save money. You not only gain respect but also the cooperation needed from employees for the company to move forward and succeed.
During Orr’s years running manufacturing plants, he realized no one knows the job and knows how to do it better than the person actually in the position. Orr brought a process with him to Myers that analyzes work. Called “Block of Work,” the company even has a room dedicated to walking through the process.
“What’s interesting about it is that you actually get the people who are doing the work involved in it,” he says. “It’s a brainstorming session, and they put up on the wall little 3-by-5 cards that are each pieces of the work that they’re doing. What you find is that when people look at it that way they understand sometimes, ‘Gosh, I may be doing some things I don’t really need to do. It’s an extraneous step in the process, so we can eliminate that.’ One of the things we’ve found is we’ve improved the efficiency of our operations by using that particular Blocks of Work technology, which allows people to have input.”
In the end, your cost structure and employees’ ideas on how to make a process run smoother come back to the metrics by which you understand your business.
“You need something to drive your business,” Orr says. “If you don’t have objectives or goals, you’re certainly not going to get there. … You’ve got to have metrics and you’ve got to be able to analyze how the business is doing with those metrics and analyze the parts and pieces of it, whether it be people, whether it be equipment, whether it be safety. You have to have something to measure. If you measure it, you’ll move it.”
Watch the cash
One thing Orr is proud of is Myers’ balance sheet. While the board of directors pushed the focus, Orr and his team made sure they held on to the company’s cash in recent years. Holding on to your cash means making sure you’re collecting from people who owe you money and you’re making wise investment decisions.
“Sometimes people are out looking for acquisitions or they’re spending money on equipment and they haven’t necessarily thought it through,” Orr says. “When you’re in a downturn situation, there might be something that is appetizing, but we believe at Myers don’t go to the grocery story when you’re hungry because you end up buying a bunch of stuff you don’t need.”
Another decision, which has positioned the company to add shareholder value and reinvest in capital in the long term, is using the last few years to pay down debt.
“We’re cautiously optimistic that the economy will get better in 2011,” Orr says. “We feel we’ve gone through this recession and we’ve learned a lot about going through it. If it happens again, and usually the economy does cycle, we’ll be even more ready and prepared to defend ourselves.”
How to reach: Myers Industries Inc., (330) 253-5592 or www.myersindustries.com The Orr file
President and CEO
Myers Industries Inc.
Education: Bachelor’s degree, organizational communication, Ohio University
What is your definition of success?
I think success in my particular case is seeing that Myers is succeeding, that our people are succeeding, that we’re meeting our objectives and our goals. What I want to do is make sure that we return the shareholders their investment. It’s been tough the last two years, quite frankly, because of the economy. But success shows up every day. When I see people with a smile on their face, they’ve done something well or they come up with a new order or they’ve created a new product, then I feel successful.
What was the last book you read?
It’s called ‘Healing Hearts’ (Dr. Kathy Magliato). It’s a memoir of a female heart surgeon. I read it because I have a daughter who is a third-year resident anesthesiologist at Virginia Commonwealth, and I’m always amazed at what she has gone through — 36-hour (shifts) and that kind of stuff. I can never get her to tell me what it’s like, so I read this book because that is what this book is about. It’s about this lady’s life as an intern and a resident. It was interesting because she was a resident at Akron General Hospital and I’m on the board at Akron General. She was very, very successful. I think there are only 1,000 female heart surgeons in the United States. I’m proud of my daughter because that’s what she does all day long; she’s in those types of surgeries and trauma surgeries.