How a dying division of International Harvester became one of America's most competitive small companies.
How a dying division of International Harvester became one of America's most competitive small companies.
You can find Joann's Expressway Lounge on the West Chestnut Expressway in Springfield, Mo. It's located in a yellow cinder-block bunker, fringed along the roof with blue shingles. Inside, there are two pool tables, a pinball machine, a jukebox, a bar, and assorted tables. For most of any given day, it is exactly what it appears to be: another juke joint along another midwestern highway. But around 4:30 every afternoon, JoAnn's is transformed into a kind of true-grit tabernacle, when the regulars begin to arrive from Springfield Remanufacturing Center Corp. (SRC).
At the moment, about 25 of them are scattered around the bar, playing and talking as the jukebox pleads, "I want to bebop with you, baby, ALL NIGHT LONG." They range from assembly-line workers to senior managers, the latter indistinguishable except for an occasional loosened tie. Here, for example, are Pam Smith and Verna Mae Ross, who assemble fuel-injection nozzles, as well as general foremen Steve Choate and Joe Loeber. Over there, pounding on a pinball machine called Memory Lane, is Doug Rothert, the production manager, and the guy trying to bank the nine ball is executive vice-president Mike Carrigan.
It's an odd assortment of people, defying the normal stratification of corporate society -- a fact of which they are all aware. "The barriers between management and employees just don't exist here," says Pam, the nozzle assembler, to which Verna Mae adds, "Here I am pretty low in seniority, and I can sit here and bullshit with Jack over there."
"Jack" is John P. Stack, SRC's president and largest shareholder, who is presently lost in thought, calculating the more esoteric geometries of pool. He is 37 years old, slightly under six feet tall, thin, and lanky, with thick brown hair and a boyish face. Of all JoAnn's regulars, he is the most regular. On any day, Stack can be found here from roughly 4:30 to 6:00 p.m., just in case someone should want to talk through a problem in less formal surroundings. Right now, however, he is more intent on making his next shot.
Standing there, leaning on his pool cue, blowing cigarette smoke over the green felt, he hardly seems like a man with a mission. And yet he is just that, for Stack has come about as close as anyone to solving one of the more perplexing business puzzles of our time.
The problem dates back to the early 1960s, when the idea took hold in boardrooms and business schools across the country that the secret of effective management lay in the numbers: first, in collecting the raw data on sales, profit margins, inventory levels, and countless other statistics; then, in arranging them into various pie charts and bar graphs; and finally, in conforming business strategies to their mathematical authority. Aided by the advance of computer technology, "quantitative" management soon became the shibboleth of the executive suite. Unfortunately, this preoccupation with numbers all too often reduced employees to the status of mere ciphers, thereby isolating the company from the creative energies of its work force.
It was a dangerous balance: too many statistics could prove toxic to humans, and too few could just as easily murder a business. To this day, the proper mixture of dismal science and effervescent humanity is the subject of heated debate, not to mention a number of best-selling books. What Stack and some 360 of his colleagues seem to have demonstrated is that a rigorous, even obsessive, quantitative regimen can still produce a strikingly people-oriented enterprise. Indeed, Stack is convinced that his number-crunching works so well because his people are so involved.
Ironically, all this has happened in a company that, up until three years ago, was a division of International Harvester Co. -- the industrial giant that grew out of Cyrus McCormick's original reaper company. A rebuilder of engines and engine components, SRC was losing $2 million a year on sales of $26 million when Stack arrived in 1979 to turn things around. In 1983, he and 12 other employees bought the business from Harvester and struck out on their own. Carrying a crushing debt load, and facing potential ruin, they developed a meticulously detailed reporting system that at one point had them calculating a full-blown income statement every day.
The results have been impressive. Since the leveraged buyout, SRC's sales have grown 40% per year and are expected to reach $42 million in fiscal 1986; net operating income has risen to 11%; the debt-to-equity ratio has been cut from 89-to-1 to 5.1-to-1; and the appraised value of a share in the company's employee stock ownership plan has increased from 10¢ to $8.45. Meanwhile, absenteeism and employee turnover, once high, have all but disappeared, and the frequency of recordable accidents in the plant has fallen dramatically.
To hear Stack tell it, this turnaround owes much to SRC's exacting quantitative controls, but even more to its almost evangelical insistence on giving human potential its due. "Look, we're appealing to the highest level of thinking we can in every employee in our company," he says between pool shots at JoAnn's. "Why hire a guy and only use his brain to grind crankshafts?"* * *
It is 11:15 on a weekday morning, and -- in the company cafeteria -- SRC is appealing to the highest level of thinking of the workers on the first shift. They are sitting at long Formica tables, talking, laughing, eating their lunch from brown bags and Tupperware containers. There is just one thing out of the ordinary: high on the wall above the microwave oven sits a red, electronic message board, quietly flashing the words, "FUEL INJECTION LABOR UTILIZATION 98%."
What the message means, as any of the lunching laborers can tell you, is that the fuel-injection pump assemblers spent 98% of their work time on direct labor (rather than overhead) during the first half of their shift. If they keep it up, they become eligible for a sizable bonus under an SRC plan known as STP-GUTR, an acronym for "Stop the Praise -- Give Us the Raise." The electronic ticker tells them how they're doing.
"It's like the big red board at Caesars Palace," says Stack. "You know, the one with 10 or 15 games on it, for any sport you want to bet on. The odds are constantly changing, and the action is fantastic. Well, it's the same thing here. When you walk through this factory, you hear numbers everywhere you go. It's like you're in the middle of a bingo tournament."
SRC certainly does have more than its share of numbers. Those numbers guide its operational and financial reporting system, which is as elaborate, and as rigorous, as any in American business. What sets it apart is the level of employee involvement. Springfield's workers all play active roles in it; they are all directly responsible for helping to make it work.
The cafeteria ticker is part of that system, and -- like most of the other parts -- it is something Stack dreamed up as he went along. "I had no education," he says. "I had no master plan. My feelings were more basic. I just felt that, if you were going to spend a majority of your time doing a job, why couldn't you have fun at it? For me, fun was action, excitement, a good game. If there's one thing common to everybody, it's that we love to play a good game."
Gamesmanship lies at the heart of Stack's approach to management. Virtually everything that happens at SRC is based on the premise that business is essentially a game -- one, moreover, that almost anyone can learn to play. As with most games, however, people won't bother to learn it unless they "get" it. That means, first, they must understand the rules; second, they must receive enough information to let them follow the action; and third, they must have the opportunity to win or lose.
It is hard to exaggerate the lengths to which Stack has gone to get everyone at SRC involved in the Great Game of Business. For openers, he has set up an extraordinary education program, designed to teach employees how the Game is played. At one point, he even went so far as to have every worker in the plant take a series of courses covering most elements of a business curriculum, from accounting to warehousing.
More recently, the company has organized an ongoing management training program, aimed at opening up opportunities for employee advancement. At SRC, those opportunities are real. General foremen Steve Choate and Joe Loeber started out as janitors; director of safety and training Lee Shaefer began as a "gofer"; Wendall Wade, the 29-year-old supervisor of engine disassembly, was a shipping clerk. Inspired by such examples, some 80% of SRC's employees have taken courses under the program.
But promotion is just one of the possible rewards for playing the Game well, More important, perhaps, are those offered by the STP-GUTR bonus program. Here, too, the approach is unusual. Instead of funneling a predetermined percentage of profits into a bonus pool, as is common, SRC ties its bonuses to the achievement of specific goals. In fiscal 1985, for example, there were two such goals: to control costs (specifically, to reduce the plant's overhead charge-out rate from $39 to $32 per hour), and to increase operating income income from 6% to 15% of sales. Although the charge-out rate was eventually cut to $23 per hour, the company missed its operating income objective. As a result, employees received bonuses amounting to 7.8% of gross salary, rather than the 10% they would have earned had the company met both goals.
Additional rewards are offered to employees whose ideas improve the company's operations -- up to $500 per idea. Such programs are not uncommon in business, but SRC's works better than most. Thirty-two-year-old engine disassembler Freeman Tracy, for one, has turned in some 50 ideas, earning him $7,500 and saving the company almost $2 million in production costs -- and that's just since the buyout. Before, says Tracy, he "wasn't in a thinking mood, but now you know you're helping yourself as well as the company."
Then, of course, there is the long-term reward of stock accumulation. Stack had originally planned to offer direct ownership to everyone as part of the leveraged buyout, but he ran afoul of a Missouri state law that limits the number of owners in a privately held corporation. Instead, he set up the ESOP. "To me," Stack says, "giving ownership to the people who do the work has always seemed like the simplest way to run a business. It frees you to concentrate on productivity."* * *
If the education program teaches employees the rules of the game, and the compensation program allows them to participate in the risks and rewards, everything else is geared toward playing the Game as well as it can be played. Like any successful team in any sport, SRC concentrates on the fundamentals, on doing the thousand and one little things that separate a champion from an also-ran: turning the double play, hitting the cutoff man, covering the bag, advancing the runner. In the sport of remanufacturing, the fundamentals include such things as using hand tools correctly, watching the labor utilization rate, figuring out better ways to make spare parts. To a certain extent, SRC works on its fundamentals through its education program and its system of rewards. Mainly, however, SRC keeps employees focused on the basics by giving them all the information they need to follow the flow of the Game.
To begin with, everyone -- managers, supervisors, administrative personnel, production workers -- has access to the company's monthly financial report, a weighty tome often running to 90 pages. In small group sessions, supervisors or department heads go over the figures, encouraging questions. In addition, there are the daily printouts from the cost-accounting department, detailing the progress of every job in each supervisor's area.
But perhaps the most extraordinary aspect of SRC's information flow involves its use of the income statement. Granted, every business concerns itself with the income statement at some point. Seldom, however, does a company do so as frequently, as intensely, or with as broad participation as SRC. "If you picture this organization," says Stack, "it's like a continuous Dow Jones ticker tape. For almost every single hour of every single day, there is a new number about the business crossing my desk. For us, the income statement is the same as the daily racing form is to a guy handicapping a race, or the same as the tape is to a guy betting on the market. I mean, it's addictive because it's fun, it's action."
The action begins every Tuesday morning, when some 25 managers and supervisors get together in a conference room near Stack's office. Everyone comes armed with a detailed, preprinted, projected income statement. The first column of figures lists the income and expense figures for the previous month. The next column gives the projections for the current month as they appeared in the budget at the start of the fiscal year. The following three columns are blank. Every week, one of the columns is filled in with adjusted projections, based on the reports given at the meeting.
Today, for example, quality supervisor Steve Shadwick notes a drop in the "average monthly deficiency rate" on General Motors diesel engines for the year to date -- from 26% to 9%. What this means, chimes in executive vice-president Mike Carrigan, is that the company has saved between three and four "equivalent men" in extra labor costs because fewer parts have to be reworked. Production scheduler Ron Maus reports unexpected problems with a spare-parts supplier. Engine disassembly supervisor Wendall Wade confesses that his department has gone $268 over budget on protective gloves. And so it goes.
In about 45 minutes, the morning's work is done. Stack, who has been recording the variances on a board in the front of the room, works the income statement down to a net operating income figure that is well above the 15% of net sales needed to trigger a bonus distribution for the quarter. Everyone appears pleased.
That same afternoon, the supervisors and managers carry the news to hourly workers all over the plant. In one lecture room, Wendall Wade stands before 17 engine disassemblers sitting expectantly around two long conference tables. Most are dressed in grease-stained T-shirts and jeans, and several wear caps embellished with the logos of brand-name beers, whiskeys, or chewing tobacco.
First, production manager Doug Rothert presents a brief review of the income statement, with heavy emphasis on the bonus distribution. Wade follows with a solemn soliloquy on the virtues of conserving protective gloves. Then comes 19-year-old Bobby Voelker, the department's safety representative, who reports that there have been nine recordable accidents and 14 days lost as a result. "We've got to do better than that," he says, adding self-consciously, "you've got to wear your safety glasses to and from lunch." Wade asks if there is anyone who does not understand the income statement. Two people raise their hands, and Wade offers to tutor them after work.
Meanwhile, in another room, general foreman Steve Choate is addressing the fuel-injection pump department. The pump has long been the most profitable item in SRC's product line, he is saying, but now it is threatened by aggressive domestic competition and cheap foreign imports. If the department could reduce the cost of remanufacturing the pump by 25%, SRC would still reign supreme for quality and price.
After the meeting, 30-year-old supervisor Tim McVeigh explains that the department has already begun shooting for this reduction. For the past month, a four-worker task force has been studying the possibilities and will eventually enlist the other pump assemblers in the effort. "You've got to get people involved," McVeigh says.
That is, indeed, a theme heard constantly around the plant. There are no spectators in the Great Game of Business, at least as it is played at SRC. Everybody is encouraged to get involved, to take responsibility. As for the top executives of the company, they work diligently, and often ingeniously, to keep raising the level of participation.
Consider, for example, how executive vice-president Mike Carrigan went about getting managers and supervisors, and ultimately employees, more involved in planning the company's future results. He selected operating expenses as the place to start. After working up his own projections in some 20 areas -- welding supplies, abrasive materials, hand tools, and so on -- he asked every manager and supervisor to take personal responsibility for one account, and to report back in a month as to whether his projections were realistic.
Over the next few weeks, each of them went around asking employees about their needs, researching past expenditures, testing the production scheduler's assumptions, checking with the various buyers, forcing Carrigan to defend his calculations. When the group reconvened at the end of a month, the managers and supervisors were surprised to learn that henceforth their findings would be accepted as the budget figures for the coming fiscal year.
"You see, what happened here," says Carrigan, "is that now these people were in effect running their own small businesses. They had set their own budgets, and they had to live with them. If they wanted to complain, they had to complain to themselves. This is above all an awareness program. Every little bit counts, and only the people here can make the numbers work."* * *
Getting people to make the numbers work is, of course, a major goal of the Great Game of Business. It is one, moreover, that the employees of SRC routinely achieve. Day in, day out, they run their drills so smartly, so effortlessly, so smoothly that an outsider is tempted to think of them as natural athletes, participating in a sport they were born to play. Watching them, it is difficult to image that, a few years ago, SRC was teetering on the brink of disaster.
But Stack remembers.
It was January 1979, and Stack, then 30 years old, had just arrived as the new plant manager. SRC was foundering badly. Opened by International Harvester in 1974 to remanufacture diesel engines and engine components for its truck and agricultural and construction equipment dealers, the plant had lost $2 million in the most recent fiscal year, and the big question was whether the employees, previously nonunion, would vote to join the Teamsters or the United Auto Workers in an election scheduled for March.
Stack had been given six months to determine whether the plant should be scrapped or saved. On his first day, he held a meeting in the cafeteria for all 140 plant employees. "I was giving them this Knute Rockne routine," he recalls, "and when I looked out over the crowd, I felt like I was looking into an aquarium. Totally immobile faces." At the end of his remarks, he asked for questions. There was a pause; then someone in the back hollered, "How old are you anyhow?"
"That was the only question I got," says Stack. "I knew then it wasn't going to be easy."
But Stack was not without experience in such matters. Four years earlier, at the age of 26, he had been named superintendent of the machining division of Harvester's Melrose Park, Ill., plant. There he had found himself in charge of five general foremen, all more than 50 years old; roughly 400 employees; and a division that ranked last in productivity out of seven divisions in the plant. Hoping to stimulate their competitive juices, Stack had hit on the idea of giving each foreman a copy of the division's daily productivity figures, broken down by foreman and then compared in total with the other six divisions. Productivity began to soar. The first time the foremen beat the previous high score, Stack bought them coffee; the second time, he bought them coffee and doughnuts; the third time, he invited them all to his house for poker, pizza, and beer. Within three months, Stack's division had risen from last to first place in the plant's productivity rankings. Thus was born the Great Game of Business.
By the time Stack got to Springfield, he had refined the concept somewhat, but he could not yet apply it to SRC. The place was in a shambles. Thanks to a critical shortage of parts, production had nearly stopped. "But the people wanted to work," says Stack. "Most of them had come off the farms. They were dedicated, hardworking people, and they were disgusted because they didn't have the tools to work with. The only reason they wanted the union was that they thought it might get them the tools they needed."
Stack convinced them otherwise. "It was very sophisticated," he says. "Me and the other managers got down on our hands and knees out on the shop floor and begged them to give us a shot."
"At least he was talking to us," says 27-year-old Randy Rossner, now a fuel-injection pump assembler. "Before, we didn't see much of anybody out here. It was as if nobody cared. Jack looked like somebody we could work with." Most of Rossner's colleagues evidently agreed. The union proposal was defeated by a 75% margin. Meanwhile, Stack managed to finagle a supply of spare parts from his erstwhile cronies in Melrose Park. So SRC's production line went back up to speed. "Now," says Stack, "we had to start winning."
Before they could start winning, however, they had to create the Game. Stack began by choosing three modest goals, which he called "accountabilities": product quality, safety, and housekeeping (meaning the organization and cleanliness of each work area). In addition, management cobbled together some production goals. Stack's purpose in all this was to focus attention on common objectives, and to suggest in some small way that performance could be measured. "Things were in such disarray," he says, "you had to start with something. We needed something to celebrate."
And celebrate they did. On the afternoon marking 100,000 hours without a recordable accident, the plant closed down for a beer bust. The theme song from Rocky played over the loudspeaker system, and members of the safety committee marched around, handing out fire extinguishers. Forklift trucks festooned with crepe paper were driven in a parade through the plant as onlookers cheered.
The celebrating continued as departments began exceeding their production goals. The department that won by the highest percentage was given an award -- the "Traveling Trophy," a huge confection in marble and brass, topped off by a winged goddess holding a torch. Whenever the award changed hands, the winning department would strut en masse to the ex-winners' department and carry off the trophy amid much self-congratulatory brouhaha.
Stack's approach to quality control was no less dramatic. If, say, a transmission broke down in service, he would fly the hapless reassembler to the job site. One poor fellow spent a weekend repairing such a transmission in Kentucky, before the customer calmed down enough to let him go home. "I can tell you," says Stack, "when the guy gets back here, the word gets around fast that you don't ever want to experience that kind of pressure."
The effect of all this was soon apparent. Within four months, SRC had earned its reprieve. "Harvester was very happy," says Stack. "They left us alone and told us to keep going." At the end of nine months, the company recorded a profit of $250,000.
But encouraging as this start was, the Game was still quite primitive. There were no training programs, no financial controls, no systems for monitoring costs. As for the goals and rewards, they served to motivate people in a general way, but they were not targeted to SRC's specific business objectives, notably improved productivity.
Part of the problem, Stack realized, was that the plant operated under a system that measured labor, overhead, and materials by their actual costs, rather than their standard costs. As a result, he and his managers could not figure out what should be used (as opposed to what was used), nor could they accurately gauge their progress in using resources more efficiently.
So in February 1980, they organized a new cost department, which was given the task of taking SRC from an actual cost system to a standard cost system. This move -- critical to the quantitative analysis SRC adopted after the leveraged buyout -- sent a small army of engineers and accountants swarming over the shop floor. Measuring costs with the precision of diamond cutters, they were soon able to calculate, for example, the portion of the plant's heating and electrical expenses that should be allocated to a fuel-injection pump. When the cost commanders presented their findings to Stack, he nearly disappeared behind the mounds of data.
"Now I had all these numbers," Stack recalls, "and what was I going to do with them? Only the people could make them work. And how were they going to do that if they didn't know what the hell the numbers meant?" His solution was to educate the entire population, some 200 people.
Thus began SRC's Great Leap Forward. In the first three weeks of March 1980, groups of 10 to 15 employees rotated, during working hours, through a full range of business courses: production scheduling, purchasing, accounting, plant audit, standard cost, industrial engineering, inspection and warehousing, and so on. Most of the sessions, which lasted 1 or 2 hours, were taught by SRC supervisors, but occasionally outside instructors were brought in. All told, 96 hours of training were offered, involving more than 1,300 hours of student instruction and preparation.
The courses were immensely popular, and Stack was thrilled. He immediately set out to expand his list of "accountabilities," devising an intricate method of evaluating each manager's individual performance. The system seemed to be working well enough until two managers showed up in Stack's office one afternoon, each with a hand on the other's lapel. It turned out that one manager had reached his goal by cutting inventory -- a move that prevented the other from meeting one of his. "The whole thing blew up in my face," says Stack. "These guys wanted to duke it out right there in the office." With customary flair, Stack ended the experiment by gathering up all the rating sheets and setting them on a fire in a small picnic area in back of the plant.
"It served its purpose though," says Gary Brown, manager of human resources, "because it showed us some of the dangers in statistics."
Despite this setback, the Great Leap Forward reached a splendid crescendo in October 1980, with an extravaganza billed as "Employee Awareness Day." The plant closed and reconvened in the ballroom of the local Hilton Inn. The employees lunched and suppered and listened to speakers. They also watched a documentary about Japanese business, which warned that -- unless the United States improved its productivity -- the next generation of Americans would be the first to experience a declining standard of living.
After the film, Stack stood up to speak. "Do you want this responsibility?" he asked. "Do you want to be the ones who started this decline? We've got to do something about it, don't we?" The audience rose as one, cheering and raising their arms, soldiers now in a great holy war. "I was standing there," says Wendall Wade, the engine disassembly supervisor, "and everyone was all around me, and I never knew working could be anything like this. It was great. It was simply great."
Little did any of them suspect how close they were to losing what they had just begun to build.* * *
By February 1981, SRC could report that profits had climbed to $1.1 million, the highest in its history; return on sales had risen from .9% in 1979 to 8.0% in 1980; and productivity had increased 53%. The next month, Stack and six of his managers were called to a meeting at Harvester headquarters. Because of precarious economic conditions, they were told, SRC could not exceed 33% of its capacity for the next three years. "That was the handwriting on the wall," Stack says. "If you're not going to increase your sales, you're just going to die."
The United States had entered a recession. Farm income had fallen sharply, creating severe overcapacity in International Harvester's largest operations -- the truck, agriculture equipment, and construction equipment divisions. The company was in trouble, meaning SRC was in trouble, too.
Stack returned to Springfield and held a meeting with his managers. They saw three possible scenarios: Harvester would reduce its capital commitment to SRC, causing the plant to deteriorate in an agonizing process of layoffs and cutbacks; the plant would be closed; or the plant would be sold. "Then the light came on," Stack says. "I thought, 'Why don't we ask Harvester to sell the plant to us?"
Stack took the idea to the vice-president and the controller of Harvester's construction equipment division, to which SRC reported. Both men asked to participate as investors and operating officers. With Stack, they submitted a proposal to buy the plant for $6 million. While Harvester was considering the plan, Stack set about selling the idea to their potential investors. "I went to one of the biggest venture capital firms in Chicago," he recalls, "and the guy says, 'It's got no schmazzle. Redo the plan.' Hell, I was a grease monkey, and I produced a grease-monkey plan. But from all those rejections, I got better at it."
In the meantime, business conditions continued to deteriorate. By 1982, Harvester, burdened with close to $4 billion in debt, was desperately trying to stave off bankruptcy, and all signs pointed to the imminent liquidation of SRC. Seventy-six employees were laid off, and wages remained frozen at the November 1980 level. SRC's shining esprit de corps had descended to fretful paranoia. "There was a lot of uneasiness," says SRC manager Robert A. Bigos. "Employees here would ask me if they should get married, if they should have a kid, if they should buy a car. I mean, it's pretty strange when someone asks you if they should get married."
To no one's surprise, Harvester soon began encouraging bids for sizable chunks of its business, including its five remanufacturing centers, which it preferred to sell as a group. As a result, Stack found himself in the uncomfortable position of describing SRC's merits to potential purchasers. "I did everything I could to help them," Stack says, "But they always wanted to know if the existing management team would stay on. I'd say I didn't know. I mean I honestly didn't know. On the other hand, now they weren't sure about their bid either."
Such niggling uncertainties did not deter Dresser Industries Inc., which bid on SRC in late 1982. At the last moment, however, the deal fell through. On the day before Christmas, Harvester informed Stack that it wanted to proceed with his earlier proposal -- but only if they could reach an agreement in one week. Stack nearly burst a major artery. How was he going to arrange financing and hire lawyers and incorporate and do everything else in one week? He absolutely had to have another month. Harvester agreed.
Stack described the opportunity before a meeting of his 12 managers, who reacted with tentative enthusiasm. "You know you want to do it," says executive vice-president Mike Carrigan, "but at times like that, you can't help thinking about what will happen if you lose your job." Nonetheless, they agreed to go for it.
Somehow, in the next month, all of the pieces fell into place. "No one remembers the Christmas of 1982," says Stack. The managers put up $100,000; the Bank of America lent them $6 million. It was an all-out, mad rush to meet the deadline.
On the afternoon of Monday, January 31, human-resources manager Brown sat anxiously by his phone, waiting for a call from Stack, who was negotiating with Harvester at his lawyer's office in downtown Springfield. Since SRC did not want to assume Harvester's liabilities to employees for sick pay and vacation time, everyone in the plant had to be terminated as soon as the buyout was completed. Finally, Brown decided he could wait no longer, and fired everybody, including himself and Stack.
The negotiations dragged on into the afternoon of February 1. At 2:30 p.m., Stack called Brown. "It's done. We own it." That evening, the managers and their wives celebrated in a second-floor room above a local restaurant. "It was probably one of the most fantastic moments you could ever have in your life," says Stack. "It was total euphoria. We knew that if we started thinking about tomorrow, we might get scared."* * *
In the next few weeks, the business literally had to be founded all over again. New stationery had to be printed, a name adopted, a corporate logo designed. More important, all of SRC's outstanding contracts had to be renegotiated, including several with Dresser Industries, which had purchased Harvester's construction equipment business and now represented 60% of SRC's annual volume. Of the 171 terminated employees, 115 were immediately rehired as fast as the paperwork could be processed--about 30 per day.
Most important, the company had to choose a marketing strategy. According to industry observers, it chose wisely. Instead of selling through wholesalers to the thousands of job shops and assorted distributors--the common industry practice--SRC decided to sell only to original equipment manufacturers under private-label arrangements. With this stroke, the company spared itself a host of uncertain receivables and avoided the need to establish an extensive and costly distribution network. At the same time, SRC set out to diversify its market structure, eventually moving into four market segments: trucks, tractors and farm equipment, construction equipment, and automotive.
Meanwhile, the stakes had risen in the Game of Business, and Stack was not entirely sure the players understood the new rules. "I was frustrated because I couldn't get some people to see that it was a matter of survival," Stack says. "The question wasn't whether the johns were going to get cleaned or not. If things got down and dirty, we were going to have to come in and turn wrenches ourselves. This wasn't going to be any kind of administrative takeover."
To some extent, Stack realized, they all were victims of their environment, even the 13 managers. "All of us came from huge corporations," Stack says. "There was still this mentality that we had an endless supply of cash. Probably half the people here didn't realize that this was it--that there was no turning back."
So now Stack had to revamp the Great Game of Business to conform with SRC's new reality as a freestanding corporation. "We had to set up a game," he says, "where we couldn't make a $10,000 mistake--or at least where we would know how to correct it right away. And we had to do this without establishing a dictatorship. Systems don't run companies, people do."
The solution, he decided, lay in the income statement. It could be a versatile tool, he thought; it could emphasize the urgency of SRC's position, transcend individual preoccupations, and measure performance. Once he set up the ESOP, moreover, the income statement could be used to encourage employee participation as well.
But the use of income statements would also require a much higher level of business sophistication. Again, Stack attacked the problem with mass education. SRC's managers and supervisors attended a series of in-house courses on income statement construction and analysis. Then supervisors returned to the shop floor and held abbreviated versions for the hourly employees in their departments. "And then they began to see," says Stack. "Their scope was no longer one of emotional protection of fiefdoms. It became one of logic and sequence. You can't live like a king. Most kings inherit their wealth. We had to scratch ours out. We had no time to lose. If we stumbled once, it was all over. So what we had to do is go by the numbers."
Thus did Jack Stack repair the rift between quantitative management and people-oriented enterprise, thereby solving the puzzle that had baffled so many for so long.* * *
There is an ironic story about Stack, one that he tells with some amusement. It seems that, in the summer of 1968, when he was 19, Stack and a bunch of his pals from suburban Elmhurst, Ill., piled into four or five cars and headed for Chicago to sample the commotion surrounding the Democratic National Convention. Grant Park was Stack's favorite haunt. There he would jostle his way to a spot up front, close enough to her full blast the rants and raves of assorted political activists railing against the profiteers of corporate America.
Stack shared their resentment of corporate profit, but that was not why he had come. The engine of history, usually so distant and remote, had sopped near home that summer, and for once a kid from the suburbs could get close enough to feel its heat. Of course, he had his own opinions about Vietnam and politics, but they were often swamped in a churning sea of more conventional teenage concerns. He had no expectations then of making any meaningful contribution to the disposition of weighty national issues.
So today, leaning on his pool cue here in JoAnn's Expressway Lounge, Stack must find it endlessly curious how fate has worked its will on him, bringing him, in its own good time, to this point where his accomplishments illuminate a subject of persistent national interest--namely, the way people live and work in corporations.
He has time to ponder such questions these days, if only because SRC seems healthier than ever. Last year, it signed a new contract to remanufacture diesel engines for General Motors, allowing it to diversify into yet another market. The deal also promises to add $75 million to SRC's top line over the life of the agreement. To accommodate the increasing volume, SRC has opened two new plants.
So much has happened so fast that even Stack sometimes worries about the dream turning a little sour. In a recent edition of the company's newsletter, he pledged himself to shoring up the retained-earnings account against the "off chance that the company runs into hard times." No, there is no specific reason. He is just the type to fret that, with so much going right, something is surely about to go wrong.
Perhaps his caution is reasonable. Paradoxically, SRC now must face the challenge of its own success. During the past few years, the company has been a close-knit family, whose daily life in the home could be easily influenced. Now, with new plants, more people, and more business, the company has to see if its management philosophy can accommodate a substantially larger, and probably less personal, enterprise. Some, like materials manager Dave LaHay, already feel the strain. "If I see one more person at the copier that I don't know," he says, "I'm going to freak out."
But here in JoAnn's, such vague and nameless threats could hardly seem more distant or more irrelevant. Pam Smith has just stunned the crowd with an account of a recent Frozen Carp Throwing Contest to benefit the visually impaired youth of southwestern Missouri. She explains how she herself came up a winner by pitching a 10-pound specimen of the frozen fish a full 21 feet. And Steve Choate has just sunk three balls with one shot--a feat that has set him to whooping and gyrating. And Jack Stack, leaning on his pool cue, must find it endlessly curious how fate has worked its will.