How To Grow Without Getting Big
"WHO DO YOU TELL PEOPLE YOU work for?"
Margaret Barry, 23, an assembler at an auto-parts plant near Toronto, Ontario, shrugs, as if the question were every bit as stupid as it sounds. She is, after all, sitting in her boss's office in the middle of a working day. "Cam-Slide," she says. "Or Magna. It doesn't matter."
In other circumstances, it might. Cam-Slide Manufacturing employs about 150 people and expects sales of maybe $15 million (Canadian) this year. Magna International Inc. has 10,300 employees and about $1 billion (Canadian, or close to $750 million U.S.) in annual sales. There's usually a difference, in the minds of factory workers as in the minds of managers, between working for a small, single-plant enterprise and working for a multinational giant.
The difference between Cam-Slide and Magna, however, is like the difference between a neighborhood and the city it's a part of. Magna -- the city -- is a large, diversified auto-parts manufacturer, complete with brick-and-smoked-glass headquarters, a well-regarded stock (traded over the counter in the United States), and a hefty growth rate, sustained since the days when gasoline cost 30? a gallon. Within its corporate borders is a collection of, at last count, 100 enterprises much like Cam-Slide. All but 10 are wholly owned by Magna, all operate under their own names, and all have exactly one factory apiece. Most Magna plants employ fewer than 200 people. If a plant gets more work than it can handle, Magna won't add to it; instead, it "clones" the facility and starts a new operation.
"In essence," says Magna chairman and chief executive officer Frank Stronach, "we are made up of many, many small businesses."
Magna is hardly the only big company to rest on a foundation of small ones. W.L. Gore & Associates Inc., Dana Corp., and a few others set limits on the size of their facilities. Giants like Johnson & Johnson and 3M Co. spin off autonomous divisions whenever a unit gets too big. At Magna, though, the number of small plants reflects not only a management philosophy, but also a powerful strategy for growth.
Over the past decade, Magna's sales grew at a compound annual rate of 34%. Its work force expanded from 913 to 10,300. In the last fiscal year alone, Magna opened 11 new plants -- nearly one every month -- and added about 2,700 new employees. Despite the fact that it is utterly dependent on the highly cyclical auto industry, the company has expanded in every year but one. In the past two years, its sales more than doubled.
In the glamourless business of making parts for new cars, such growth is news enough. The fact that Magna has grown not by building bigger and bigger divisions, but by creating more and more small ones, makes the company an oddity even to the experts. "This is an industry where size has always been the name of the game," one muses. "But Stronach has proven that this small-plant concept can work pretty well."
Exactly how well the concept could work in practice didn't become plain until the early 1980s. Until then, Stronach's company had been on a kind of a shakedown cruise, its CEO slowly evolving some rather unorthodox ideas about management and growth.
Stronach, born in 1932, moved to Toronto from his native Austria in 1954. Trained as a tool-and-die maker, he eventually set up a small manufacturing shop, Multimatic Investments Ltd., in -- sure enough -- a garage. He soon landed a contract producing sun-visor brackets for General Motors of Canada and after a couple of years was employing 20 people. "Then my foreman," he recalls now, "began acting a little strange." Herman Koob, it turned out, wanted to go out on his own. Stronach remonstrated -- "We get along fine; there's got to be a better way" -- but Koob was adamant.
"Next day," Stronach says, "I said to the foreman, 'Why don't we open up a new factory together?" Stronach would put up the money, Koob would run the plant, and they would share in the ownership. Koob agreed to the plan. The plant the two set up -- Dieomatic Inc. -- prospered, too. In the years that followed, Stronach repeated the process several times and bought a few other companies, including taking control, through merger, of a publicly held aerospace-and-defense-oriented manufacturer called Magna Electronics Ltd. By 1978, he was head of a fair-size company, now named Magna International Inc., with about 18 plants, most of them producing metal trim for new cars.
Philosophically, Stronach had always been predisposed to keeping his plants small. "If you have a thousand people in a factory," he says, repeating one of his favorite homilies, "each one becomes a number. It's basically incompatible with the human spirit." The late Bill Gore, who built a new W. L. Gore & Associates plant every time an old one reached about 200 employees, once observed that his employees started smiling more when the size of their group was reduced (see "The Un-Manager," INC., August 1982). It's an observation Stronach would find congenial.
As managers, though, Gore and Stronach were looking for different things. Gore felt that the intimacy of a small plant helped people work together and share responsibility -- "lattice management," he called his system. Stronach chooses to focus on accountability and entrepreneurship instead. Responsibility for a factory's operation, he believes, always lies squarely with the plant manager, the "number-one guy." Keep the plant small, and its manager will know every employee, every machine, every job.Let it grow too big, and suddenly that knowledge -- and the accountability that goes with it -- gets lost in the spreading bureaucracy. Stronach has also evolved a system of incentives to encourage growth. If there's enough work not only for the existing plant but for a new one as well, a manager can develop a plan for a new factory. Though he can continue to manage only one -- the new or the old -- he's entitled to a share of the profits from both enterprises.
To an outsider, the chances for growth of any sort in the auto-parts business would have looked bleak in the early '80s. After the second oil shock, touched off by the 1979 revolution in Iran, came the most serious recession since the '30s; U.S. and Canadian vehicle production dropped 42% in three years. Surprisingly, though, the downturn spurred the suppliers' business. "Auto companies saw the handwriting on the wall," explains Michael R. Hottinger, a 13-year GM veteran who is now an executive vice-president at Magna, "and began to entertain proposals for new ways of building cars." Chief among these new ways was outsourcing -- farming out the production of parts and components that the Big Three had previously built themselves.
Between 1980 and '85, estimates Gregory Macosko, an auto-industry consultant, each of the Big Three increased its outsourcing by 5 to 10 percentage points. In the auto business, that's a fast-growing market -- and Magna, with dozens of managers scrambling to win the new contracts, was positioned smartly to take advantage of it. "The way that guy [Stronach] set it up," Macosko adds, "a lot of young guys had a great deal of entrepreneurial freedom." As the new work poured in, he offered them the opportunity not to expand, but to clone.
Cam-Slide's family tree illustrates the process; it's Magna's history in microcosm. In 1978, a young tool-and-die maker named Manfred Gingl, who had spent the previous two years managing a division called Speedex Manufacturing, opened a plant called Maple Stamping Inc., which produced metal trim. Moving on to yet another start-up, Gingl put George Schacht in charge of Maple. Schacht promptly bid on a job producing seat tracks for Chrysler Corp. His bid was successful, and he followed it up with more seat-track bids.
In 1981, after two more start-ups and a stint as corporate vice-president, Gingl became president and chief operating officer of Magna. When Schacht went off to another plant in 1983, Gingl asked a recent hire, Stefan Boekamp, to take over as Maple's acting general manager. Boekamp, too, began quoting, and before long he had enough work to convince Gingl to let him open a new plant.
That plant was Cam-Slide, Margaret Barry's employer. It opened in early 1984. But in a matter of months, Boekamp had landed yet another big job, an $8-million contract to produce seat adjusters for Ford Motor Co.'s 1986 Taurus/Sable models, and so he began laying plans for yet another plant. Last May, he opened up Slide-Master Inc. A modern, 80,000-square-foot factory, it is next door to Cam-Slide.
How can Stronach and Gingl run such a prolific operation? The typical fast-growing company must struggle to find seasoned executives, yet Magna somehow has found enough to run 100 different plants, with a new one being added every month. Where do they come from? And how does the company keep its enterprises from going off in a hundred different directions?
Just how much Magna relies on its managers was made plain one morning last August at Cam-Slide.
Cam-Slide occupies a handsome brick building in an industrial park built by Magna a few years ago, an hour or so north of Toronto. Peter Reinlaender, the company's general manager, pulled up to the plant at six that morning, as usual, only to be told that the giant Komatsu 500-ton transfer press wasn't working. Its computerized controller kept announcing that everything was set for operation, but the machine wouldn't budge. Reinlaender and the press operator worked until eight to start the press, but without success.
Like ripples from a stone thrown into a pond, the effects of the shutdown were soon felt elsewhere in the factory. The Komatsu churned out parts for Cam-Slide's main product, the Taurus/Sable seat adjusters. Without the press in operation, Reinlaender had to find something for the idled press operators to do and had to change some of the assembly lines over to different products. By the time it was fixed, he had lost eight shifts' worth of regular work.
"When something like this happens, I must be involved," says Reinlaender, his precise, slightly accented english reflecting his emigration only a year ago from Germany. Yet solving such problems -- the conventional responsibility of plant managers everywhere -- is only a portion of his job. Like all Magna managers, he is responsible for submitting bids on new work: nine quotes in August alone, he remembers. He travels to Detroit two or three times a month, on average, to meet with his opposite numbers in the Big Three. He is responsible for hiring and, through his eight-person supervisory team, for purchasing, engineering, and accounting. His employees, who call him Peter, are likely to come to him with personal problems ranging from illness in the family to difficulty dealing with immigration papers. He works 12-hour days, five or six days a week.
"We call the head man in each division a general manager," says J. W. Leonard Johnson, a company executive who until recently ran a division himself. "But he is much closer to being a president. He has financial responsibility, marketing responsibility, management responsibility, manufacturing, shipping, every aspect."
In a sense, it was Reinlaender who made it possible for Stefan Boekamp to start Slide-Master. When Boekamp came to Fred Gingl with his plan for another seat-adjuster plant, Gingl's first question was "Have you got a manager?" -- meaning someone to run the old plant if Boekamp took over the new one. No, Boekamp answered, but surely you do. Well, maybe. Gingl had been introduced to Reinlaender in Europe by a mutual acquaintance, had hired him, and had installed him in corporate headquarters to learn the ropes. Now he put him in Cam-Slide under Boekamp, both to train him in plant management and to try him out. After six months, Reinlaender seemed ready to take over, and Gingl approved Boekamp's proposal to start and run the new division.
As prime recruiter, Gingl may have the most critical job at Magna. "That's 70% of my work; 90% of all the managers are people I brought in to Magna," he says. "I go on shopping trips." his secret is the fact that he, like Stronach, was born in Austria and speaks fluent German. Like a major-league baseball scout scouring Latin America for overlooked prospects, he cruises Western Europe, mainly West Germany and Austria. The results of his expeditions are reflected in the ubiquitous German accents around Magna and in the number of managers with names like Wolfgang and Gunther. About 70% of Magna's managers, Gingl estimates, are immigrants.
Why Europe? It costs Magna about $15,000, Gingl says, to move a manager to Canada, and many of them need instruction in English as well as training in the ways of the company. Like Reinlaender, most recruits are likely to spend a couple of weeks in the corporate office and several months in a division, learning plant management. But, adds Gingl, his alternatives are sparse. Finding entrepreneurial managers with tool-and-die backgrounds in the United States or Canada is hard, and if you do find them, they are likely to have their own businesses. In West Germany, by contrast, technical training in tool-and-die making is well developed, but there is little tradition of entrepreneurship.
From the recruits' point of view, Magna's attraction is the opportunity to play on a larger diamond. "We can offer them a much bigger realm of decision making," Gingl says. "That's what makes the difference."
"In Germany," confirms Reinlaender, "I had to get five signatures to spend 50,000 marks [U.S. $25,000]. Here, I'm fully responsible for Cam-Slide."
In many respects, Magna's managers do run their shops, as Stefan Boekamp says, like private businesses. Each general manager decides what contracts to bid on, which ones to accept, and how to get the product out the door. "Nobody comes in here to tell me how to do my job," says Peter Voss, manager of Dortec, another division. "I would throw them out." Managers even compete for contracts. Boekamp and Reinlaender, who run similarly equipped factories with similar product lines, find themselves bidding against each other frequently. (Though plants can submit competitive bids on a job, only one bid from Magna goes out to a customer.)
The fact remains, however, that Magna is not 100 individual businesses; it's a single company with some clearly defined strategic priorities and a distinct corporate identity. Fred Gingl enforces the one, Frank Stronach the other. Though both men prefer to manage by what Stronach calls "persuasion, ingenuity, and incentives" rather than by command, neither the strategy nor the corporate philosophy is up for grabs. The company is structured accordingly.
The first layer of oversight is what Magna calls "group" offices -- eight in all, each with between 10 and 20 plants. Part of the groups' function is coordination: they maintain sales offices in Detroit and act as clearinghouses for quotes. But they also have the formidable task of arbitrating plant managers' claims on company capital. If a manager wants to replace a machine, he borrows money from the group. If he wants to build a new plant, he approaches the group with his proposal.
Where the basic product decisions are concerned, though, the groups are still very much accountable to the man who creates them and who appoints their top managers: Fred Gingl. "For the last six or eight years," says Gingl, "every decision about where a factory goes, how big it is, who the manager is, and what products they will make came through my office somehow." In effect, the groups are conduits for Gingl's priorities. For example, he wants Magna to start developing modular seating systems, which it would then sell to the auto manufacturers as fully assembled units. Integram Group, formed last August to coordinate all seat-related divisions, is charged with dispensing the company's capital in this area. Plant managers whose proposals fit in with the overall strategy will benefit accordingly.
Magna's corporate philosophy, developed and propagated mainly by Stronach, imposes an entirely different set of constraints on the company's managers. Magna sets a minimum wage -- currently $8 (Canadian) an hour -- for unskilled production workers and provides all of its employees with an extensive list of benefits, from fully paid health and dental care to the free use of a 95-acre park situated in woodlands north of Toronto. A Corporate Constitution, published in the annual report (and incorporated in Magna's organizational bylaws), binds management to distribute 10% of each year's pretax profits to employee accounts, mostly in the form of company stock, thus ensuring that each worker has at least a small equity interest. Posters on the walls of every plant explain the connection between the plant and Magna; announce Magna's commitment to fair treatment, safety, and job security; and encourage any workers with grievances to contact human-relations officers (anonymously, if they wish) at the group or corporate level.
All these measures reflect an atmosphere in which the workers' interests are taken seriously. Fred Gingl, called one day by a factory worker who feared he was about to be let go, met with the man at five that afternoon. "No complaint that reaches this office will be left longer than a day," he says. Jim Gray's job as a human-relations officer for the CMT Group is, in effect, to make sure complaints don't get to Stronach's or Gingl's level. He reports spending 60% of his time handling individual problems and disputes. He has no power other than persuasion, but the company's culture lends him a good deal of authority.In one case, a manager was preparing to fire an employee for repeated fighting and sexual harassment -- an open-and-shut case, Gray acknowledges. The manager nevertheless felt compelled to check with Gray before dismissing the man.
Inevitably, Stronach and his plant managers don't always see eye-to-eye. Last year, he decided that Magna's factories should abolish time clocks -- a decision, he admits, that the company had a "hell of a time" convincing its more traditional managers to carry out. But there's no question who's in charge. In July, for example, Magna opened the first of what Stronach says will be a series of state-of-the-art day-care centers for its workers' children. This one, housed in a new building within walking distance of Cam-Slide, was established by headquarters and given to the CMT Group. Suppose CMT didn't want it? "Mr. Stronach would step in," says center director Wendy Campbell, no uncertainty in her voice.
Sometime in 1987, Stronach promises, Magna will promulgate an employee charter of rights, which will be enforced by an advisory board of prominent citizens and a hired staff of ombudsmenlike human-relations workers. The board's offices will be located outside Magna and its activities financed by an independent trust fund.
To Stronach, every such move is one more step toward his vision of a "fair-enterprise" society (see box, right). But the culture has implications for the company as well. The National Automobile, Aerospace & Agricultural Implementation Workers' Union of Canada, for example, has never succeeded in its attempts to organize Magna, despite wages that are, Stronach acknowledges, below those of many unionized companies in the industry. That's partly because of Magna's small plants, each of which has to be organized separately. But it's also because of the benefits, the profit sharing, and the atmosphere of respect for labor that Magna's culture creates. "The last thing Frank Stronach wants is to get the operation unionized," says John Miller, a securities analyst with a division of Dean Witter Reynolds Canada Inc., in Toronto. "His philosophy makes sure that workers in the plant aren't being abused, and if they have grievances, they'll be heard."
Stronach's philosophy also imbues Magna's divisions with a sense of common purpose. If you subscribe, as Stronach does, to the notion that good management means a contented labor force, the culture is a form of quality control. It ensures that Magna's companies are well managed for the long term as well as for the short term -- and that things never reach the point where the workers want, or need, a union.
For the moment, Magna's growth is continuing apace. The company has already secured so many contracts for the 1987 and 1988 model years that its sales will rise almost regardless of how many vehicles Detroit produces. According to a recent report on Magna by Goldman, Sachs, revenues in fiscal 1988 are likely to rise nearly 50% to $1.5 billion (Canadian). Every car produced in North America would then contain an average of $117 (Can.) worth of Magna parts, up from about $73 in 1986.
The company structure is also evolving. Late in September, Magna announced the creation of a supergroup, dubbed Atoma, to include four existing groups and 31 divisions. The long-range plan envisioned by Stronach is to spin off separate public companies, with roughly half of their stock controlled by Magna and half distributed to existing Magna shareholders. As long as the new companies make money and stick to Stronach's principles -- the latter, he says, "is nonnegotiable" -- they will be allowed to run themselves. Atoma is likely to be the first such spin-off.
No amount of decentralization, however, will get Magna around its never-ending problem: finding enough people to run its plants. Even Gingl's overseas sources may be drying up. "We just can't find people," says Leonard Johnson. Gingl agrees: "I have dozens of new ideas for products, but I don't have the people to take on the challenge." For the future, the company hopes to cultivate its own managers; it has already established a tool-and-die training center and is sending some of its brightest prospects for a business-and-manufacturing education at General Motors Institute. But it's not yet clear whether such moves will be sufficient to support the company's rate of growth.
Nor can decentralization alone solve the fundamental issue of Magna's position in the marketplace. "Magna is entering what I call never-never land," says Dennis DesRosiers, who heads an automotive research firm in Toronto. "They're competing in a league now with the Rockwells, the Danas, the Eatons. Vehicle companies expect Magna to have the resources of the giants, and it doesn't yet." The number of competitors, moreover, is growing, as major Japanese parts companies begin to set up shop in the United States and Canada.
As People Express Airlines discovered, a fast-growing young company can be inordinately vulnerable once well-heeled competitors begin to take it seriously. Like People's employees, Magna's have accepted relatively low wages in return for an unusual corporate culture and an ownership stake in the company. Increased competition could easily slow the company's growth and cause the stock to fall. Workers, their savings tied up mainly in the stock, might then be more receptive to union overtures. A unionized Magna would probably lose both the cost advantages and the managerial flexibility that have made it so formidable a competitor.
For now, though, Magna has defied all such cautions. It has kept its employees happy, and it has made all the right moves in the marketplace. It has grown big enough to compete in a giant industrial market while maintaining the accountability and entrepreneurship of the small, individually managed plant. Margaret Barry works for Cam-Slide; she works for Magna. Which one, as she says, doesn't really matter.
It's the combination that counts.