"new Management" Pioneer Jim Swiggett

This CEO used to think that if employees were motivated, profits and growth would take care of themselves. But after two years of declining earnings, he's not so sure.

 

When we visited with Robert and Jim Swiggett three years ago, their company was something of a model for a new business-management philosophy. Then a $326-million electronics concern, Kollmorgen Corp., represented an alternative to the centralized and bureaucratic practices of the nation's large corporations.

What made Kollmorgen different was both its organization and culture. To better serve their markets and focus on the future, the Swiggetts had broken their company into 14 autonomous divisions, each with its own board of directors and a mandate for financial independence and self-sufficiency. But on all Kollmorgen divisions the Swiggetts imposed their own dedication to individual productivity and a code of respect for individual employees. The efficiency, creativity, and enterprise that would flow from such a corporate structure and culture, they argued, would allow them to offer stockholders a 20% return on equity and double earnings every four years.

That, anyway, was the theory, as first presented by INC. senior writer Lucien Rhodes and later praised by Tom Peters in his Passion for Excellence. In practice, it hasn't turned out quite so neatly. Since 1984, the Kollmorgen system has been tested by a dramatic slump in the electronics industry that has put the company in the red. Bob Swiggett has retired to the position of chairman of the board, while his brother, as the company's new CEO, has struggled to keep the structure and culture intact. "Chastened," he says, by the experience, Jim Swiggett offered a reassessment of Kollmorgen's management approach in two conversations with writer Rhodes late last year.

INC.: When we last talked, things were going great guns at Kollmorgen, in terms of how your management system was working and the results that you were anticipating. What's gone wrong?

SWIGGETT: I suppose what went wrong is that things were going so well that we didn't pay enough attention to the changing fundamentals of the economy and of our industry. And as a result, we found ourselves going off in too many different directions at what turned out to be a very bad time. Back in 1983, when you and I last spoke, we did not anticipate the kind of downturn in the electronics or industrial marketplace that we've seen since then. And our enthusiasm for running a largely decentralized organization, with its high level of entrepreneurial orientation -- that caused us to get ourselves spread too thin. We had become overenthusiastic about the idea of corporate regeneration.

INC.: How bad have things gotten, exactly?

SWIGGETT: On the operational side, we've had to cut employment more than 10%, mostly through layoffs. We've closed two new facilities, one in New Hampshire, the other on Long Island, and we've had to sell off some product lines. And we'll probably have to do something with our motor division in Ireland.

INC.: And financially?

SWIGGETT: Financially, we've had nine straight quarters of declining earnings; we've been losing money since the second quarter of 1985. And the price of our stock has been cut by three -- we're selling at around $13 now and we were up in the mid-30s.

INC.: So we're talking serious damage.

SWIGGETT: It's been expensive.

INC.: You say now that you got spread out too thin. What was going through your mind when you were laying all these plans?

SWIGGETT: There were two things, really. One was that, in looking at our core businesses, we were beginning to see that after a long period of consistent growth in sales and earnings, margins were beginning to be compressed. We felt our business was becoming less vital, and there was a need to find new, proprietary products that could modernize our lines. We didn't consider it part of our tradition simply to coast, to sit by contentedly and milk our cash cows. So there was a major amount of time and attention devoted to the need of each division to deal more aggressively with its own future.

In addition, we began to feel that we could and should begin to look outside of our traditional lines of business -- to diversify. And so we set up a separate division called Questech and began to invest in ventures where we had less than 100% ownership. We took positions, for instance, in several semiconductor-equipment manufacturers and in a highly speculative company that was working with lasers in the field of biology.

INC.: And what's happened to Questech? Is it still around?

SWIGGETT: It's still around, but it's been cut off -- down to the point where it's not being fed for any new activities. We're just trying to keep alive the areas in which we already have investments.

INC.: What kind of projections were you making for the company when you embarked on all this?

SWIGGETT: Back in 1983, the industry was just coming out of an inventory recession, and we were earning roughly 90? a share. As we entered 1984, we felt we had $2.35 in our hip pocket and had a very good shot at $2.50.

INC.: And yet, as it turned out, you were really heading into the worst electronics industry recession in 20 years. How could you have missed that? Didn't you have some inkling?

SWIGGETT: Well, there was some. For a long time, our company has supported some work going on up at MIT in economic cycling -- long waves, that sort of thing -- and they were forecasting that we were entering a long downward slide.

INC.: And you didn't pay any attention to that?

SWIGGETT: I guess we were able to convince ourselves that during the down periods, it would be the old engines of the economy such as steel and autos that would really take it on the neck, while the new engines, like technology, would come out of the period stronger than ever. So we thought we were going to be somewhat insulated. We had come through several electronics recessions before that without any perceptible blips. And, in fact, we had been getting some pressure from disappointed customers because we had not been able to meet their orders. Wang Laboratories, for example, with which we did around $6 or $8 million worth of business in 1983 -- they were pressing us hard to get it up to something like $14 million in 1984. And in 1985, I think we did on the order of $500,000. So the extent of the pullback -- when it came -- was really precipitous.

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