A CEO discovers the difference between 'best-made' and 'best-selling' and learns to listen to the market.
If ever a company seemed reliant on its founder's vision, Vermont Castings did. And never more so than after the founder was gone
When founder Duncan Syme left Vermont Castings he felt that he'd worked himself out of a job. What did his company need from him? Vision, the standard answer went. But what was "vision"? And how could it help make Vermont Castings the professional outfit it needed to become? Syme didn't have a clue -- until things got so bad he was forced to come back. -- C.H.
What does it take to make the best wood stove in the world? Ask Duncan Syme, founder of Vermont Castings Inc., and he'll show you the $900 Resolute Acclaim sitting, rejected, on the repair line.
From a distance, the stove looks perfect: bright and gleaming, engineered with state-of-the-art combustion technology, designed and built with uncompromising grace, and finished in a top-of-the-line majolica porcelain enamel finish.
But someone -- it could have been anyone in the company -- decided it couldn't be shipped.
Bend over; catch the light just right. If you look very closely you can see a scratch no bigger than a baby's fingernail.
It can't be patched. Syme will have to spend $100 to reenamel the entire stove, more than one-third of his $250 margin. But he has no choice: for 14 years, long before quality became a buzzword for the marketing mavens, he's staked his franchise around a single obsessive standard.
The product is sacred. Always was. Always will be.
But the best has never come cheap. Other stove companies could buy castings from the marketplace or manufacture offshore. Syme had to build his own computerized foundry, the most sophisticated stove-plate facility in the western hemisphere. Other companies could use ordinary enamel finish on their stoves. Syme introduced the European majolica process, adding 40% to his materials costs and requiring a lab to test each run, a $2.2-million enameling facility with an Eisenmann furnace, and an Irish engineer with enough expertise to make the process work. Vermont Castings even makes its own shipping pallets in-house, stove-specific softwood cradles to guard against jarring the product on its journey to the customer's living room.
The costs are endless. Although the company holds 290 patents and boasts the lowest emissions in its market, Syme still feels compelled to spend 4% of his $40-million annual revenues on R&D.
Conventional management structures don't work. If Syme expects every employee to be a relentless quality-control inspector, he has to be there on the floor, reinforcing the standards every day. Wandering around preaching work-force participation isn't good enough; he has to integrate the ideas from the line into his manufacturing process. Forget cutting employees to meet a seasonal drop in demand: layoffs have too drastic an effect on morale. Forget just-in-time inventory control, too. Syme has to eat inventory costs, sometimes letting finished castings gather dust for months, other times building with hot metal.
He wouldn't do it any other way -- "Why would anyone want to settle for anything less than their best?" he asks. But along with personal satisfaction, Syme can measure the benefits in numbers, in margins and market share that have led the industry through good times and bad. During the boom years of the 1970s, when national wood-stove sales climbed from 200,000 to 1 million and every job shop with a wrench started selling stoves, Vermont Castings was the star, the fastest-growing company in its industry, doubling in size every year, making the Inc. 500 list of the fastest-growing private companies. Sales reached $29 million and margins were as high as 60%. During the downturn in the '80s, even while industry sales fell to 400,000 and hundreds of stove companies folded, Vermont Castings managed to become the largest company in the industry, expanding market share to 10% and keeping revenues stable.
But the numbers by themselves don't begin to tell the full story of Vermont Castings' 14-year pursuit of excellence, or suggest how close the company came to the brink of extinction in spite of it. That is a more complicated tale, of dream and tragedy and tentative revival. It begins with a product that became an icon for an era, and with the model of new-age entrepreneurship that seemed to blossom spontaneously at its birth. It is the story of a failed corporate metamorphosis, too, of a growth company struggling to come to grips with a declining market. And it is the story of a personal education as yet unfinished, of the transformation of Duncan Syme from a self-proclaimed "backyard hippie" with a dream into a manager with a responsibility.
For the old-timers on the assembly floor, watching Syme wander through the cavernous assembly plant this chilly winter morning, it's almost as if the glory days of growth had returned. Eyes bright, hair disheveled, he peers into scrap bins, chatting with the folks on the line, still the obsessive tinkerer, keeper of the corporate flame.
But Syme, like the company he runs, has had to grow up. In the old days he'd built the equivalent of a Model T, a simple product sold for a few hundred dollars to back-to-the-land true believers. Now, he sells a combustion technology that can cost thousands of dollars by the time it's installed; his customers are more likely to live in a Georgetown town house than a cabin in the woods -- and they may decide that value for dollar comes from Taiwan.
Back then, growth had seemed like serendipity, the natural flowering of Syme's vision. Now, growth, if it comes, must be fought for. Personal vision, by itself, will not be enough. State-of-the art technology and a relentless commitment to quality, a dedicated founder and a motivated work force will not be enough, either. They are just a start -- necessary, but not sufficient.
It's not even enough to build the best stove in the world -- it probably never was.
The legend of the Defiant began prosaically enough with two young men in a bar and grill in Crested Butte, Colo., in 1970 -- the tail end of the Age of Aquarius. Twenty-five-year-old Murray Howell, co-owner of The Tailings, was a University of Pennsylvania political-science graduate getting his head together, working behind the bar. Thirty-two-year-old Duncan Syme, a Yale-trained sculptor and architect, was drifting through town.
Night after night the two would sit, sipping their Budweisers and listening to the jukebox, wondering, as young men will, what to do with their lives. Wouldn't it be nice to move back to the land, they'd ask each other, to live in rural New England? To work as honest craftsmen and live as brothers, building something to be proud of, free from the tyranny of suit and tie?
They even developed a name for the vision: "the New Hampshire ball-bearing factory," they called it, shared shorthand for the business they promised they would start together. They didn't know what they could build, exactly. But they agreed it would have to be something "rare and unusual," magic for everyone it touched.
Flash forward to 1975, after the two friends have moved back East. Howell, in suit and tie, was working for New York City's Lazard Frères & Co. Syme, now married to Howell's sister, was still drifting, a subsistence architect trying, without much luck, to build energy-efficient houses in tiny Warren, Vt., living in a drafty wood shop.
Wood stoves seemed to be everywhere that winter in counterculture New England. Syme himself heated with an old Montgomery Ward coal burner he'd converted. Then one particularly frosty March night Syme didn't get up to feed the fire, and he woke up to an 11-degree chill outside his covers.
Syme was a tinkerer. He wasn't thinking about starting a stove business initially; all he wanted was to build himself a better stove. "But then I looked at the stoves that were around. Most of them didn't work very well. A few worked well enough but looked terrible." So he talked with Howell in New York -- could this be their chance?
Howell had seen the market opportunity himself. With the birth of OPEC and the rise of oil prices, wood heating was hot -- not only economically and environmentally sound, but morally righteous, a way to assert your independence from Exxon, Shell, and the oil sheiks. In the two years since its introduction, sales of the imported Jotul were said to be as high as 40,000 units. Even U.S. stove companies were growing, selling giant wood-eating behemoths designed in the nineteenth century, as ugly as they were inefficient. So Howell moved up to Vermont with $25,000 in seed money.
Their intentions were modest, Syme says. "We wanted to make a stove that was better looking than anything else on the market -- and worked a little better, too, if possible." Howell ran "stove races," competitive firings of the stoves already on the market. Syme sketched out designs and gave himself a crash course in wood burning. He stumbled eventually onto the breakthrough resource: boxes of World War II research on the distillation of wood, moldering in the cellar of a retired professor.
They called their first stove the Defiant, for its ability to defy the winter winds. And it wasn't a little better, it was a lot better. Other stoves delivered, at most, 40% of the wood's heat. The Defiant, airtight and thermostatically controlled, delivered 60%. Other stoves were ungainly boxes; Syme's Defiant looked like heirloom furniture. Other stoves could warm your house. The Defiant could warm your heart, with doors you could swing wide if, like Syme, you wanted to sit and dream in front of an open flame.
"A sensible piece of hardware," Syme called it modestly. "I thought if we were lucky we could sell enough that Murray and I could make $10,000 a year, enough to live in a beautiful area and do what we wanted." Instead, they sold their first 200 units before they started production, on the basis of their design sketches alone.
Within a year they had sold some $250,000 worth.
Within five years they were on the Inc. 500, the fastest-growing stove company in America.
The Defiant was a phenomenon. Like the Apple computer, to which it was widely compared, it was as much a symbol as a product. The customers who flocked to the showroom weren't just buying a stove, they were buying membership in a tribe, bound into the Vermont Castings dream through the "Owners' News" and a toll-free line that would put you in touch with a fellow stove freak back in Randolph, Vt., ready to talk burn times and cords. Few products have ever won as much customer loyalty: proud owners sent thank-you notes to the Vermont craftsmen who built it, or Christmas cards with their stoves the center of the family picture.
"Marketing, schmarketing," Syme said; they couldn't build stoves fast enough. They priced their product high, adding a 50% margin to their costs and operating expenses, then adding another 30% margin for their dealers. But the price didn't seem to matter. From day one a steady stream of customers had shown up at their door, cash in hand, drawn by word of mouth or one of the growing number of glowing stories in the press. Why pay a dealer's margin? One flier, circulated locally, led them into mail order, and a customer base that stretched through Michigan's Upper Peninsula and into California's Big Sur. There was no need to pitch the Defiant; its quality and artistry spoke for themselves. It would take six years to catch up with demand: the orders and the cash just kept flowing in.
The two partners managed by instinct, working at opposite ends of a long wooden trestle with Howell as the businessman and Syme as the creative force. "We weren't two guys with an M.B.A.'s notion of how to kill the world. We had a strong sense of ethics and morals, and out of those came habits and decisions. We did our best to make the best -- not because it had marketing value, but because it seemed the right way to express what we wanted to do."
The success of the Defiant seemed eloquent proof that they'd been right-on when they'd sat dreaming in the bar in Crested Butte, they agreed. "So let's put that into everything we do -- the quality of the literature, the way we serve our customers, everything. And let's make this an extraordinary experience for all of us -- if we aren't going to have that we might as well go work for someone else."
The religion of "rare and unusual" started with the product, "built to last forever," Syme insisted. Each stove was built twice: ground, dry-fitted, taken apart, and reground, then reassembled with furnace cement. Then it was signed, personally, by its builder.
Howell and Syme didn't just preach excellence; they stood on the line, setting the example stove by stove. "It became standard practice that everybody who touched a casting was a QC inspector -- if you didn't like it you'd put it aside," Bill Floyd, Vermont Castings' first employee, remembers. "There was no close enough; it was either there, or it wasn't."
Everything about the stove had to surprise their customers, giving them more than they expected. Complaints were dealt with simply: if your stove didn't work you'd get a new one, no questions asked. "Our intention was for you to have acquired something of lasting value," Syme says. "If it failed in any way there was an implied breach that had to be rectified." You weren't buying a stove, you were buying membership in a movement,
It was a rare and unusual place to work, too: the best wages and benefits in the region, profit sharing, and the satisfaction of knowing you were number one. They worked hard, double shifts to meet demand, but they partied hard, too, departmental six-packs for a production record broken or a design problem solved, company wide Christmas parties and Halloween parties, and a spring fling on the day the winter's snow finally disappeared.
Planning, such as it was, was casual. "We never considered anything as sophisticated as developing 'a line,' " Syme says. "The Defiant was selling like crazy, but after you hear 150 times from customers that it's too big, you get the idea." So Syme designed the Vigilant, a smaller stove with still higher efficiency, adding optional glass on the doors. Thus began a steady stream of new stoves, each more combustion efficient than the last, each with new customer-oriented features.
The only problem was the supply of parts. Few of America's rusting foundries produced parts of high enough quality. But depending on the more sophisticated European facilities limited Vermont Castings' flexibility to build whatever those people on the phone wanted. In 1979 Syme and Howell built a facility of their own, the first new foundry for the casting of stove plate to be built in the United States since the turn of the century.
They dreamed big, designing the foundry with capacity for $50 million in stoves. Growth, they felt, was "manifest destiny"; they were building the industry juggernaut, with $50 million in sales the next plateau. They'd already started bringing in new managers, outside professionals to help them take that step.
The bankers were skeptical. But it didn't matter what the bankers thought. Stoves were selling so fast that Syme and Howell paid all but $250,000 of the $5.5-million construction cost out of cash flow.
In June 1979, construction completed, they decided to throw an open house, a chance to show off the company to their local neighbors. They weren't expecting much of a crowd; there'd been no effort to spread the world, except for a short note in the "Owners' News."
Five thousand people showed up, proud Defiant owners from across the country. So a tradition was born, the annual Owners' Outing, a gathering of the tribe, repeated every August in growing numbers, a celebration of the dream.
Looking back, the 1980 Owners' Outing was probably the high point in Vermont Castings' history. Sales would climb for one more year, to $29 million, but by Christmas 1980 Howell's cancer had been diagnosed.
It was Howell, along with the board of directors he assembled, who convinced Syme to turn the company over to "the corporate types," as they were later so scornfully called within the company. It was a question of keeping their "manifest destiny" alive, Howell argued: that $50-million goal was still within reach, but to get there without Howell's steadying hand, the ball-bearing factory would have to grow up. Vision wasn't enough; they'd need strong executive leadership, professional management to bring in systems and procedures, a formal planning process, and a chain of command. With so much of that infrastructure already in place, by the early '80s it was time for Syme to let go of the torch.
"It was a hard argument to disagree with," Syme says. "At that point I didn't have a job in the company in any case."
No one expected Syme to take over. His role had been corporate wildman, the blithe tinkerer. Clearly he was too obsessive to function in the real world of balance sheet and bottom line, too disruptive to be part of the effective management team they would need to cope with the new problems facing Vermont Castings in the early 1980s.
Those problems kept getting worse. The wood-stove boom was over, the market dropping between 10% and 20% year after year. The back-to-the-land set had traded their overalls for pinstripes and moved to the city; the old problem of unfillable demand had been replaced by a growing battle with inventory control.
Vermont Castings' wood stoves were still among the "99 Things that, Yes, Americans Make Best," according to Money magazine, and market share was growing enough to keep revenues fairly flat. But profits were slipping. As a one-product company in a shrinking niche, Vermont Castings looked particularly vulnerable to further market erosion. That $50 million worth of infrastructure and unused foundry capacity now looked like simple, expensive overhead.
There was a logic to every decision the corporate types made over the three years after Howell's death, each a conventional management solution to a perplexing corporate problem. But Vermont Castings had never been conventional; those well-meant decisions would nearly destroy the company, severing its connection with the market and its work force, putting its reputation and franchise at risk.
How does conventional management cope with falling profits? One way is cut costs by adding controls. Vermont Castings' management still preached quality, but it implemented management by objectives, with foundry and assembly workers measured by their ability to improve scrap and assembly rates.
Sure enough, the scrap rate went down; employees stopped rejecting marginal castings. The assembly rate improved, too; fewer cosmetic defects were being caught. "We may have accepted some stoves that were 'close enough,' " Bill Floyd says. "We'd always looked at the numbers, but under the corporate types the numbers became job one. I don't know if quality dropped off that much, but it certainly wasn't as much fun to work here."
What's the solution? Look for a new niche, something countercyclical, and hope your reputation can be transferred. So Vermont Castings' management began considering new products: hot tubs and spas, perhaps, a gift line of trivets and thermometers, a gardening-by-mail business.
It didn't make sense to Syme, "but I kept telling myself, 'I can't be right; they have all the management horsepower.' "
While few of the new product lines worked out, they led, logically, to a change in distribution systems that would cut the company off from direct market connections. It made sense to build a strong dealer network: Vermont Castings would need dealers to push those countercyclical products, whatever they might be. And it made sense to move out of mail order, too: cannibalizing your dealers' sales was no way to win their loyalty.
After that, it was a simple question of costs. If you weren't selling directly to customers, why did you need a toll-free number or a newsletter? "Rare and unusual" doesn't show up on a balance sheet.
The Owners' Outing went, too, victim of the same logic. Read the numbers. The party cost Vermont Castings $75,000 a year. Since the company sold some $120,000 worth of product with a 60% gross margin each time, netting $72,000, it would be saving $3,000 a year.
No one planned to end the outing, exactly. But no one approved the list of committee assignments either, or signed off on a budget, and the deadline passed.
There was a new leadership style in place. No more calling your boss by first name; you communicated by memo. No more batting around ideas in the halls; planning moved through a formal process. The spontaneous parties were gone; you couldn't even bring in a six-pack for your department on a Friday afternoon without formal permission. Rare and unusual? Bob Ferguson, head of R&D, started thinking about wearing a tie.
Internally, the company was paralyzed. Endless discussions of administration and procedures produced no agreement; endless memos and planning meetings produced no business plan. The corporate types had run out of ideas; after three years of fighting the culture, they'd run out of will. How do you manage a company where everyone expects to put their two cents in? There was no telling people what to do; you had to convince them. Give them an order with an inadequate explanation, and they would dig in their heels, passive and obstinate at the same time, convinced that they alone knew the Vermont Castings way.
"It was scary to be a middle manager and to feel that you were running the company," remembers direct-sales manager Sandy Levesque. "We had a lot of heads walking around with their chickens cut off."
The flow of new products had stopped, except for cosmetic updates. Bob Ferguson's R&D department spent more than $1.2 million, "but it was all non-stove specific, because we were always so unclear about what the market wanted."
For Syme, watching unhappily from his home in nearby Norwich, it was clear by 1986 that Vermont Castings was "heading for disaster," perhaps in as little as three or four months. In his day they'd turned out a new stove every year and a half or so, but in the five years since Howell's cancer diagnosis, the company had been drifting. Worse, the Environmental Protection Agency was set to announce tough new national emission standards that would force the Defiant, the corporate standard bearer, off the market completely.
So Syme told the board he was going to take active control again. What was there to lose? Sales, profits, margins, and equity were all flat, the market falling, their foundry running at 50% capacity. The cash cow was obsolete, with no new product to replace it -- while an upstart competitor was coming right at them.
Howell had been right: vision wasn't enough. But without vision you don't have anything, Syme argued. The corporate types "weren't malicious; they had been miscast." They'd never understood what made the company special. Vermont Castings wasn't about stoves, it was about values. "A professional manager can't watchdog those. Only the guys who saw them from the start can."
How could the board deny him a chance? He owned 45% of the equity, after all, "so it's my bat and ball."
There was no fanfare when Syme came back to work, no announcement on the assembly plant floor, no speech to rally the troops. He just started showing up in the design shop in the spring of 1986, doodling out ideas, then he followed the stove that emerged through design to production.
Just like in the old days, his presence paid off in product: the Defiant Encore, introduced in July 1986, the new state-of-the-art model, with emissions lower than any federal or state regulations, and far lower than any competitors'. Syme's return paid off in morale and quality control, too. "Seeing Duncan call the shots made people realize that things had changed," Bill Floyd remembers. "The guys on the line enjoyed seeing him walk through again, discussing the problems building stoves, knowing that 'good enough' no longer was."
But Syme had no illusions that his mere presence could be enough, or that he could ever re-create the ball-bearing factory. That dream had died with his partner and best friend. Syme had been aged by the pain and by the exile that followed. But he'd grown up, accepting that the responsibility for Vermont Castings was his. It would not be enough to be a blithe tinkerer; he'd have to learn to lead a team. No more management by instinct; he'd have to consciously reestablish the best of what the old company had had.
The company would have to grow up, too. If it wanted to retain its franchise as the nation's premier stove crafter it would have to find ways to institutionalize product and production excellence, and find a way to reconnect with the market.
Syme wrote the new mission down, a business plan of sorts, the Vermont Castings "Vision Statement," a 21-page meditation on corporate philosophy, assets, and opportunities circulated throughout the company. He started by redefining the basic creed of rare and unusual as "significantly above the average and expected," promising that the goal of the company and all employees would be to provide "an extraordinary life experience in all ways" to customers, community, and self.
What business was he in? There would be no more forays into hot tubs; Syme wanted to broaden his niche, not abandon it. The future lay in the "fire on the hearth" industry, just wood stoves for now, but gas stoves and fireplace inserts for new-home construction in the immediate future.
Syme could only set the direction; he would need a team to execute it, not just veterans who understood the culture, but professionals with management expertise. But this time the managers were chosen for their past successes with similar high-end products, like Ed Abrain, hired as president, a veteran of 10 years overseeing Titleist Golf Division, or Dennis Dillon, the head of manufacturing and operations, lured away from Raleigh bikes.
Next, he turned to the stove. Innovation, too, had to be institutionalized, and manufacturing processes adapted to handle ever-more sophisticated products. Traditionally, Vermont Castings had had a short design and process engineering cycle: Syme would get an idea and they'd all bounce it around, moving it to the line as fast as they could. They'd work out the problems there, refining the concept or changing the design, making decisions so far downstream that there was no chance to hit an introduction deadline.
So they changed the system, hoping to speed the process without losing its spirit. A stove started in the advanced development group, four brainstormers including Syme, Ferguson from R&D, Abrain from marketing, and Jiggs Blackburn from design engineering. They met off site, away from ringing telephones, working as if they were a subcontractor reporting to Vermont Castings as a client. Their mandate was freeform: formulate a concept and assign objectives, without bogging down in how to make the product. Then the stove was handed off quickly to process design. There the system was opened up, and slowed down to allow designers, builders, and marketers to have their full say as the stove moved from master patterns to design tooling to assembly procedure.
So far, the new system has brought mixed blessings. In the past 18 months the company has introduced three new stoves, each more technologically advanced, each moving from concept to shipping carton in less than 12 months. Even with tighter manufacturing tolerances, there were fewer processing problems. Actual production has been more efficient, too, thanks to input from the floor: with the Resolute Acclaim, for example, suggestions from the line boosted the hourly assembly rate from 5 or 6 stoves per hour to 15. But those gains have had their cost. Three new products in 18 months have pushed scrap rates up. Yield, targeted at 90% to 95%, fluctuates between 50% and 60%.
It's a cost Dillon doesn't want to pay. But he has no choice. The product is sacred.
"It's a cop-out to say the standards are too tough," Dillon insists. "There's nothing magic about finishing; it's just a question of controlling the variables." Rather than lowering standards, they will have to introduce formalized process-control monitors to track specific problems proactively, correcting them before parts start hitting the scrap bin.
In the end, of course, that would not be enough to let the company grow. Even if the new system had worked perfectly, it was leading it toward a dead end.
Pursuing the grail of technological and design innovation is, truly, a rare and unusual thing. And creating institutionalized operational excellence is a tribute to any leader. But it doesn't do any good to build the best stove in the world if it is a better stove than people want to buy.
Vermont Castings' state-of-the-art product owned the high end of the market, but it had left a huge hole behind and gained a new competitor, Consolidated Dutchwest Inc. (CDW), a Plymouth, Mass.-based marketer that manufactured at its foundry in Taiwan.
It was almost déjà vu -- only this time the hot stove company was CDW, twice named to the Inc. 500, a six-year-old company with $18.5 million in sales and a 1,637% five-year growth climb. CDW had had to listen to the market: unlike Syme and Howell, who caught the industry wave just before it swelled, CDW's founders had started when the industry was cresting. They had made a basic heater to fill a basic need, stressing value for dollar, then worked their way up as the market matured, selling through a carefully positioned catalog and dedicated company stores strategically dotted over the East Coast and Midwest. CDW would never make the best stove in the world, but Syme feared it might soon be making the best-selling one.
"The cost of competition with them would have been horrendous," Syme says, "and they might have eaten my lunch." So he bought the company and changed the course of Vermont Castings' history.
The April 1988 acquisition made manufacturing sense: by moving production to Vermont, Syme would finally solve the problem of absorbing unused foundry capacity. It made marketing sense: besides giving Vermont Castings the customer access to mail-order image building, it gave their dealers a mid-range line, basic heat at half the price, a product for the customer who wanted a pick-up truck, not a Mercedes. It made strategic sense, too, putting Vermont Castings within range of $50 million in sales, claiming 15% of the stoves sold worldwide and 20% of the dollars.
But it has brought the company new problems as well. It will have to learn to manage two different brands in a declining market, keeping each distinct enough that one doesn't cannibalize the other. And that will be the easy part. It will be more important, and more difficult, to combine CDW's "find a need and fill it" orientation with Vermont Castings' long-standing commitment to the sacredness of the product.
First, though, Vermont Castings will have to figure out how to build two different kinds of stoves. How do you set a lower-quality standard after a 14-year obsession with the best? "Do we suddenly turn the low-end line into