Profile of the rapid growth
Building a world-class company -- one that not only leads in its market but provides a shining example of enlightened and effective management -- is exhilarating. Not to mention chaotic. And costly. And, sometimes, painful. Just ask Steve Braccini
Now and then we hear about some unusual companies here at Inc. Not your run-of-the-mill successful businesses; rather, the ones that are emerging as market leaders, as world-class competitors, as models for others to emulate and learn from. These companies boast incredibly innovative marketing, impossibly high quality levels, extensive employee involvement. Their growth and profitability mark them as a class apart.
Early last winter we began hearing glowing reports of a company called Pro Fasteners Inc., in San Jose, Calif. Pro is a 55-employee distributor of industrial hardware and components to the electronics industry, and it seemed to fit the mold.
Ever since its birth, a decade ago, Pro has been snapping up market share in a fiercely competitive business. Since 1989 -- what recession? -- its sales have risen a total of 20%; this year alone the figure could be as high as 33%. Pro has garnered numerous quality awards (more than 50 in the past two years) and has won acceptance as a prime vendor to A-list customers such as Applied Materials Inc., the big semiconductor-equipment manufacturer. "They're the best," one purchasing agent told us. "They're way out ahead of the curve."
Internally, management appeared to be making all the right moves. Pro mounts a continuous-improvement quality push and records near-perfect performance. Pro introduces a million-dollar, state-of-the-art computer system and plans to offer services virtually unheard of in its industry. Pro promotes communication and training; it utilizes cross-functional teams. The moves are especially striking because of Pro's size and resources -- no hundred-million-dollar company here. When the company set out to transform itself, it had only 25 employees and $5 million in sales. It's in an industry, moreover, that considers 3% a healthy net profit.
Anyway, we figure we'd better write an article. So one sunny day in early spring I show up at the company's sleek building on Old Oakland Road. I am ready to write about visionary executives, active and involved employees, a smoothly functioning operation capable of growing well into the 21st century.
Trouble is, not everything Pro's employees tell me fits easily into the well-formed picture in my mind.
Teams? Sure, we have teams. Yeah, they accomplished quite a lot -- but, uh, they haven't met for a while. The new computer? Hey, it'll be great -- one of these days. Communication? Well, let's see. Oh, we have a monthly newsletter. And you can always go and see Steve. A couple of us went to talk to him a few months ago, when morale was bad.
I sit in on the weekly companywide lunch meeting, itself a recent and significant innovation on the communication front. But today's discussion isn't about quality or customer service, it's about who should clean up the coffee area. Later I attend a meeting of the Continuous Improvement Council, the key employee group charged with overseeing the company's quality push; several people have mentioned its importance. But this meeting, lackadaisical at best, focuses on exactly how a training session should be structured.
My one-on-one interviews with Pro employees are distinctly upbeat: people are clearly excited about the company and its prospects. Yet in the hallways are ghosts and echoes. I hear references to the marketing manager who left last year, the controller who was let go in January. Pretty soon the boss, Steve, is confessing that he even had to ask his wife to leave the company -- "the hardest thing I ever had to do in business." Nor has it always been peaceful for those employees who stayed. There have been shouting matches and painful confrontations. "It was like a lynch mob," says one young man, recalling an episode when employees were psyching themselves up to challenge a manager.
What's going on here? During my stay at Pro, I see plenty that confirms the company's stellar reputation. Its indisputable accomplishments in the marketplace, attested to by several customers. The many examples of internal improvements that employees are quick to point out. But I also hear discordant notes, hints and suggestions that the road has been rocky and that some aren't sure where they're headed. Frankly, it isn't until several days later, when I try to piece it all together, that I understand what I have seen.
Think about it. Every Motorola and Nucor and Springfield Remanufacturing, every market leader that is not a brand-new start-up, had at some point to reinvent itself, to put itself through a wrenching metamorphosis of thought and action. We read about these companies only when their transformations are complete, when the butterfly has emerged from the cocoon. At that point, paradoxically, the change seems both obvious (Of course -- that's what a world-class business looks like) and unattainable (How on earth does our little company sprout those wings?).
But what would it be like in the middle of such a change? Particularly in a small, everyday type of company, without a big bank balance or a proprietary product or deep reserves of managerial talent? Chances are, you'd see a good deal of groping and experimentation. Chances are, too, that the excitement would be tempered with skepticism, anxiety, bickering. No company setting out on such a journey, after all, gets a road map.
At Pro Fasteners, the false starts and missteps in the company's ongoing transformation are still apparent, the disputes over direction still lingering. The costs have been steep and are fresh in the mind. The casualties -- the people who were unable or unwilling to keep up -- haven't yet been buried and forgotten. Right now, in 1992, Pro is poised for truly explosive growth; commitment and exhilaration are in the air. But so is a sense of uncertainty, even of trepidation. The way is still new.
Such is life, I believe, when a company sets out to become the leader in its marketplace, to join the front ranks of American enterprise.* * *
The early days at Pro Fasteners -- early, in this case, meaning the 1980s, before Steve Braccini's stint at the clinic -- live on in company legend. The couple dozen employees, many of them not long out of high school, all knew one another. They'd wear jeans and T-shirts to work. They'd rope off the parking lot for beer and barbecue on Friday afternoons, starting at 11 a.m. if business was slow. Despite Pro's Silicon Valley location, this was not a collection of high-tech hotshots. The company was essentially an industrial hardware store, its job mainly to sell nuts and bolts and washers. Steve, the founder and president, was head salesman. Cinde, his wife, ran the office.
Pro, in short, resembled a million other family businesses on Main Street, USA. "It was a little, small operation," says Joe Varela, a senior quality engineer with Applied Materials, making it clear he's referring to Pro's ambitions and vision as well as its head count. "If you walked in there now, you'd say, 'I can't believe this is the same company.' "
The transformation began in 1990 -- coinciding, not by chance, with Braccini's transformation of himself.
Braccini is a big man, age 39, warm and engaging but perpetually restless, a friendly bear with a Type A personality. In the early years he seemed to make Pro grow by sheer force of will. He'd get in early and spend his days working the phones, giving orders, his fingers in every company pie. Evenings he would unwind with a bottle. Pro's future? More of the same, so it seemed. Braccini had little vision of where he wanted to go, still less a plan of how to get there. Do tomorrow what you did today -- only try to do a little more.
That spring Braccini decided he'd better get on top of his drinking; checking into the Betty Ford Clinic, he spent 28 days learning to live without alcohol. When he got out, not only was he dry, he was a man with a mission.
"I began to realize a lot of things about myself," he says now, "and the theories I had about myself for some reason corresponded to the business. The better I took care of myself, for example, the better I felt and the better I did. It was like this light went on. 'Oh -- so the better I take care of the customers, the better they'll feel about me. . . .' And it just went on from there." Cinde Braccini, who's been married to Steve for 16 years, remembers the change with a laugh. "Oh, God! They warned me! When you take an energetic and knowledge-hungry mind like his . . . They said, 'When he comes home, he's going to have all that energy back.' Boy, were they right. The improvement he had chosen for himself he also imposed on Pro Fasteners. It was like, 'I've now realized something about myself -- and we are going to change.' "
Braccini plunged into reading. Articles in the business press. Books such as Philip B. Crosby's Quality Without Tears. ("Every new hire at Pro still gets a copy of this book," he says.) He began talking to other company presidents; he joined a chapter of the Executive Committee, an organization of CEOs and entrepreneurs. He noticed there were a small number of companies -- Nordstrom, for one -- that everyone regarded as models for business in the 1990s. Pro Fasteners, he decided, would join the ranks of those exemplary enterprises. He would reexamine every facet of Pro's operations. He would transform its internal operations to ensure first-rate quality and service.
It was an auspicious time to be thinking about such matters, for Pro's marketplace was evolving quickly. In the early years the company had sold most of its parts much as a retail store does. Customers called with orders. Braccini's employees pulled the items off the shelf or ordered them from the manufacturer, then shipped them out with an invoice. By the late 1980s many customers had begun asking for more. "It wasn't just, 'I want this part,' " says Braccini. "It was, 'I want it on my shelf all the time. And I want you to make sure it's there all the time.' " Implicit in each request were a promise and a threat. The promise -- if you could deliver the goods -- was a long-term contract, ensuring a certain volume of business. The threat was elimination as an approved vendor. Like manufacturers all over America, Pro's customers were slashing their supplier lists, and distributors hoping to make the cut would have to dance to a new tune.
The contracts side of Pro's business had begun to grow as early as 1988. But it wasn't until he returned from Betty Ford, his mind now hitting on all cylinders, that Braccini spotted the long-term potential for his company. What customers were really saying was that they didn't want to manage their parts inventory. It was too costly for them, and they weren't good at it. Pro, he realized, could do it for them. It could take responsibility not just for nuts and bolts but for hundreds of a customer's parts. It could guarantee not only that the parts would be on the shelf when needed but that they would be checked for quality. "Suddenly, the customer could cut his in-house staff," Braccini explains, summarizing what turned out to be a compelling marketing pitch. "He'd have no purchasing costs, no receiving costs, no quality-assurance costs." Per-part prices, moreover, could actually be lowered, because Pro's buying power would increase.
It was an enticing vision. Pro as inventory manager for any number of big customers. Pro opening up branches elsewhere in the country, cloning its procedures and practices, ultimately becoming a $50-million business. Granted, the little company faced huge challenges. It would have to anticipate customer needs rather than simply respond to phone calls. It would have to learn state-of-the-art quality-assurance techniques. It would need a computer system capable of tracking tens of thousands of parts for hundreds of customers. From his reading, Braccini understood it would need something else, too: people in every job who wanted the company to succeed, who were eager to learn and adapt and change and grow, who would apply their new abilities to helping Pro.
To Braccini, that meant imbuing the employees with a sense of responsibility for the business. Henceforth, he proclaimed, the pyramid structure of the traditional company would be inverted. Ultimate responsibility for the business's operation would lie with each employee. Day-to-day managerial responsibility would rest with the line managers. He, Steve, the hands-on, work-the-phones CEO, would pull back, ceding line authority to his managers and concentrating instead on long-term planning. To implement the new structure, employees would be organized into cross-functional action teams, no managers allowed. The teams would meet at least weekly, sometimes for training, sometimes to focus on particular problems.
In retrospect, the first several months after Braccini's return -- the rest of 1990, really -- was the easy part of the trip. The way was smooth, the mountains still in the distance. Braccini brought a few consultants in to do some early training. The action teams began to meet and to register accomplishments. One created a quality-assurance manual, the company's first. Others began defining and documenting job processes with an eye to identifying bottlenecks. To be sure, the teams were new to the game and sometimes spun their wheels. And not everyone was buying this weird concept of turning the company upside down. The warehouse manager didn't like it. Neither did Cinde Braccini. To her, it smacked of the monkeys' running the zoo.
Oh, well. Steve figured a little inefficiency and a little carping were inevitable. Surely, he was doing something right. Sales for 1990 were up substantially over those for 1989. Profits were healthy. Maybe full acceptance was only a matter of time -- and of refining the system so it worked better. Over Christmas, on holiday in Jamaica, he read H. James Harrington's The Improvement Process. When he returned he decided to delegate still more authority, as Harrington recommended. Before, managers had brought issues to the teams to work on. Now Braccini set up an employee body called the Continuous Improvement Council. The CIC would be responsible for the teams. It would also have authority to do anything necessary to improve quality levels.
Meanwhile, Braccini himself could begin pondering everything else the company would need for growth. More training. That new computer. Those other branches. Applied Materials, he had heard, was opening a facility in Austin, Tex. Maybe Pro could ride along on Applied's coattails.* * *
In 1991, as Pro's transformation picked up speed, the road began to get a little treacherous.
On the plus side, Braccini noticed with satisfaction that the teams kept finding ways to improve operations. One group figured out how to alter the order-processing system to eliminate early shipments, responsible for about 5% of all rejects from customers. Another group simplified warehouse procedures so the company could be sure to ship out by 4 p.m. every order received before noon. A third worked specifically with Applied Materials, developing ways to ensure 100% on-time delivery of 100% correct parts.
Training, too, began to percolate through the company. One set of consultants taught teamwork. Another taught what they called Total Responsibility Management; still others communication skills. Outside the office, individual employees went on benchmarking trips to Hewlett-Packard and Boise-Cascade distribution centers. Some attended specialized seminars in subjects such as collections; others went to industry training programs sponsored by the Western Association of Fastener Distributors. In effect, the training had both text and subtext. The employees learned specific, job-related skills. They also learned to "think quality" -- to examine every procedure for possible improvements. COD orders often go out as credit orders? Let's get a big, red "COD" stamp to prevent the error. New customers find Pro slow in opening accounts? Let's try a "courtesy account" of $100, opened on the spot with no credit check. After so much training, says Paul Hathaway, a quality-control technician, things "just started snowballing. Quality just started rolling through the whole company, spreading to different departments."
Assuming the internal changes were proceeding apace, Braccini hit the gas on the growth front. He met with IBM about the company's new AS/400 minicomputer, which, he realized, could provide Pro with capabilities unique in the industry. Using remote terminals, customers could punch in their own part numbers, quantities needed, and delivery dates; the computer would automatically generate orders, invoices, and buy lists for Pro's purchasing department. Warehouse workers pulling parts off the shelf could carry portable bar-code scanners connected by radio to the computer; they'd know instantly that the parts were correct, and the computer could calculate instantaneous inventory levels. Trumpeting such soon-to-be-installed capabilities, Braccini prepared a proposal for a new Pro branch in Austin to handle Applied's inventory management. Meantime, he mounted a search for a general manager to run the San Jose operation. That would give him more time to plan Pro's rosy future.
But while Braccini was peering down the road, his passengers were wondering if he knew where he was going. Take the teams, for example. Sure, there were accomplishments to point to -- and now, looking back, the accomplishments add up. Back then, who knew if it was all worth the time and effort? Every team met every week for an hour or an hour and a half. Most departments had weekly or biweekly meetings, and the new Continuous Improvement Council had meetings of its own. Some teams -- those with the most forceful individuals among their members -- got a lot done. Others took forever to accomplish even little changes. Did Steve know? Did Steve care? Then too, lines of authority and responsibility were growing murkier by the month. Before, Pro had been run in the traditional way: Steve and Cinde at the top, with a full complement of middle managers between them and the rest of the employees. Now Steve was inverting the pyramid. What was that supposed to mean?
In fact, Braccini was groping. At the outset he had said the employees were in charge. But the teams got their issues from management and had to submit solutions to management for approval. Later, hoping to boost the teams' ability to make changes directly, he asked managers to join them. But now line employees figured there was no need to participate; the managers would do what they would have done anyway. CIC members such as Michelle Thibaudeau, employee-relations administrator, began picking up the grumbling around the coffee machine. "There was, um, a breakdown in communication," she says tactfully.
The CIC was the wild card in this mix. Braccini had given it authority to do anything necessary to improve the company's operation. In May the group flexed its muscles, asking the managers again to step down from the teams and announcing it now would run them. Trouble was, the managers were still responsible for implementing proposals -- and they weren't too wild about this upstart CIC. Nor was the CIC as effective as it might have been. "We didn't know what we were doing," says Paul Hathaway, bluntly. "And we were feeling this extreme resentment from management."
Soon things were falling through the cracks. Pat Morreira, then a new hire in the warehouse, remembers serving on a team that ordered a set of lockable drawers for employees' tools, which were getting lost or borrowed too often. The drawers arrived, but no one seemed to know or care who was responsible for installing them. A little while later, the teams were reshuffled. His new team, says Morreira, never proposed much of anything. Eventually, the drawers were shipped back.
For some, it was all too much. The warehouse manager quit. The marketing manager quit. Cinde Braccini didn't quit, but neither was she a convert. On the day Steve announced he was pulling back from daily involvement with the sales department, he and Cinde had a shouting match in full view of the salespeople. He was crazy, she said, to give up control. It would send the company down the tubes. She stalked out, slamming the door behind her. Over the year, remembers Steve, there were probably three such blowups and numerous little disputes, all over the teams or the redistribution of authority. Cinde doesn't disagree. "I'd walk in on certain days and say, 'Well, is it bad enough now? Can we stop?' He'd say no, and I'd say, 'Well, I have to leave. I can't watch this.' To me, it was the inmates' running the asylum."
Early in the year Steve broached the idea that Cinde might be happier at home. She set up a home office and began coming in less frequently. By fall, though, her visits to Pro were more numerous, and the disagreements only got worse. Steve steeled himself and finally told her. Now was the time to go. Really go. She left.
By the end of 1991, a year and a half after Steve had come back from the clinic, Pro Fasteners was poised, gingerly, on a cusp.
On the one hand, Braccini's plans for growth were clicking into place. For all the uncertainties, the teamwork and training had paid off: the company was raising its quality to near-perfect levels. In March, April, and May, for example, Pro was late on only 96 out of 11,500 lots shipped to Applied Materials. By August the figure was down to 20 out of 13,000 and falling. In September Pro landed the Austin contract. A month later a new general manager, Robert Landau, came on board. Soon Braccini had signed an agreement with IBM for the million-dollar computer system, to be installed in December. The time seemed ripe, moreover, for a big new sales push in Silicon Valley. The customer list was growing, with more than 400 companies a month buying from Pro. Many of those customers were interested in contracts, and Pro could offer them capabilities the competition simply couldn't match. Landau began laying plans to hire more salespeople.
On the other hand, there were no two ways about it: morale was terrible. By November the teams were no longer meeting. The CIC had tried giving them issues to work on; then it had decided the teams would be primarily vehicles for training. But demoralization had set in, and the CIC itself was stumbling. Paul Hathaway, one of five members, decided he'd better quit; his job was suffering. So did Carl Ericsson in sales. They met no opposition from their managers. "I think the council is great; the company needs it," says sales manager Carlos Bombino. "But I can't afford to put my salespeople on it. It takes too much of their time."
Braccini, toting up the year's accomplishments and costs, felt morale problems of his own. He had lost some of his key managers, including Cinde. (Yes, both Braccinis acknowledge, the whole thing strained their marriage; yes, they got over it.) With Landau still new, everyone was stretched thin trying to fill in. Then too, Braccini had spent a whopping $200,000 on training, better than $4,000 for every employee, not counting the time everyone spent away from work. Now, though business was up a little over the previous year, profits had dropped by half. Pro was supposed to be poised for a Great Leap Forward, bringing on the new computer, branching out, going for a quantum jump in sales. But would it have any money in the till?
Ruefully, Braccini sat down with Landau to do some cost cutting. Their first target was health insurance, which Pro had always bought for both employees and dependents. Starting next month, the two men announced, the company would buy insurance only for employees. If you bought additional insurance for dependents, the premiums would be deducted from your paycheck.
For the employees, it was a bleak day in a bleak time. They'd been through the training and the teamwork; they'd heard the rhetoric of responsibility and pyramid inversion; they'd made the improvements that seemed to be preparing Pro for a bright new future. Now they couldn't fathom what was going on. The new boss, Landau, was still a question mark. Was this insurance business his doing, or was it Steve's? And what about the new computer system -- would it automate people out of a job? Shortly before Pro closed for a holiday break, Michelle Thibaudeau and a colleague went to see Steve. You'd better do something, they said; morale has never been worse.* * *
And yet when I visit -- it is now almost three months later -- morale doesn't seem so bad at all. Not Steve's, and not anybody else's.
For one thing, business has picked up. January sales were up, February's rose still further, and March appears to be hitting record levels. Braccini's plans for future growth are one step closer to fruition. The AS/400 computer has been installed and will soon be up and running. Landau expects to land about 14 major contracts this year, totaling some $4 million in new business. "We have 500 or 600 items we're putting on contract with them," confirms Ruth Kavanaugh, purchasing supervisor for Coherent Medical Group, in Palo Alto, Calif. "We want a long-term relationship." Braccini estimates that 1992 profits will be 6%, about triple the industry average.
Even though the action teams haven't met since November, people talk about little changes they've implemented on their own to make things work better. Dave Sarmago, taking over as warehouse manager, has initiated a kind of open-book management, making sure his employees have access to weekly sales figures and helping them keep track of how the warehouse is doing compared with its budget. Cheryl Caglia, hired not long ago in purchasing, has begun tracking vendors' on-time-delivery perfor-mance. In short, the training and the pyramid inversion that Steve Braccini set in motion seem to have had an indelible effect, action teams or no. "One of the great things about this company," says Paul Hathaway, "is that management listens to the regular workers." That culture is not lost on customers. "They're really an employee-oriented company," says Kavanaugh of Coherent Medical. "And people that are happy to go to work do well for their customers."
As for how the company recovered from its crisis, the lesson seems to be that Braccini refused to retreat. Yes, his program of employee involvement ran into some sullen realities, both of group dynamics and of business. It is hard to redirect lines of authority. It is hard to expect people to take on responsibilities they aren't used to. Some won't adapt. And the whole thing is likely to be costly. But time heals wounds, and expenses don't last forever. Besides, Braccini figures, the ultimate solution was more involvement, not less. He instituted the weekly meeting of the entire company, with lunch provided by each department on a rotating basis. The "lunch chats," as they were quickly dubbed, became a vehicle to address grievances, to reassert solidarity, and above all to reestablish that this was a company with a rare degree of openness and common purpose:
* At an early meeting, Braccini and Robert Landau laid out the company's finances, showing the low profits for 1991 and the increases in health-insurance costs. No, they said, no layoffs were in the offing. The new computer would increase Pro's growth capacity -- which meant more opportunities, not lost jobs. Admittedly, the controller had been let go in January. But that was an individual matter, and the company would soon be hiring a new one.
* At another, employees voted to reestablish the teams. The CIC said it was working on it; Steve asked for, and got, a sizable group of volunteers to speed up the process. Soon, someone proposed that the newly constituted teams begin entering data into the new computer. That would not only get them going, it would let all the members familiarize themselves with the new system.
* At a third, several employees worked themselves up to confront general manager Landau about his management style. But what beforehand struck one employee as a "lynch mob" turned into a civil and productive confrontation. You're too cold, too blunt, said the employees. Hey, give me a break, replied Landau -- I've been here only a few months, and I'm feeling uncomfortable, too. Afterward, feelings softened. "Robert has totally blossomed," says a warehouse worker admiringly.
In fact, the lunch chat I attend, for all its seemingly trivial discussion of who would keep the coffee area clean, shows the culture Braccini has created. Sitting around in the cafeteria, eating lasagna and salad, 35 or 40 people from every part of the company assume they have a right to hear and take part in a dozen different discussions. How the company covers the phones while people are being trained on the new computer. Whether Pro will continue buying its San Francisco 49er season tickets for employee use. Who will work on the newsletter. People shout, crack jokes, carry on private conversations, challenge top managers (and one another) in no uncertain terms. Yet somehow the discussions come to closure, often with someone volunteering to do a survey to get more employee input. Even that dispute over the coffee area, once I think about it, doesn't seem quite so trite. Sure, most companies just assign some secretary, the low person on the totem pole, to make coffee and clean up, and maybe that's the most efficient way of getting the job done. But there's something to be said, in a company that relies on everyone's feeling that quality depends on him or her, for taking turns cleaning up. "Looking top-notch is a sign of quality," says Cheryl Caglia. "It gets as small as that."
What happens at pro will be worth watching for the next several months, indeed for the next couple of years: despite its accomplishments, the company's transformation is by no means complete. Before long the Braccinis will be moving to Austin. Steve is laying plans to manage an inventory depot not just for the parts Pro stocks but for other Applied Materials suppliers, too. For him, it is a chance to go back to what he likes best -- hands-on start-up mode. Cinde, who has recently been a consultant to the company, may get involved again, too; she now admits to being at least a partial convert to Steve's ideas. If Austin succeeds, other branch facilities will soon be on the drawing board. "We're going to double our sales in 36 months," promises Robert Landau.
But Landau will have to maintain the renewed momentum among employees at San Jose. The teams may be restarted, but they won't automatically begin functioning smoothly. The Continuous Improvement Council has taken on a new member, but it's still having trouble functioning effectively. Here, too, the prescription on the table is more involvement, not less. Braccini and Landau have agreed to make more financial information regularly available to employees, and Braccini is thinking of eventually establishing an employee stock ownership plan. But both moves will require sizable amounts of time and training before they make a difference in the way the company operates.
Not being a gambling man, I'm not sure of the odds on Pro Fasteners' eventual emergence as a distribution company par excellence, one of those models for others to emulate and learn from. I am sure that companies setting out along that road can learn a lot from Pro already. Like how rough the journey can be. And how long it can take. In some respects, after all, Pro is still warming up.
"These last two years," says Steve Braccini, "have been about learning to walk, then trot, then run fast. Now we're ready to compete."* * *
Research assistance for this article was provided by Martha E. Mangelsdorf.