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Higher Ground

Some Inc. 500 CEOs from the 1980s explain how if you don't act fast, your successful business might out grow you.
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Take it from THE FOUNDERS who occupied these rankings a decade ago: your Inc. 500 company will soon outgrow you--unless you act fast

Fast-forward 10 years. the Inc. 500 company you founded back in 1991 is a market leader, racing toward $1 billion in sales. You realize in an instant of startling clarity that managing that company still boils down to a familiar challenge: plucking bits and pieces of strategy from an ever-evolving landscape and then combining them to make bets on what will push revenues and profits higher. It's exactly what you did back when you spotted an opportunity and shaped a business to fit it. The trouble is, you're not the one doing the managing anymore. You've been cast aside as CEO, replaced in day-to-day management.

Right now it's hard to imagine exactly how it will happen. But you can choose from the scenarios played out in countless business tomes or repeated by legions of consultants: at a certain stage, growth companies almost have to leave their founders behind. True, there are exceptions. There's that fellow named Gates, for instance, who continued to grow his software company long after it ranked #163 on the 1985 Inc. 500. Watch him--or others like him--for clues, and you'll come to the conclusion that they're naturally able to delegate more as a company grows.

Don't believe it for a second.

Pick the brains of a dozen founders who've continued to grow their businesses fast a decade after appearing on the Inc. 500, and there's no question that they often express gratitude to a person or a team that helped steer the business out of one crisis or another. But keep the spotlight on the founders themselves, and it becomes clear that what looks like skilled delegation is really a byproduct of the very concrete ways they have come to understand themselves and their business, and to build what they've learned into their company's practices. It takes work.

If these founders have mastered any one discipline, it's that they manage to be a presence without being around. As their companies grow, they aren't just frantically handing off decisions. Instead they have passed on a framework that enables employees to anticipate and react to events, making decisions on a much sounder footing than they would if they were just second-guessing the boss. The latter can work, of course--for a while. But it's only a matter of time before an employee does something that makes you wonder why you ever ceded any authority at all. You're left trying to figure out what went wrong, likely to lay blame on everyone except the person who is really responsible: you.

"There are some fundamentals that are as important to a $2-million business as they are to a $2-billion business," says John Kotter, professor of leadership at Harvard Business School. "I would suspect that the people who can take a business from $2 million to $2 billion have figured out those fundamentals early on and haven't lost track of them." That's much harder than it sounds. The entrepreneurs who endure haven't let the greater demands of growth cloud their thinking about who they are, what they want from employees, or how to preserve their company's fundamental purpose. Most important, they haven't let those demands drag them away from what they love to do. "My job hasn't changed much," insist the founders who have stayed atop their fast-growing companies.

It's exactly how you want to feel a decade from now.

you already know what you need to know about yourself to take your company to the next level. The challenge is acting on it. Chances are, you're comfortable with a high level of control and prone to tinker with every aspect of your business. It's natural for you to feel proprietary--after all, you conceived the business, and you were smart enough to grow it exponentially. But greater growth, and the finer rewards it bestows, pose special threats to even the most self-aware founders. "People are easily corrupted by success," says Kot-ter. "They become arrogant and diverted by fame, glory, and money."

Founders who stay on top of their growth companies aren't any less susceptible to such difficulties. The difference is that they recognize their own weaknesses and have built that knowledge into their company's operations. By doing so tangibly, and often openly, they make it difficult for their worst instincts to prevail. The key is to make it difficult enough.

Lane Nemeth, who founded Dis-covery Toys Inc. (#306 on the 1986 Inc. 500), didn't fully understand the vulnerability of her educational-toy company until about 3 years ago, when her chief operating officer, Mike Clark, died. For 10 years she had relied on Clark to bring her down to earth by "asking questions that no one else would think of. He was very analytical." She served as the wide-eyed idea generator, capitalizing on her own strengths ("I love marketing, sales, and product development") and depending on him to protect the company from her limitations ("I can't stay focused on the operations side").

But not long after Clark died, Nemeth found herself drawn deeply into dangerous territory. "Every time I take my eyes off what I do best, growth suffers," she says. In 1994 she decided that Discovery Toys should branch out into children's clothing, and she approached the project with her usual zeal, carefully attending to the details of design and market research. But while the clothing succeeded in terms of quality and customer satisfaction, it caused enormous back-office problems that Nemeth had failed to foresee. Warehousing and inventory control were disastrous, a source of growing frustration among the company's independent sales reps. "We made a complete mess out of our computer," says Nemeth, "and we should have known it would happen." She discontinued the line after a year, taking a significant loss.

To Nemeth--whose 18-year-old company has grown from $37.9 million in 1986 to almost $100 million this year--the problem was clear: having just one person between her and the business she'd founded wasn't enough. She had hoped there were systems in place to provide more of a bulwark. There weren't, as she found out. Clark, she says, "didn't delegate well enough, and if your organization is dependent on one person, you're in trouble."

Wisely, Nemeth is intent on making sure that all her top managers understand her business and her role in it, as she does. "Now it's really a team effort," she says.

once you accept that your company's continued growth relies chiefly on other people--and not on your own mastery of an intimidating inventory of skills--you're likely to reach another conclusion: I could be Bill Gates too, if only I had the right people.

The "right people," of course, are those employees who seem to think and act intuitively, as you would. And when they don't? "You abandon the bigger picture," says Kotter. "You start worrying about pettier things." Tuning out the bigger picture is a sure stop on the way to becoming a former CEO.

It's not that you have to learn to love other people's mistakes, as business gurus so often preach. But if you're giving your employees the tools--principles, goals, guidelines--they need to reach the best decisions and not just follow marching orders, then you at least share a common language for dissecting a bad decision and figuring out why it was made.

"I tell my managers, 'Don't be afraid to experiment and take risks. I've dug some huge craters out there in the woods, and there's no way you're going to dig a deeper hole than I have," says Jim Goodnight, president of $562-million SAS Institute Inc., a software developer that was a $70-million company when it ranked #429 on the 1986 Inc. 500 list. Goodnight, whose business is based in Cary, N.C., isn't afraid to admit loudly that he's botched plenty, including making a bad acquisition that cost the company more than $2 million. He assumes that others are both as capable--and as fallible--as he is.

Goodnight claims that he couldn't make every decision even if he wanted to: rapidly changing technology means he can't stay current on every new project; employees have to be more technically proficient. And to grow, he wants them to take risks, which means some failures are inevitable. Case in point: "Steve Jobs came to us and asked us to support a new product," recalls Goodnight. "We spent a couple of years and a couple of million devel-oping software for NeXT, and then we sold a couple hundred thousand dollars' worth. The manager who made that decision, his credibility may be tainted, but we don't terminate someone who makes that kind of mistake. We can't make the correct decision at every juncture in the road."

Besides, Goodnight doesn't see dwelling on every decision--no matter how it turns out--as his main job. He's got more important things to do. "I'm on the R&D side, and I want to stay involved there," he says. His modus operandi is to move from one product area to another, concentrating on projects until he feels he's contributed as much as he possibly can. Last year he spent about 75% of his time at a new internal venture called the Business Solutions Division, which was created to develop state-of-the-art financial-reporting software. "It was like being involved in a start-up," says Goodnight. "It gave me the opportunity to mentor employees, to try to create as much autonomy as possible. If this were a top-down organization, I'd be locked in and I wouldn't be able to do that."

goodnight isn't alone in being certain about how he wants to contribute to the operation and in being insistent on staying true to that. Staying central to their business--if not staying precisely at the center of it--has required these founders to confront some tough issues about themselves and their employees. If there's an easy part of the process for them, it's this: figuring out how they want to spend their time. Leading your company upward isn't going to feel worth it, after all, if it doesn't enable you to keep the most fulfilling job you can imagine.

You probably know what that is, but making it possible requires vigilance. And a forceful imagination. ABC Supply Inc., a national chain of wholesale construction-supply outlets that earned the number one spot on the 1986 Inc. 500 list, had 600 employees and $183 million in revenues back then. Today the company, based in Beloit, Wis., boasts $950 million in sales and 2,300 employees. It's easy to assume that founder Ken Hendricks has managed the growth by dint of being an unusually innovative management thinker; after all, he long ago put in place a carefully designed incentive program for employees.

The truth is, though, that Hendricks installed the system--and stuck with it--not simply because he thought it would benefit employees. He needed it to work so he could concentrate on the aspects of management he has always enjoyed, which is why he can accurately claim to be doing "pretty much the same things I did 10 to 15 years ago."

Because he's a former contractor who went into the construction-supply business, you might assume Hendricks would spend a good bit of time, at least initially, with his customers. Not so. "I never did spend a lot of time in the stores," he says. Knowing that store floors weren't where he wanted to plant his feet gave him an incentive to think hard about training. "You hire people and train them to care about customers," he says. He spends his time talking to his managers, training them to think like owners, and giving them the psychic and financial rewards they need to run their individual businesses. He hired trainers from Domino's Pizza and Marriott International, hosts an annual five-day training session and awards banquet to honor top performers, and provides managers with monthly financial statements for their stores and teaches them how to read and interpret the numbers. And at year's end, Hendricks distributes 25% of the company's pretax profits to employees according to the profitability of individual stores--an incentive system that has rewarded some truck drivers and warehouse staff with bonuses in the $3,000 to $8,000 range.

It is a structure that keeps Hen-dricks close to the people who directly serve ABC's customers--sources of critical information that he uses to do his "real" job. He still spends at least an hour every day speaking directly with store managers, and he calls the office in which he works the "service center" rather than "corporate headquarters"--a prosaic but more accurate description of how he defines its role and his own. For if the service center is supporting store managers, and the store managers are tending customers, then Hendricks is free to do what he does best: find ways to grow the business.

"Somebody in the company has to think about what this industry is going to look like in five years and get ahead of that," he says. So he has kept close tabs on satellite technology and is now ready to link all his stores to a videoconferencing system that will enable store managers to keep in touch and help solve one another's problems. His wife, Diane, started an insurance company that saves his customers up to 40% on workers' compensation costs. And he's developing a recycling program that will enable contractors to remove and dispose of asphalt shingles safely and cost-effectively. It's the kind of conceptual thinking that ABC, a commodity business, needs as fuel to differentiate itself from its competitors, and that Hendricks can continue to provide because his ingenious structure has allowed him to carve out that space for himself.

"I would describe myself as the visionary," he says. What CEO doesn't? But what sets Hendricks apart is that he's a full-time visionary.

assuming you're intent on continuing to grow your Inc. 500 company, there's one last question you need to think through: Why?

Yes, building a big company will give you a tremendous sense of accomplishment. And expanding into new areas will offer greater opportunities--financial and otherwise--to your best employees. But those who saw their Inc. 500 ranking of a decade ago as just a start viewed growth in another way: as an essential part of their business strategy.

Entrepreneurs do sometimes grow businesses simply because the option presents itself. But when that happens, they often end up in a tug-of-war with what the business has unexpectedly become: "It isn't fun anymore," they'll say. "I don't know my employees like I used to." Growth becomes an overwhelming distraction.

When Dennis Bakke and his partner, Roger Sant, cofounded AES Corp. (#12 on the 1986 Inc. 500), in 1982, they openly set out to create one of the leading independent power producers in the world. The larger AES grew, the better a vehicle it became for another goal they had: proving, as Bakke puts it, that a successful company could be built on "certain principles." On the surface Bakke sounds like a New Age management guru. AES was founded, he says, on the assumption that "people are thinking, creative, capable of making decisions, and trustworthy. They're unique, fallible, and accountable, and they want to be part of a group that makes a contribution to society." Sounds lofty, not unlike the rhetoric in corporate mission statements. But Bakke and Sant, well, they mean it.

Over the past decade, they've created a system of what Bakke calls "radical power sharing" at AES. There's virtually no office staff, no finance or legal department, no head of human re-sources, no safety or engineering department. Multidisciplined teams at 31 plants and project-development teams in 35 countries make their own decisions. An engineer might handle a billion-dollar coal purchase, or a mechanic might help invest part of a plant's debt reserve. And to make sure people understand why they're working in this "radical" way, they take part in educational programs that focus on the company's values, fill out surveys that gauge how well AES is living up to those values, and may even spend time with Bakke discussing philosophy.

So tenacious were Bakke and Sant about their values that when the company first went public, in 1991, the Securities and Exchange Commission required the founders to state in their prospectus that given the choice between profit and principle, the latter would rule the day.

And it has, though not always smoothly. In 1992 workers at an AES plant in Oklahoma were caught falsifying waste-water quality reports--an incident that resulted in a $400-million loss in the company's market value in one day. "I was very close to being let go," says Bakke. There was pressure from the board and shareholders to switch to a more conventional management structure, but Bakke and Sant resisted and eventually prevailed. The stock has since rebounded impressively. "Right now everyone thinks we're geniuses because the stock has gone up 35% this year," says Bakke. "But I tell our people not to get too giddy. Even when things are bad, from a financial standpoint, we're going to stay the course, and that's hard when you're getting pelted inside and out. But it's our struggle, our experiment."

Bakke spends much of his time visiting company plants, meeting with employees in groups of 10 to 100. Given the company's sprawl, that requires him to be a globe-trotter. In just the last six months, he has touched down in Argentina, Pakistan, India, Hungary, Northern Ireland, England, Australia, Taiwan, Kazakh-stan, and China. "I'm not talking about what kind of gas-fired burners they're going to install," he explains. "We're talking about philosophy. That's the nuts and bolts of the business as far as I'm concerned." As hectic as his job sounds, Bakke seems to feel perfectly comfortable in it.

It is, of course, the role he's always had.

Last updated: Oct 15, 1996

DONNA FENN | Inc.com Contributing Editor

Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.




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